The U.S. sanctions Russia, Europe says 'Ouch

The Russia sanctions bill passed by the U.S. Senate threatens to deepen the rift between the U.S. and Europe that has emerged since Donald Trump won the presidency. Though in the U.S., the bill is only discussed in a domestic political context, German and Austrian leaders see certain provisions as an attempt to give an unfair advantage to U.S. energy exports.

Prior to the first three rounds of sanctions, which were linked to Kremlin-backed aggression in Ukraine in 2014, the U.S. made a point of negotiating with its European allies. The European Union timed the roll-out of its own sanctions to coincide with U.S. actions. Indeed, it's the European trade and finance restrictions that have hurt Russia the most; Europe is the biggest market for Russia's energy exports, while Russia never had much of a trade relationship with the U.S. The loss of direct and portfolio investment from Europe and the demise of the South Stream natural gas pipeline plan were the most painful effects of the sanctions. Today, those European restrictions are the primary reason why the Kremlin wants sanctions lifted.

This time around, the senators who sponsored the bill have made no effort to build a coalition that would include Europe. It would probably be futile, anyway. Though the EU, with some reluctance, keeps extending its restrictions against Russia, there is little support for making them tougher. Besides, the Senate bill responds to allegations of Russian interference in the U.S. presidential election. But given the experience of recent European elections, where candidates favorable to Russian President Vladimir Putin have been losing, it looks to some EU leaders as if the U.S. is overreacting or worse.

Consulting European allies on the substance of the sanctions bill would have made sense given how offensive it was bound to be to some of them. Among other things, the bill says the U.S. president “may impose” various sanctions on companies that take part -- as investors, suppliers or contractors -- in Russian pipeline construction projects. Worse, it makes quite clear that this is not just about punishing Russia, but also about fighting for the European energy market.

“The United States government,” the Senate bill says, “should prioritize the export of United States energy resources in order to create American jobs, help United States allies and partners, and strengthen United States foreign policy.”

That seems aimed against Nord Stream 2, the proposed Russian pipeline across the Baltic Sea to Germany, bypassing Ukraine. Investors in Nord Stream 2 include five major European companies: French ENGIE, German Uniper and Wintershall, Anglo-Dutch Shell and Austrian OMV. The U.S. president is not about to sanction them for working with Russia as the bill authorizes. But by linking the issue to U.S. jobs and exports to Europe, the senators clearly want to make it hard for Trump to reject the proposal: His agenda is heavy on jobs and trade advantages for U.S. producers.

That's what worries European leaders. Gas production in the northwest of Europe is falling rapidly, and while the U.S. is ramping up its liquefied natural gas (LNG) export capacity, it's not clear whether the price of U.S. gas can remain competitive with that of the Russian pipeline gas, supplied by state-controlled Gazprom. At this point, large-scale U.S. LNG exports to Europe appear to be a money-losing enterprise aimed at gaining market share. But if those exports are buoyed by U.S. sanctions against Gazprom's pipeline projects, northern and central Europe may become hostages to U.S. suppliers at some point.

Europe's energy supply

In a sharply worded joint statement issued Thursday, German Foreign Minister Sigmar Gabriel and Austrian Chancellor Christian Kern said they couldn't “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's energy supply is a European affair, not an American one, they wrote. Gabriel and Kern also warned the U.S. against expanding sanctions without consulting European partners:

It would not only be highly regrettable, but would also diminish the effectiveness of our stance on the conflict in Ukraine, if we were to no longer take joint action, and if completely separate interests were to prevail, such as the U.S.'s economic pursuits in the field of gas exports.

Foreign policy interests must in no way be linked to economic interests.
Europe's own economic interests here are not easy to sort out. Nord Stream 2 is highly unpopular with Eastern European countries that benefit from Russian gas transit via Ukraine and Belarus. They receive hundreds of millions of dollars in transit fees from Gazprom. Poland is pushing the EU to ban Nord Stream 2, as it effectively banned South Stream. It has plans for a different Baltic pipeline, from Norway.

Sweden, Finland and Denmark, whose territorial waters the Russian pipeline is to cross, have pushed the European Commission to obtain a mandate to negotiate with Gazprom to remove legal uncertainty around the project. That's not gone well so far. On Thursday, German Chancellor Angela Merkel said she didn't believe the “economic project” needed EU approval.The current political dynamics in the EU favor Nord Stream 2. Western European nations,

primarily Germany and France, are not inclined to cosset post-communist EU members such as Poland, especially given brazen flouting of EU values and refusal to cooperate in resolving the refugee crisis. To help matters along, Gazprom has been cooperative with the EU in the hopes of holding on to the market to which it delivered a record amount of gas in 2016. It has agreed to settle an antitrust case brought against it by the Commission and amend its contracts to give buyers more flexibility.

ventually, the matter is likely to be settled with a compromise: Gazprom may be held to contracts specifying delivery points in Eastern Europe even once the Baltic pipe is built.  

That compromise, however, is for the Europeans to hammer out. If the U.S. wants to play a role, it needs to talk to its allies rather than try to present them with a fait accompli. U.S. legislators should realize that doing otherwise merely compounds the international chaos already sown by the Trump administration. Their zeal in trying to punish Russia shouldn't be served at the expense of the Western alliance's already diminished cohesion.

(Source: Bloomberg)