Gas and oil interests split Europe and US in sanction policy

As Trump and Putin met for the first time during the G20, they apparently didn't speak about a very sensitive issue: the economic sanctions. This concerns not only the relations between the US and Russia, but also those of both powers with Europe. While the German government wants to expand the energy supply from Russia to Europe, the US Senate ordered new sanctions that could harm Russian and European companies. This leads to friction, says political analist Hannes Adomeit. Nervous bystander is Ukraine.

by Hannes Adomeit

On 15 June the US Senate voted almost unanimously (98:2) for legislation to impose new sanctions on Russia and force president Donald Trump to get the approval of Congress before taking any action to ease, suspend or lift any existing sanctions on Russia.

The draft legislation, essentially an amendment as part of a larger measure that imposes sanctions on Iran over its ballistic missile program and human rights violations, proposes new sanctions on Russian mining, metals, shipping and railways and aims at Russians guilty of conducting cyber attacks or supplying weapons to Syria's government.

mccain senatorRepublican senator John McCain voted for new sanctions against Russia

As described and analyzed by the US Atlantic Council, current sanctions prohibit Western companies from providing goods or services to next-generation oil projects in Russia. Specifically, these pertain to Arctic offshore, deepwater, and shale projects. The draft bill expands US restrictions in two important ways. First, it brings projects in which Russian companies are involved − regardless in which country they are located − under the purview of sanctions. That means Russian companies would be denied the opportunity to acquire expertise in advanced drilling techniques by learning from Western partners. Second, the bill requires the executive branch to impose sanctions on foreign firms that make significant investments in next-generation Russian oil projects.

This provision − a classic case of secondary sanctions also known as backfilling – would discourage companies around the world from investing in Arctic offshore, deepwater, and shale oil projects in Russia, diminishing the risk that lost US business will be picked up by foreign competitors. Taken together, the energy sanctions in the bill would severely hamper Russia’s development of next-generation oil resources.

Furthermore, while most sanctions in the Senate bill are mandatory, one important measure is discretionary: the imposition of sanctions on investment in the construction of Russian energy export pipelines. If the Treasury Department, that is, the branch of the executive responsible for the implementation of sanctions, opted to use this provision, it could impose sanctions on companies that take part − as investors, suppliers or contractors − in Russian pipeline construction projects. That includes Nord Stream 2.

Nord Stream 2 - a bone of contention

The project, in essence, is a replica of Nord Stream conceived in the early 2000s as a means to avoid conflicts over Ukrainian transit of gas to Europe, and to bring gas to Germany, Russia’s most lucrative market. In October 2012, both strings of the NS pipeline were completed, each with a carrying capacity of 27.5 billion cubic meters (bcm) of natural gas per year, thus bringing the combined transport capacity to 55 bcm. The pipeline runs from Vyborg on the Russian coast to Greifswald on the German coast, passing through the exclusive economic zones of Finland, Sweden, Estonia, Latvia, Lithuania, Denmark, and Germany (and the territorial seas of the latter two states; see the map below).

From there, the gas enters the gas transportation systems of other European countries via two extensions in Germany, the Baltic (OPAL) and the Northern European (NEL) extension. The pipeline length is 1,224 kilometers, making it the world’s longest undersea gas pipeline. The holding company is the Nord Stream AG based in the Canton of Zug in Switzerland. Chairman of the Board is ex-chancellor Gerhard Schröder who, together with president Vladimir Putin, was one of the chief sponsors of the original project and who today is an ardent supporter of Nord Stream 2.



Green line: Nord Stream 2 route as projected. Once operational it will double the gas flow from Russia to Europe, bypassing Ukraine completely

A corresponding agreement was signed on 4 September 2015, at the Economic Forum in Vladivostok, between Gazprom and several European companies − the German companies Wintershall (a BASF subsidiary) and E.ON (now Uniper), the Dutch Gasunie, Austria’s OMV, and France’s ENGIE. Yet again two pipelines with a total carrying capacity of 55 bcm of natural gas are to be constructed, thus bringing the total of Nord Stream 1 and 2 gas flows to a possible 110 bcm.

