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New US Sanctions may target Europe’s gas relationship with Russia

by on July 26, 2017 in News, Russian Economy, Russian Federation

Congress has passed, overwhelmingly, a new sanctions bill – which includes sanctions against Iran, Russia and North Korea.

The bill now goes to the Senate where it is expected to be passed. President Trump will then be under strong pressure to sign it into law.

The sanctions against Russia include new Iran-style sanctions. These go beyond instructing US businesses what they can and cannot do. These sanctions target the businesses of other countries; imposing penalties on their US operations if they work with Russia in certain ways. The EU is up in arms – though they may not in reality do very much.

The part of the bill (Section 232) which has so offended the EU is that part which imposes penalties on entities which make financial investments which “directly and significantly contributes to the enhancement of the ability of the Russian Federation to construct energy export pipelines” or which make technology transfers which “could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy export pipelines by the Russian Federation”. I.e they are targeting non Russian companies who work with Russia to develop export pipelines.

The penalties are various (given in Section 235 of the document). They include:

  • withdrawal of US government export credit facilities
  • curtailment of any export licenses concerning goods which would be exported to the targeted entity
  • blocking of loans made by any US financial institution to the targeted entity
  • using the US vote to block loans made by international organisations
  • withdrawal of a right to be a primary dealer in US government debt
  • blocking of any US government contracts made with the targeted entity
  • blocking of any financial transactions made with/by/to the targeted entity via the US financial system
  • blocking of US purchasing debt from the targeted entity

This is very serious stuff.

The immediate target of this is the the Nord Stream 2 project – a pipeline Russia is building under the Baltic to export gas to Europe, bypassing Ukraine. (There is already one pipeline on this route; this is to add capacity). This project is a joint project between Russian state controlled Gazprom [2] and several European energy companies. [3]

These companies will now have to decide if they want to risk substantial negative repercussions if they continue to be involved.

A secondary target might be Russian plans for a gas pipeline across the Black Sea to Turkey.

The EU – which was looking forward to its citizens consuming the exported gas will have to decide if it wants to make a political response.

The way out for everyone appears to be that the bill permits the President at will to impose the sanctions. The bill can be passed and become law but President Trump might simply choose not to take advantage of the provisions in the bill. Though one imagines that if the bill is passed then he will face pressure to use the measures in it. But for the EU to accept some kind of fudge like this would set a dangerous precedent for them.

Up till now EU and US sanctions have targeted Russia’s oil industry rather than gas. Russia exports oil to Europe but China, South Korea and Japan are also recipients. But almost all of Russia’s gas exports go to Europe. [4] Up till now – the EU has been careful to avoid doing anything which could affect its own gas supply. And, clearly, the continued export of its gas to the EU is a major source of revenue for the Russian state. The US bill thus threatens both the EU (in terms of cheap, reliable, gas supplies) and Russia (in terms of a potential loss of revenue).

The argument being made by the Russian side is that the driver for this is a US desire to sell its own gas products to Europe. This view is also being openly voiced in Germany. [5] (Readers of RT cannot but fail to notice that the long predicted division between the EU and the US over sanctions is now coming to pass).

The bill also makes existing sanctions which currently have the status of a directive into law which will make it harder for them to be removed.

This is a kind of declaration of war.

In the end all this will probably backfire on the US. When Congress chants ‘we are protecting freedom’ what they are actually chanting is ‘we are protecting the profits and interests of US business’. But they are in the long run backing themselves into a backwater. The world will go on – whatever difficulties they try to create for people who don’t ‘get’ the American way.

Notes

1. Full text of the Bill in Congress

2. https://www.economist.com/news/business/21573975-worlds-biggest-gas-producer-ailing-it-should-be-broken-up-russias-wounded-giant

3. https://www.rt.com/business/357176-nord-stream2-biden-us-russia/

4. https://www.forbes.com/sites/kenrapoza/2015/04/07/heres-where-russia-shipped-oil-last-year-as-ukraine-europe-diversifies/#4755fb017c5d

https://www.eia.gov/todayinenergy/detail.php?id=17231

5. https://www.rt.com/news/394783-germany-russia-sanctions-nordstream/

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