[NGW Magazine] US sanctions delight eastern Europe
This article is featured in NGW Magazine Volume 2, Issue 13.
The forecast that Nord Stream 2 would divide Europe has come to pass and now looming US sanctions have widened the rift between west and east.
In the middle of a summer filled with news about Russia interfering in US politics and fights over legislative priorities such as healthcare, a strong note of bipartisanship was struck mid-June when the US Senate overwhelmingly voted in favour of a new sanctions bill targeting Iran and Russia. The bill passed the chamber 98-2, with only Senators Rand Paul (R-Ky.) and Bernie Sanders (I-Vt.) voting against. This tally, should it hold, is easily enough to bypass a presidential veto.
The Countering Iran’s Destabilizing Activities Act, despite the name, includes provisions with significant ramifications on Russia, its energy industry and key partners in Europe. It shakes things up in two areas: it takes decision-making power away from the Trump administration; and it expands the sanctions target list.
The first note highlights the contentious relationship that Congress has developed with the White House. The new bill is a power-grab that sets the previous sanctions regime in stone, codifying the executive orders set up by the previous administration of Barack Obama and preventing Trump’s White House from easily modifying them. It requires Congress to have 30 days – 60 days if the period includes the August recess – to review and possibly block White House changes. The White House has pushed back against the move, but clearly Congress is suspicious of this administration’s pro-Russia leanings.
The second area of Russia-related provisions is expansion of the list of targeted individuals and companies. The scope is fairly broad, hitting various individuals deemed to violate human rights; who are involved with weapons and the regime of Syria’s president Bashar al-Assad; or who are players in the Russian defence or intelligence industries, among other things. They also target the mining, shipping and railway sectors. But – and most importantly for natural gas – they could be applied to non-Russian companies that support Russian export pipelines. This quickly raised the ire of European leaders (see below).
Technical hitch
Despite the near-unanimity in the Senate, the sanctions bill hit a potentially large hurdle in the House. One arcane rule in the US system is that spending bills must originate in the House, not the Senate. Since this bill affects financial matters and thus federal revenue, it ran afoul of this rule and was slapped with a so-called ‘blue slip’ violation by the house parliamentarian, who enforces procedure. A spokeswoman for House Speaker Paul Ryan (R-Wis.), AshLee Strong, made a forceful statement on the matter: “The Senate bill cannot be considered in the House [in] its current form.”
Unfortunately for supporters of the bill, politics and partisanship have re-asserted themselves while this is being sorted out. There have been a series of news reports and articles about the White House leaning on Republican House members to weaken or delay the bill. And the Democratic Senate leadership has started to make statements linking the delay to Trump’s problematic Russian ties. An almost identical problem happened with Obama’s sanctions bill in 2014, yet the House resolved it the very same day by simply passing its own, identical version.
House Republicans, meanwhile, are blaming the Senate for creating the mess in the first place. This is all happening while the Senate is deep in contentious negotiations over healthcare, putting what could potentially be a quick fix – the Senate passing a version with slightly different financial language – on the backburner.
Time is running out before the two chambers adjourn for summer and both parties predict that the bill will easily pass in a revised form, but the unity signified in the initial 98-2 tally has been undermined and further delays allow surprise developments.
US politics collide with EU relations
Throughout all the above manoeuvring and debate, the bill has been framed and discussed primarily through domestic US lenses. The justification for the Russia-focused sections is almost entirely centred on the Kremlin’s alleged meddling in the 2016 election – which even many Republicans agree smells fishy while still contesting Trump and his team’s role in it.
This is in sharp contrast to the earlier set of sanctions enacted by Obama – negotiated in close co-ordination with EU partners – primarily as a response to Russia’s annexation of Crimea and the Moscow-backed war in eastern Ukraine, which have destabilized the west-leaning former Soviet Republic. Co-ordination kept the sanctions in place and maximised their actual impact on targeted parties. The EU is a much more important trade partner for Russia than the US.