The North Stream 2 project raises a whole host of international political, economic, and legal issues. It confirms Russia’s determination to eradicate Ukraine as a transit country for Russian gas exports. That aim was clearly stated during the visit by Putin and Gazprom’s CEO Alexei Miller to Ankara on 1 December 2014. On that occasion, the Kremlin chief told reporters that Moscow was scrapping plans to build the South Stream pipeline but that a new gas pipeline to Turkey would be put in place to run from southern Russia through the Black Sea to the European part of Turkey, from there to Greece and – provided the EU countries in question consented and developed corresponding infrastructure – to South-Eastern and Central Europe. Miller stated bluntly that once the new pipeline became operational, the role of Ukraine as a transit country ‘will be reduced to zero’.

alexey miller june 2012Gazprom boss Alexey Miller: 'The role of Ukraine as a transit country will be reduced to zero.’ Photo Wikimedia

Although a complete shutdown of the Ukrainian transit route would not be possible before 2020 when the current long-term Russian-Ukrainian transit contract expires, the new strings of Nord Stream would allow Gazprom to reduce the amount it now transmits via Ukraine to around 30 bcm of gas per year. The effect of this would be that Ukraine stands to lose some $2 billion a year in transit fees. Furthermore, if Ukraine were to drop out as a significant transit country, the EU would lose interest in the modernization of the country’s pipelines and gas infrastructure. Nord Stream 2 would, therefore, undermine EU policies toward Ukraine within the bilateral energy cooperation framework or under the auspices of the Energy Community.

The German government’s stance has been consistent throughout the controversy. It argues that Nord Stream 2 is a ‘commercial project’ involving ‘private investors’ and that the government, therefore, should refrain from interfering. That position is all the more surprising as chancellor Angela Merkel has been equally consistent in her staunch advocacy of the sanctions regime, invariably supporting its prolongation whenever the issue arises in the EU and reiterating that it should remain in place until the ‘full’ implementation of the Minsk-2 protocol of February 2015.

Pipeline may be a lever for improvement of German-Russian relations

Sigmar Gabriel, the vice-chancellor, ex-chairman of the social democratic party (SPD), economics and energy minister (until January 2017) and the current foreign minister, however, has made a case not only for the construction of the Nord Stream 2 gas pipeline per se but also for using it as a lever for the improvement of German-Russian relations, proclaiming that ‘a different and better relationship with Russia’ should begin with the construction of the pipeline and end in the lifting of sanctions against Russia.

Furthermore, in ‘private’ conversation with Putin at the Novo Ogaryovo state residence in October 2015, Gabriel assured his Russian hosts that he would to do everything to ensure that all the legal issues connected with the project would ‘remain under the competence of the German authorities’ and that the German government would make sure that any ‘opportunities for external meddling’ and ‘political interference’ would be limited – a clear commitment to subvert both EU policies and law.

EU Commisson opposed to Nord Stream 2

On 1 July 2017, however, EU commission vice president Maroš Šefčovič in charge of energy affairs stated that the EU commission will conduct negotiations with Gazprom, not the German government. The commission, just like Poland, the Baltic States, the Czech Republic, Slovakia and Hungary, opposes the project. Šefčovič has put forward legal grounds and considerations of energy security. The Baltic Sea, he told the German journal Der Spiegel, should not be considered a space void of EU law and regulations. It was unacceptable that Russian law should apply up to the last millimeter of maritime space and EU law only on the mainland. Furthermore, he found it ‘disconcerting that starting from 2019 the major share of Russian gas for Europe should be transported through Nord Stream 1 and 2’.

2015 12 14 angela merkel cdu parteitag by olaf kosinsky 18Angela Merkel: 'A solution should be found for Ukraine as a transit country for Russian gas'. Photo Wikimedia

In evident recognition of the damaging effects of the project on the Ukrainian economy, Merkel has demanded that ‘a solution should be found that would maintain Ukraine as a transit country for Russian gas’. Gabriel even claimed that this was an inalienable ‘condition’. Gernot Erler, the German government’s special coordinator for Russia policy, wants to ‘prevent the project from becoming a unilateral anti-Ukrainian policy’. The German government, however, has offered no suggestions as to how Gazprom’s goal of reducing the transit of gas through Ukraine to ‘zero’ could effectively be undercut.

Furious response

Predictably, the June 2017 Senate bill has elicited a furious response by the German government. In a joint statement, foreign minister Gabriel and Austrian chancellor Christian Kern charged that ‘we cannot accept the threat of illegal extraterritorial sanctions being imposed on European companies that are participating in efforts to expand Europe’s energy supply network!’

‘Europe decides who supplies us with energy, not the USA!'

They went on to say that ‘Europe’s energy supply network is Europe’s affair, not that of the United States of America!’ ‘We decide who supplies us with energy’; and in an obvious swipe at Trump’s protectionist impulses they added that ‘we do so based on transparency and on free market principles’.

The joint German-Austrian statement, in explicit reference to NS2, called the US Senate’s draft bill ‘surprisingly candid’ about what was actually at stake, ‘namely selling American liquefied natural gas’, ‘ending the supply of Russian natural gas to the European market’, and ‘protecting US jobs in the natural gas and petroleum industries’.

lng gasShipping liquefied natural gas becomes a priority for the United States

Indeed, US companies recently started shipping liquefied natural gas to Poland, and the Senate’s draft law demands that the government ‘should prioritize the export of US energy resources in order to create American jobs, help US allies and partners, and strengthen US foreign policy’.

