ISSN 0024-5089
Copyright © 2015 LITUANUS Foundation, Inc.

Volume 61, No.2 - Summer 2015
Editor of this issue: Almantas Samalavičius

Book Review

Margarita Balmaceda. Politics of Energy Dependency: Ukraine, Belarus and Lithuania Between Domestic Oligarchs and Russian Pressure.
3rd rev. ed. Toronto: University of Toronto Press, 2013, 464 pages. ISBN: 978-1442645332

Margarita Balmaceda explores how three post-Soviet states— Ukraine, Belarus, and Lithuania—have managed their energy dependency on Russia in the period from their emergence as independent states in 1991 all the way through 2013. The book is an extension of her earlier work, which focused on Ukraine's failure to develop a coherent energy policy in the years 1995-2006.

This thoroughly researched work details how each of the three countries dealt with its energy dependency on Russia. In particular, the book focuses on articulation systems among the various interest groups that affect how each country handled its external dependency on Russian energy. Such analysis purposefully leaves Russian policy goals towards each of the countries out of the scope of investigation.

The three cases appear remarkably different. In Ukraine's case, management of energy dependency boils down to weak institutions, undermined by powerful business lobbies. These lobbies build political power on the back of energy rentals. They emerge as business-administrative groups capable of privatizing public policy. They become a defining feature of Ukraine. Balmaceda presents the situation with scientific detachment. However, the story could be retold as a thriller, featuring the most egregious theft, private interest masquerading as public concern, and the refined cynicism of the players.

The Belarus case is very different. Energy rentals derived from Russia were used to shore up the power of an authoritarian president, preventing the emergence of independent political actors. In the Ukraine, private economic interests used profits from energy rentals to build political power. As a result, a much larger share of energy rentals benefitted the wider Byelorussian society: They were channeled into either productive investments in oil refineries or unproductive subsidies for the inefficient agricultural sector. In Ukraine, public institutions were emasculated by the business-administrative groups that benefitted from energy rentals; in Belarus, they strengthened the presidential administration.

Lithuania went through several different phases in its management of energy dependency. The outcomes are less clear-cut. An early proactive period diversified oil supplies and culminated in the construction of the Butingė offshore oil terminal in the late nineties. Accommodation to Russian energy interests followed for a lengthy period, resulting in the sale of Lithuanian Gas to a consortium led by Gazprom. The third phase was triggered by a sharp rise in gas prices, starting in 2005. It culminated in a series of bold moves towards dismantling Gazprom's Lithuanian monopoly. These included implementation of the EU Third Energy Package, an antitrust investigation of the Gazprom monopoly by the European Commission, and the 2014 construction of a liquefied natural gas (LNG) terminal in Klaipėda. The last project can be seen as a pinnacle of Lithuanian efforts to diversify its gas supply independent of the Russian economy. It receives no mention in Balmaceda's book, despite the fact that key decisions concerning its construction were taken in 2010-2, well within the purview of the book.

The author aims to determine how the internal politics of each country affect its management of energy dependence. The most interesting insights offered in the book are somewhat beside this focus. In particular, these three cases lead to the conclusion that energy dependence became more entrenched the longer each country attempted to pay below-market prices for its energy, retained energy subsidies, subsidized household energy consumption with higher industrial tariffs, and bartered energy debts in exchange for key industrial assets. These were all opaque energy trading schemes that allowed intermediary companies or, in the case of Belarus, the presidential administration, to perpetuate the status quo, thereby preventing sustained diversification. Arguably, Lithuania made the most progress by replacing the aforementioned practices with tariffs that recovered costs, and it instituted transparent, state-regulated pricing policies in the late nineties. These efforts go a long way to explain why Lithuania was able to prevent entrenched energy trading groups from writing its energy policy. It eventually made the most progress in diversifying its energy supplies.

However, these conclusions come almost accidentally. Instead, the book aims to explain how domestic institutions and informal arrangements in each country influence its energy diversification efforts. The author sets up an analytical framework. Each country's political system, understood as a balancing mechanism between the executive and various interest groups, is an independent variable. These factors determine the different ways each of the countries manages its energy dependency. Balmaceda distinguishes between a centralized system with a powerful executive as the ultimate arbiter of decisions (Belarus), a political system with the executive as a mediator between different interest groups (Ukraine), and a fragmented political system with a weak executive (Lithuania). However, the rigor of such an analytical model is undermined by her subsequent claim that the "recycling" of energy rentals (profits derived from price arbitrage and mostly nontransparent dealings that characterize energy trade with Russia) affect the political system itself. This clearly happened in Ukraine, where intermediary companies increasingly set the energy agenda. However, she does not question why this did not happen in Lithuania, where the system of interest articulation lacked a strong executive as an arbiter between the interest groups. This framework makes it difficult to tell what is at work in each particular case: When does the configuration of the political system determine the outcomes, and when do these outcomes result from the recycling of energy rentals?

Balmaceda acknowledges the importance of EU pressure in streamlining Lithuania's institutions towards greater transparency and accountability prior to 2004. This included energy pricing reform and other regulatory changes. These reforms prevented some of the grisliest energy-related corruption evident in the other two cases. The author seems to be oblivious that institutional reforms were prompted by a near-universal consensus among Lithuania's political forces in favor of EU accession. This omission further undermines the rigor of her analytical framework. She claims that a configuration of interest groups, balanced by the executive, is a determining factor. It goes without saying that EU's institutional accountability requirements did not affect the configuration of Lithuania's political system. Nevertheless, they contributed profoundly to the way Lithuania managed energy dependency.

Overall, the book contributes to a better understanding of a wide variety of issues arising from energy dependence on Russia. In retrospect, Ukraine remains the most dramatic cautionary tale of how pervasive corruption, originating from energy rentals, divorced self-serving political elites from the aspirations of Ukrainian society. This lead to a revolution. Energy remains the main source of Russian leverage over its neighbors. Margarita Balmaceda has done us all a service by helping us to understand how these levers work.

Vytautas Adomaitis