The Baltics in 2020. Frontline States and the Double Periphery

Over the past three years, political processes in the Baltic states have developed within the overall western trend of the population protesting against the old elites, characterised by voting for the so-called “populists.” In all three republics, members of the old elites lost to political movements and politicians that voters do not associate with the ruling class.

The populist revolt was most strikingly evident in Estonia, where the ultra-right Conservative People’s Party of Estonia (EKRE) finished third in the 2019 parliamentary elections (winning 19 seats in the Riigikogu) and joined the coalition that denies the value of European integration for Estonia. This is the only case where the populist revolt in the Baltic states has led to visible changes in the political course of a country. However, these changes are mostly manifested in the new rhetoric of public officials who are EKRE members.

In the other states of the region, voters cast their ballots for new “faces.” In Lithuania, the Lithuanian Farmers and Greens Union won the parliamentary election, thus putting an end to the constant changing back and forth of power between the social democrats and the conservatives. What is more, the banker Gitanas Nausėda was elected president of the country. Meanwhile, in Latvia, the KPV LV party led by entertainer Artuss Kaimiņš achieved success at the elections to Latvia’s Saeima. However, none of those developments had any noticeable consequences.

Several factors will influence the development of Lithuania, Latvia and Estonia in the next decade. First, the consequences of the critical deformation of the age structure as a result of an ageing population and the migration of the younger generation will be felt. There will be a pensions crisis since the taxes paid by the few who are in employment will not be enough to cover retirement payments. This critical situation will be exacerbated by a social infrastructure crisis stemming from the drain of professionals in socially significant areas (already now, the Baltic states have an acute shortage of doctors).

Second, European financing for the Baltic countries will drop significantly following Brexit and the adoption of the European Union’s new seven-year financial outlook. Third, the Baltic states will withdraw from the BRELL and the bulk of Russian freight will switch from the Baltic states to the freight ports in Russia’s north-west.

Thus, several factors of negative significance for Lithuania, Latvia and Estonia will converge in the same period, which could spark full-fledged economic and social crises in the Baltic states.

Politics. A Populist Revolt with Zero Results

Over the past three years, political processes in the Baltic states have developed within the overall western trend of the population protesting against the old elites, characterised by voting for the so-called “populists.” In all three republics, members of the old elites lost to political movements and politicians that voters do not associate with the ruling class.

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The populist revolt was most strikingly evident in Estonia, where the ultra-right Conservative People’s Party of Estonia (EKRE) finished third in the 2019 parliamentary elections (winning 19 seats in the Riigikogu) and joined the coalition that denies the value of European integration for Estonia. This is the only case where the populist revolt in the Baltic states has led to visible changes in the political course of a country. However, these changes are mostly manifested in the new rhetoric of public officials who are EKRE members.

In the other states of the region, voters cast their ballots for new “faces.” In Lithuania, the Lithuanian Farmers and Greens Union won the parliamentary election, thus putting an end to the constant changing back and forth of power between the social democrats and the conservatives. What is more, the banker Gitanas Nausėda was elected president of the country. Meanwhile, in Latvia, the KPV LV party led by entertainer Artuss Kaimiņš achieved success at the elections to Latvia’s Saeima. However, none of those developments had any noticeable consequences.

Thus, the prediction that the political systems in the Baltic states would be preserved in spite of seemingly revolutionary election results panned out. The anti-Russian narrative continues to be a factor that determines the foreign policy of the Baltic states and has a significant influence on their internal life.

As predicted, the Lithuanian presidential elections demonstrated that the people were looking for someone who would take a more balanced approach to Russia than Dalia Grybauskaitė. This is one of the reasons why Gitanas Nausėda’s emerged victorious. Despite this, Vilnius has continued to steer a markedly anti-Russian course since Nausėda took the helm. Unsurprisingly, the only difference from the Grybauskaitė era is that the new President demonstrates more restrained rhetoric, which keeps the window of opportunity for resuming political dialogue with Moscow open. However, the Lithuanian leadership is no hurry to use these opportunities. Instead, Russia and the common history that Lithuania shares with that country continue to be used as an instrument in domestic politics to divide people into “friend” and “foe,” which manifests itself in the persecution of critics of the regime (Rūta Vanagaitė, Algirdas Paleckis and Vyacheslav Titov) as “agents of the Kremlin.”