As for the position of chancellor Merkel, her spokesman Steffen Seibert said that she shared the concerns raised by her foreign minister and the Austrian chancellor. He (Seibert) called the US move ‘peculiar’ and found it ‘strange’ that sanctions intended to punish Russia for meddling in the US elections could also lead to penalties against European companies.

Flexible approach to Ukraine

Merkel could also agree with Rex Tillerson concerning the Minsk 2 protocol (the cease fire agreement for Eastern Ukraine). In hearings before the Foreign Affairs Committees of the Senate and the House of Representatives, on 13 and 14 June, the US secretary of state said that he did not want be ‘handcuffed’ to the agreement if it turned out that Russia and Ukraine decided to settle the conflict through some other structure. Merkel could perhaps be persuaded to align herself with that position if indeed, as Tillerson said, the new structure served ‘to achieve the Minsk objectives’.

Tillerson doesn't want to be 'handcuffed' to the Minsk-2 agreement

The same applies to any possible linkages between sanctions on Russia and any possible trade-offs between Russian concessions and compromises in Syria. Tillerson told the Senate that he would like ‘flexibility to turn the heat up when we sense that our efforts’ are failing to secure greater cooperation from Russia on anti-terrorism efforts and resolving the Syrian civil war. The US and Russia had ‘some channels open’ that could be at risk if new sanctions were now to be introduced, he said. The emphasis is, indeed, on ‘new’. The existing sanctions, in the consensus view of Trump, Tillerson, and the U.S Senate as well as the German government should remain linked to Minsk 2.

Last October, Merkel did advocate the imposition of new sanctions on Russia. It is clear, however, that she wants them tied to Russian behavior in Ukraine. This is different from the current purposes as seen in Washington. President Barack Obama imposed and Trump has retained sanctions on Russia in response to the Kremlin’s alleged interference in the US electoral process. New sanctions, as the Senate draft legislation demonstrates, are contemplated also with regard to Russian behavior in Syria.

No grand bargain Trump-Putin

Compared to the state of affairs during Trump’s electoral campaign and in the months prior to his inauguration, objective conditions and corresponding perceptions in Germany have changed substantially. The German government was concerned that Trump would forge some kind of ‘grand bargain’ with the Kremlin. After all, he had consistently held out the promise of substantially improved relations with Russia; called for ‘respect’ of Putin and admired him as a ‘strong leader’; expressed understanding for Russia’s annexation of the Crimea; and downplayed the significance of its military intervention in eastern Ukraine.

Berlin's anxieties about a deal have lessened, but outcome is unpredictable

The specter of a unilateral lifting of the sanctions and acceptance of Eastern Europe as a Russian sphere of influence by Washington in exchange for uncertain concessions created anxieties in Berlin. It felt as if Trump was setting out to saw off the branch of economic sanctions on which Merkel was sitting. By itself, without US support, Germany would not be strong enough to cope with Russia’s assertiveness and revisionism in Europe.

The anxieties in Berlin about a comprehensive deal between Washington and Moscow have subsided. A mere two and a half months after his inauguration and against the background of the US military strikes in Syria and Afghanistan, Trump acknowledged that ‘we’re not getting along with Russia at all, we may be at an all-time low’.

Unpredictability instead of a deal

That is small consolation for the German government, however, because it is inconceivable that the close friendship and mutual respect that existed between Merkel and Obama as well as the close coordination of policies on sanctions will be continued between the German chancellor and Trump.

Now we are faced with an unforeseen development, in fact almost a reversal of the position of the US and Germany. While the German government wants to do business with Russia, with limited sanctions, and expand the energy supply from Russia to Europe, the US – the US Senate at least – wants to impose new sanctions that could harm German and European companies.

How eventually the interrelated issues of Germany’s Russia policy, economic sanctions, Nord Stream 2, and the conflict in Ukraine will be decided is uncertain. They remain hostage to the vagaries of US foreign policy decision-making, the struggle of at least four directions or tendencies: right-wing ‘fundamentalism’, as epitomized by Trump confidant and member of the national security council Steve Bannon; cabinet and NSC ‘realism’, as advocated by secretaries Tillerson and James Mattis and national security adviser H.R. McMaster; ‘family’ idiosyncrasies, as represented by Trump’s daughter Ivanka and son-in-law Jared Kushner; and subjective, arbitrary Trumpian ‘populism’ of the president himself with scant regard for objective conditions and requirements. The outcome of the struggle is unpredictable.

Wekelijkse update?

Iedere donderdag uitgelichte artikelen in uw mailbox

Eerst doorlezen? U kunt zich ook later aanmelden via de home pagina.

Als u in uw browser de cookies blokkeert, ziet u deze popup steeds weer. Daarvoor excuus.