Sorry if this is a bit late, but most here seem to view a potential Baltic duchy with to put it mildly, rose tinted glasses. The idea of puting an overhelming majority of natives (Estonians and Latvians were nearly 80% in 1897, and their proportion of the population had most likely grown) under the rule of a small minority, which had exploited the native people for centurities, holding them as serfs for century, does not strike me as a model of stability. Yes, it's true that Latvians and Estonians have generally little in common, however their mutual hatred of the Germans would be really helpful in them putting their differences aside. Not to mention that they don't really have any disputes between each other, so it would be a bit difficult to create conflicts between them. The OTL events which brought down the Soviet Union should be instructive.
As for the Russians, the Latvians and Estonians considered them a lesser evil and even helpful against the Baltic Germans. After all, it was during the Russian Empire that they started the process of national awakening. As contemporary observers noted, the fact that the Balts greeted the Germans as liberators in 1941, was a sign of how terrible the year under Soviet rule was. But this will not be in the case here and if the Soviet Union exists, it is fairly likely that most of the population would be at the very least sympathetic to Communism in fairly short order.
So while Germany could certainly hold the Baltics by force of arms, it's difficult to see them developing into anything but a repressive dictatorship.