The key event of the last three years in Latvia was the political downfall of Nils Ušakovs, who was forced to resign as Mayor of Riga and Chair of the Harmony party following a corruption scandal that was uncovered in the Riga City Council. Harmony had already lost several seats in the Saeima before the scandal broke out, and it was not a part of the ruling coalition. Ušakovs’ resignation, coupled with the fact that he has left the country to work in the European Parliament, means that Harmony will likely lose control of Riga, and the party’s political decline will continue.

The case of Ušakovs and his party marked a failure of the strategy to integrate Latvia’s Russian-speaking population into the Russian-speaking community and create a political nation of Russians and Latvians in Latvia. The Latvian political class confirmed its propensity towards ethnic insulation and the understanding that the Latvian nation comprises only ethnic Latvians, meaning that Russians should be either assimilated or kicked out of the country. The main consequence of this approach over the past three years has been the introduction of school reforms which propose to eliminate instruction in the Russian language in ethnic minority schools by 2021. The ethnic divide between Russians and Latvians is as evident as ever and continues to grow.

In Estonia, to no one’s surprise, the Centre Party led by Edgar Savisaar (which has traditionally represented the interests of Estonia's Russian-speaking minority) took up seats in the government. Its success in the 2019 elections can be put down, first of all, to the 2017 parliamentary crisis that pushed the Estonian Reform Party, which had long overstayed its welcome at the helm of the country, into the opposition. Another reason was the fact that Savisaar, an unpopular figure among the Estonian elites, stepped away from the political scene. Finally, the Centre Party refused to represent the interests of the Russian-speaking minority. The centrists came to power because they had committed themselves to the principal tenets of Estonian nationalism, thereby ensuring the stability of Estonia’s political course.

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While the new approach to the European Union may be connected to the EKRE Eurosceptics coming into the government, the new President of Estonia Kersti Kaljulaid is attempting to revise the country’s relations with Russia. Her initiatives have resulted in an official visit to Moscow and a meeting with Vladimir Putin. The President of Russia is set to make a return visit in the coming months. Kaljulaid’s actions have caused anger among the Estonian elites, who for the most part are calling for the previous anti-Russian policies to be resumed. Since Estonia is a parliamentary republic and its president has almost no real powers, it is doubtful that Tallinn's attitude to Russia and Russians in Estonia will improve.

The Economy. The End of European Financing

In terms of economic relations, the Baltic countries continued to steer a course towards breaking their Soviet integration ties in the East for good and further incorporating their economies into the economic and infrastructural space of the European Union. This is most clearly manifested in the desire to withdraw from the Belarus–Russia–Estonia–Latvia–Lithuania (BRELL) power grid and integrate their power networks into the European Union’s interconnected energy system. Besides, the Baltic states are keen to diversify energy sources to overcome Gazprom’s monopoly on the region’s gas market. LNG terminals have been built in the Baltic Sea region for this very purpose (although only the Independence LNG-terminal in Lithuania has been put into operation thus far) and projects to build pipelines for the reverse delivery of Russian gas (between Poland and Lithuania, between Finland and Estonia) have been adopted.

A key factor in the implementation of all of these projects is co-financing from the European Union. Some of them were launched primarily to attract money from European funds to the Baltic region. However, the Baltic countries were hit by cutbacks in European financing that were only supposed to begin on a large scale when the new long-term EU budget came into effect in 2021. In reality, the Baltic states already face a freeze on the construction of the Rail Baltica standard gauge track and have to deal with the prospect of delays in financing the withdrawal from the BRELL grid. Latvia has a shortage of European money for the repair of its highways. In Lithuania, in the absence of financing from Brussels, the loss-making LNG-terminal was forced to purchase LNG in Russia, even though it was initially intended to be an anti-Russian project.

As for Russia, it has been steadily implementing a strategy of minimising economic interaction with the Baltic states in recent years. As predicted, this has resulted in a further deterioration of the food industry in the three Baltic states that have been hit by the Russian food embargo. The strategy has also led to reduced sea and rail freight flows through Latvia and Estonia, as well as to a long-term crisis in the transit sectors of these countries. As the port capacities of Russia’s Ust-Luga and Vysotsk were being put into operation, the trade turnover of the Port of Tallinn fell by 24 per cent, which ultimately forced the Estonian authorities to resume political dialogue with Moscow.

Predictably, the critical drop in Russian freight traffic resulted in increased competition between Latvia and Lithuania for the transit of Belarusian commodities. Lithuania believes that Latvia was playing dirty when it agreed to buy power generated by the Belarusian NPP, as Vilnius has been challenging the construction of the power plant. This decision, as well as the destructive position that Vilnius adopted in the standoff, led President of Belarus Alexander Lukashenko to publicly set the task of redirecting Belarusian transit from the Port of Klaipeda in Lithuania to ports in Latvia. The arrival of Belarusian freight will partially improve the situation of Latvia’s transit sector (although it will not be able to replace Russian freight fully). At the same time, Klaipeda will join other ports in the Baltics that are experiencing a critical reduction in their freight flow.

