The U.S. sanctions bill approved this week in the House of Representatives has European leaders worried about how the bill could affect continental divisions over dependence on Russian oil and gas.
If President Trump signs the bill, it would put into law sanctions approved by President Obama, which were largely created in collaboration with European consultation. But the new bill would expand the list of targeted Russian companies and individuals, particularly in the energy sector. That could subject European companies to U.S. sanctions for doing business with Russian companies on the list, specifically jeopardizing a controversial $10-billion gas pipeline project called Nord Stream 2.
What is Nord Stream 2?
The Nord Stream 2 pipeline project follows the first Nord Stream project, which was built in 2011 to pump gas from Russia’s Baltic coast to Germany. The second phase would expand the supply of Russian gas exports to Europe.
The $10-billion pipeline project is the pride of the Kremlin-controlled gas supply company, Gazprom, and was scheduled to be completed and pumping gas directly to Europe by 2019.
The pipeline project is financed partially by a consortium of European investment partners.
The route bypasses Ukraine, where previous disputes between Moscow and Kiev over natural gas prices and transit fees have led to Gazprom shutting down supplies. This has caused stress in Europe, which depends on gas supplies from Russia via Ukraine’s pipelines.
The Nord Stream 2 project has created rifts among the European Union’s 28 members, some of whom fear the completion of the pipeline acts against the EU’s goal of diversifying its energy sector away from Moscow’s exports.
Russia currently supplies a third of Europe’s natural gas. With the Nord Stream 2 pipeline, that could increase to more than 40%.
Critics of Nord Stream projects say they will allow Gazprom to increase its dominance of Europe’s energy supply, making energy a geopolitical tool and putting the Kremlin in greater control than some European leaders would prefer.
“The pipeline pits the interests of Germany and Austria against Central and Eastern European countries, fracturing the EU at a moment when the bloc is finally gaining traction as a geopolitical actor,” wrote Kristine Berzina, a senior fellow at the German Marshall Fund, on Thursday. “But by threatening to end the Nord Stream 2 project, the United States is depriving the EU of the opportunity to mature as an energy security actor.”
How has Moscow reacted?
The Kremlin was quick to point out that the U.S. sanctions would harm not just Russia, but “third parties.” Moscow responded by seizing two diplomatic properties and booting several members of the U.S. Embassy staff out of the country.
“It goes without saying that we and our European partners attach great importance to finishing these projects, and we will work towards this,” Kremlin spokesman Dmitry Peskov said this week. “That is why discussions about sanctions, which could potentially obstruct these projects, are a cause of concern for us.”
Last week, the chairman of Gazprom’s board suggested that the U.S. sanctions could threaten Europe’s Russian gas supply if Nord Stream 2 were not completed.
“In Europe, the region’s gas supply is being threatened. Washington pursues purely economic interests by lobbying for American energy companies in Europe,” the Gazprom board chairman, Viktor Zubkov, said at a business forum in Vienna last week.
The Kremlin’s suggestion that Europe’s supply of Russian gas is under threat because of the U.S. sanctions bill is “either empty bluff or dangerous miscalculation,” wrote Agnia Grigas, a senior fellow at the Atlantic Council, in a paper for Yale University’s Yale Global Online. Grigas is a specialist on energy and security issues in Europe and post-Soviet states.
“At the end of the day, the global natural gas markets have transformed with much greater supply and liquidity from booming U.S. natural gas production and rising U.S. liquefied natural gas exports,” Grigas said.
On Thursday, the German Committee on Eastern European Economic Relations accused the U.S. of using the sanctions bill to stimulate U.S. energy exports to Europe.
How else would the new sanctions bill affect Russia’s energy sector?
Russia’s economy is dominated by revenue from its oil and gas sector. Since the breakup of the Soviet Union, economists have warned Russia that if it didn’t diversify its economy and distance itself from being a petro state, its economy would falter. Indeed, in 2014 Russia’s economy was hit by two major factors: a decrease in world oil prices and a package of sanctions placed on Russian companies and individuals in retaliation for Moscow’s annexation of Crimea and interference in eastern Ukraine.
The 50% drop in global prices of oil, Russia’s most lucrative export, pushed the economy into recession, from which it has slowly emerged this year.
The harshest sanctions made it difficult for Russian companies to get long-term loans from international lenders. With very few ways to borrow capital for investment, many large infrastructure projects were put on hold while development in other sectors stalled.
Russia responded stoically, saying the self-reliance on its homegrown products would only make it stronger. Major state-controlled energy companies such as Gazprom, Lukoil and Rosneft said they would turn to domestic investors and rely on in-house technology instead of foreign experts.
The new sanctions bill would increase the number of Russian companies and individuals affected, especially targeting the energy sector. The bill would also restrict U.S. investors from buying or facilitating the purchase of Russian assets worth more than $10 million as part of any Russian privatization schemes.
Ayres is a special correspondent.