This bill though was not negotiated in concert with the Europeans, and risks upsetting the apple cart. In a particularly inflammatory passage, it allows that the US president ‘may impose’ sanctions on companies involved in Russian pipeline projects, whether they are investors, suppliers or contractors.
This is hugely significant, as Nord Stream 2 brings together some of Europe’s biggest energy companies, two of which are still partly state-owned: French Engie and Austrian OMV. Others are German Wintershall and Uniper and Anglo-Dutch major Shell, all three, along with OMV, also being involved in Russian gas production and marketing. Against this backdrop, Berlin and Vienna issued a heated joint statement condemning the bill on the very same day as the Senate vote:
“Since 2014, Europe and the USA have responded side by side and in close partnership [regarding] the Crimea [issue], which violates international law, and the Russian approach in the eastern Ukraine. This was the right and the right response to a Russian attitude that put peace and security in danger in Europe. We cannot, however, accept the threat of non-international extra-territorial sanctions against European companies, which are involved in the expansion of the European energy supply!”
These sanctions have always been a delicate issue for Europe, particularly in the business world. Almost right from the beginning there have been scores of articles discussing the close ties between European and Russian businesses, and the pressure that German chanceller Angela Merkel and other leaders have been under to return to the profitable pre-sanctions world.
A primary example is Russia’s enormous Bazhenov formation, estimated at 75bn barrels to be the largest shale oil deposit in the world. Russian companies need western technology and services to develop these resources, yet sanctions cut out western companies and forced the suspension of joint ventures between Gazprom Neft and Royal Dutch Shell, Rosneft and ExxonMobil, and Lukoil and Total.
Meanwhile, sanctions are very carefully constructed to avoid harming gas supply deals with Gazprom and other Russian companies, since disruption would dramatically affect European markets and prices. In the giant $27bn LNG project in Russia’s Yamal Peninsula, Paris-based Total was allowed to keep its 20% stake, since it is a gas project.
The project was still targeted and prevented from financing in US dollars, however, forcing Total and other partners to scramble and find aid from Beijing and Moscow, among others. Although it is still ready to launch first LNG late this year, completion was delayed and financing costs increased. Nord Stream II is particularly prickly, because it represents a fight within Europe itself over the role of Russian imports. The pipeline, which will re-route natural gas transit away from Ukraine and send it directly under the Baltic Sea to Germany, has been the subject of numerous legal challenges and debates at the highest levels.
The governments of the shareholders are defending it against many of the Baltic and east European states who are worried about Russian domination of their gas markets.
Into this carefully balanced situation then stomps the Senate bill, which is framed primarily as retribution for a domestic US issue (the election meddling), and represents a massive escalation by allowing European companies to be targeted for sanctions.
Weaponising US gas
The bill also contains wording explicitly prioritizing US LNG exports and development, which leaves yet another bad taste in European mouths.
Many European leaders welcome diversification, as the numerous LNG import projects in Poland and the Baltics attest, but Russia will likely always be able to undercut LNG prices. The bill, then, can be read as a way for the US to extraterritorially target cheap Russian supplies in favour of its own LNG exports, roping EU customers into paying higher prices.
In normal times, this bill could be seen as a blip, with problems that could be ironed out and harmonised between the US and EU partners – much like in the original package of Russian sanctions, which EU leaders ensured did not affect Russian exports, even if it blocked the export to Russia of technology.
But this is a new era of US-EU relations. This controversy follows a string of others, with Trump’s withdrawal from the Paris Agreement and Merkel’s post-G7 statements about the US’ reliability as a partner being key low points. With zero co-ordination with the EU, the unilateral approach of the new bill could easily further the damage and undermine transAtlantic unity regarding the entire sanctions package.
On the other hand, Europe is not united behind Merkel. Poland and other eastern European countries are happy with the US position. Thirteen EU states officially want the EC to negotiate the legal uncertainty of the situation, and argue against Berlin’s position that the project is strictly about economics.
As such, even though Europe will never unify in support of the new sanctions bill, it could resonate with a certain set of supporters and lead to a realignment of US-EU relations, instead of strictly degrading them.
Ben McPherson