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In recent years, the hopes of reviving the economies of the Baltic states by attracting Chinese resources have proven unfounded. First, the countries were reprimanded by U.S. emissaries, who explained that NATO allies could not cooperate with the United States' leading trade and economic competitor. As a consequence of these statements, the intelligence agencies of the Baltic countries started to mention the so-called “Chinese threat” in their reports (up until that point, Russia had been deemed the only external threat to the Baltic states). Chinese loans and cooperation with China in the real sector have been declared a threat to national security, which makes such cooperation in the future problematic. Second, the Baltic countries soon realised that they simply could not increase cooperation with China because doing so would mean involving Russia in some capacity or other (particularly within the “One Belt One Road” project), and confrontation with Moscow is a central tenet of the Estonia, Latvian and Lithuania strategies. The fallout of the decision to back away from cooperation with China is that the Baltic states will not be able to revive their economies through cooperation with that country, or with any of the rapidly growing markets in the east for that matter.

Demographics. Recognising a Disaster

Over the past three years, all three Baltic states have come to the realisation that their respective demographic crises have led them into a strategic impasse. As of today, neither Lithuania, nor Latvia, nor Estonia have figured out how to effectively combat the mass outgoing migration of employable young people and the critical increase in the share of retirees in the population structure. The current development model of these three countries suggests that there is no single effective solution.

The 2017 forecast proposed several options for overcoming the crisis trends in the Baltic states: the appearance of significant infrastructure projects with Chinese participation; the transition to an innovative economy with an emphasis on the IT sector; and long-term investments in the social sphere, primarily in programmes to improve the demographic situation. As predicted, none of this was done, and the current development model in Lithuania, Latvia and Estonia means that the likelihood of such initiatives being implemented is extremely low.

The Chinese factor has already been mentioned. Transitioning to an IT economy is impossible since young, educated and economically active people are leaving the Baltic states, and the pace of this outgoing migration remains high. The Baltic countries as a place of living are drastically unattractive for the younger generation. According to sociological surveys, nine out of ten high school students in Latvia plan to emigrate in the future. Attracting young professionals from abroad appears all the more difficult due to the low quality of life, poor salaries and the often xenophobic attitudes of the elderly population.

In this regard, the recent trend of Ukrainian nationals migrating to the Baltic states is particularly interesting. The initial enthusiasm at the prospect of the migration balance improving and the demographic problem being resolved soon gave way to concerns about the potential change in the ethnic makeup of the Baltic countries and possibility that the new Slavic arrivals could wreak havoc in their new homes. As a result, Estonia now views Ukrainian emigration as a threat rather than an opportunity, and signs of a change in attitude can also be witnessed in Latvia.

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The Baltic countries do not have the financial resources to correct the demographic situation by pouring money into the social sphere. It is a particularly painful situation for them given the successful proactive social policies that are currently being carried out in Poland, a country that has similar demographic problems. It is only just beginning to dawn on these countries that their attempts to integrate the Baltic economies into the European Union have failed, as have the neoliberal economic policies they adopted (which led to the shutdown of large enterprises that generated substantial revenue for the budget). The realisation that the infrastructural split with Moscow may just have been a mistake is starting to sink in. At the same time, there have been no discernible moves to change the development model in the Baltic countries: they are stuck in their current state, and the slow degradation of all areas of public life thus continues.

In the Near Future

Several factors will influence the development of Lithuania, Latvia and Estonia in the next decade. First, the consequences of the critical deformation of the age structure as a result of an ageing population and the migration of the younger generation will be felt. There will be a pensions crisis since the taxes paid by the few who are in employment will not be enough to cover retirement payments. This critical situation will be exacerbated by a social infrastructure crisis stemming from the drain of professionals in socially significant areas (already now, the Baltic states have an acute shortage of doctors).

Second, European financing for the Baltic countries will drop significantly following Brexit and the adoption of the European Union’s new seven-year financial outlook. Third, the Baltic states will withdraw from the BRELL and the bulk of Russian freight will switch from the Baltic states to the freight ports in Russia’s north-west.

Thus, several factors of negative significance for Lithuania, Latvia and Estonia will converge in the same period, which could spark full-fledged economic and social crises in the Baltic states.