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Russia is waging an "economic war," Lithuanian Prime Minister Algirdas Butkevicius claimed on September 19, as he rejected demands from Gazprom in ongoing talks over gas prices. Meanwhile, Russia is lashing out on all fronts ahead of an upcoming EU summit in Vilnius.

Spurred on by the apparent failure of Vilnius to secure better pricing on gas imports - the PM, who has toned down the previous government's confrontational approach to Moscow over energy independence since coming to office in December, appears to be responding to pressure from domestic and EU critics who have been pushing him to be more aggressive with Moscow. "This could almost be considered a sort of economic war," Butkevicius told a local radio station, according to Bloomberg.

Butkevicius met with Gazprom CEO Alexei Miller earlier this month, with both expressing confidence that the Russian state-controlled giant - which currently supplies 100% of the Baltic state's annual demand - would offer Lithuania improved prices on imports. Vilnius is currently studying a proposal it received last week.

While the contents are not public, it appears clear that Gazprom is trying to push Lithuania to drop recent efforts to diversify gas supplies before getting a price cut. The current contract - which runs out at the end of 2015 - sees Lithuania paying some of the highest prices for gas of any European customer.

President Dalia Grybauskaite told reporters Gazprom is demanding the government "do things that can't be done" and won't consider reducing prices, reports BNS. A Gazprom official would say only that the Russian company is acting within the parameters of the current supply contract.

"I have looked through the documents sent by Gazprom," the president, who has regularly criticized Butkevicius for easing back on the aggressive stance of his predecessor Andrius Kubilius, said according to Prime. "I cannot tell you the details because they are classified. But I can tell you about my attitude towards this proposal. I think that the negotiations have stalled. Both sides must be committed to come to an agreement one day."

Leverage

In contrast to Kubilius, Butkevicius has - as promised during campaigning ahead of last October's election - followed a more "pragmatic" course in relations with Moscow. While a flagship project to launch a liquified nature gas (LNG) terminal by the end of next year is going forward, Vilnius has slowed efforts to hunt for shale gas and build a new nuclear power station.

The unbundling of national gas utility Lietuvos dujos was pushed through despite Gazprom's objections this summer, and is a key development as it frees Lithuania's gas pipelines from Russian control. Spun off into an entity called Amber Grid, Vilnius has lent heavily on EU legislation to insist Gazprom - and fellow Lietuvos dujos shareholder, Germany's E.ON - must sell their interest in the new company.

Moscow, which complained it was forced to agree to the unbundling by threats from Kubilius, has been suspiciously quiet on the issue since Social Democrat Butkevicius led his left-leaning coalition into office in December. Following the September 6 meeting with Miller, the PM said Vilnius is ready to offer to buy out Gazprom and E.ON's Amber Gold stakes.

That clearly offers the pair an extra point of negotiation. The Lithuanian press has not been slow to point out that the last gas contract with Gazprom - negotiated by a previous Social Democrat government in 2004 - saw the Russian giant handed its Lietuvos dujos stake for just LTL100m (EUR29m) - a price claimed to be around 10% of its true value. Russia will also be looking to secure gas supplies to the enclave of Kaliningrad, which is served through Lithuania's pipelines.

Another point of leverage for Vilnius is an ongoing arbitration suit in Stockholm. Submitted by Kubilius' administration just ahead of its demise, the action has Lithuania claiming LTL5bn in compensation for what it says are overcharged gas supplies during the 10-year contract that ends next year. However, during the summer, Lithuanian officials - including the PM - have made disparaging comments over the cost of the legal work.

At the same time, the claims out of Vilnius come just as it hosts a meeting of EU energy ministers. Energy security - in other words: how to diversify away from Russian gas - is at the top of the agenda, and officials did not disappoint Vilnius in trying to raise the pressure on Moscow.

EU energy chief Guenther Oettinger opened proceedings on September 19 by saying he expects to publish the results of an anti-trust investigation - launched by by Brussels in September - into Gazprom's pricing and contract policy in CEE by "spring next year". The commissioner, who has also pushed Butkevicius to accelerate efforts to secure greater energy diversification, said earlier this year: "It's not acceptable that in Lithuania's energy prices are 20, 30 or 40% higher than in neighboring states."

The pressure from Grybauskaite and Brussels, and apparent lack of progress in securing a better deal from Gazprom, looks to be nudging the PM - often said to be too eager to avoid confrontation - onwards. The bid of US energy major Chevron to explore for shale gas was finally given the green light in September, after months of delay, and he pledged in his radio interview to coordinate any formal response to Gazprom with the feisty president.

However, Butkevicius also expressed hope Gazprom will agree to reduce prices before the winter heating season. "I hope that sober thinking will prevail," he said. The president meanwhile once again urged more urgency in response to the Russian position. "I invite the government to speed up construction of the LNG terminal and try to reduce dependence on Gazprom as fast as possible," she said, according to BNS.

Lines

However, Moscow is a master at exploiting the vulnerabilities of neighbouring states to keep them in check, and is in the midst of a concentrated campaign to persuade former Soviet states that their future lies with its Customs Union - set up with Kazakhstan and Belarus in 2011 - rather than the EU. The crunch comes in Lithuania - which currently holds the rotating EU presidency - in November, when several countries are due to sign Association Agreements with Brussels at a summit.

Domination of energy markets in the region is Russia's biggest stick, and has already been used to beat Armenia back into line. Prices for Yerevan were raised earlier this year, putting stress on households and companies. Armenia announced an about face earlier this month, and will join the Customs Union. On September 18, Energy Minister Armen Movsisyan announced Russia is to subsidize gas imports.

Analysts quoted by Interfax estimate the price at the border will be $189 per 1,000 cubic meters, down from the $270 recently demanded by Gazprom. This would be on a par with the price Belarus pays, which until a trade dispute over potash erupted in August received the cheapest Russian gas of any CIS state. At around $420, the Ukrainians, which have said they will continue on a path towards the EU, pay the most.

At the same time, Ukrainian companies are experiencing severe problems in getting their goods onto the Russian market. Moldova, also due to sign with the EU in November, recently saw its wine - the country's largest export item - banned from the Russian market over concerns for "consumer safety and quality". Lithuania has already been an EU member for close to a decade, but is also facing pressure on trade. In particular, Moscow is attacking the country's vital transportation sector.

Russia started subjecting Lithuanian-registered vehicles to lengthy border checks in August, and movement on the huge lines of trucks trying to enter the country appears to have halted altogether. The Lithuanian haulers' association said on September 19 that no truck loaded in Lithuania had cleared Russian customs for a week. Vilnius estimates that its transport firms and traders are losing EUR2m per day due to the extra checks. The European Commission called on Russia on September 17 to cease the supplementary border checks.