Gas Wars

Europe needn’t worry that proposed American sanctions on Russia will hit its gas supply

Energy markets have undergone significant transformation in favour of importers, and Russia’s tough talk against sanctions is little more than posturing

US legislation renewing and tightening sanctions on Russia, stalled in the House of Representatives, was not passed before the US and Russian presidents met at the G20 summit in Hamburg. The proposed bill had already received criticism not only from Russia but also from Germany and Austria about the impact sanctions may have on Europe’s gas supply.

Europe and the United States need not worry: energy markets have undergone significant transformation in favour of importers, and Russia’s tough talk warning against sanctions is little more than posturing. Russia needs Europe as a market for its oil and gas.

The proposed sanctions bill – if passed by the House of Representatives and not vetoed by President Donald Trump – would put into law sanctions previously established under former President Barack Obama as well as expand them, targeting various companies and sectors of the Russian economy, including the energy sector. The sanctions, renewing earlier sanctions for Russia’s annexation of Crimea in 2014 and involvement in the war in eastern Ukraine, are a response to Russia’s cyber attacks during the 2016 US presidential election as well as weapons supply to Syria’s government.

Significantly, the new bill hinders Trump from easing sanctions on Russia without approval from Congress. The Senate approved the bill nearly unanimously in June.

Controversial project

Russia’s majority state-owned gas company, Gazprom, complains that the new sanctions target European companies involved in Russia’s controversial Nord Stream II pipeline project. The planned project expands the existing Nord Stream system that pumps Russian gas under the Baltic Sea to Germany and bypasses Europe’s previous gas transit hub, Ukraine. With companies from Austria, France, Germany, the Netherlands and the UK on board with the project, Nord Stream II, if completed, would support the dominance of Russian gas in Europe. Gazprom controls about 15% of global reserves and more than 70% of Russia’s.

In response to the sanctions, Viktor Zubkov, chairman of Gazprom’s board and former prime minister stated, “As the project moves towards implementation, the basic design is completed, the construction of the pipes continues, there are now more insinuations and tightening of sanctions against Russia in the field of energy. In Europe, the region’s gas supply is being threatened. Washington pursues purely economic interests by lobbying for American energy companies in Europe.”

There are two ways to interpret Zubkov’s statement. First, given the Kremlin’s history of using energy as a weapon the statement reads as an innuendo that Russia could or has the potential to threaten Europe’s gas supplies. Another, that the Nord Stream II pipeline ensures European gas supplies from Russia, and thus US sanctions that threaten the pipeline’s completion indirectly threaten Europe’s imports. Neither is quite accurate though the threat could ring true to long-term Russia watchers.

Veiled threats

Zubkov’s statement echoes the Kremlin’s tradition of veiled threats to cause disruptions in energy supplies to its rivals. Indeed, Russia has cut gas supplies to Ukraine on multiple occasions and hiked gas prices to Central and Eastern European countries when political tensions ran high.

Gazprom’s leadership has been closely tied to the Kremlin since the 2000s. For instance, before he was elected Russian president in 2008, current Prime Minister Dmitry Medvedev served as Gazprom’s chairman of the board in 2000 and then on the board of directors between 2000 and 2001 and between 2002 and 2008. Chairman of the management committee of Gazprom, Alexei Miller, not only worked for Putin in the St. Petersburg Mayor’s Office in the 1990s, but was also a loyal friend. Zubkov was prime minister under Putin before Putin became prime minister himself while Zubkov replaced Medvedev at Gazprom when he took the presidential office.

However, the Kremlin’s innuendo that US sanctions threaten Europe’s supply of Russian gas is either empty bluff or dangerous miscalculation. At the end of the day, the global natural gas markets have transformed with much greater supply and liquidity from booming US natural gas production and rising US liquefied natural gas exports.

For instance, this month the first US shipment of LNG arrived to Poland’s new Swinoujscie terminal. Likewise, Lithuania signed its first agreement to receive US LNG by August of this year, utilizing its LNG terminal that since 2014 has challenged Gazprom’s gas supply monopoly in the Baltics. Even within Russia itself, Gazprom is losing the power it once had over the export market. A private Russian gas firm is slated to deliver the first Russian LNG shipment to Europe, ahead of Gazprom.

Holding on

Overall, Gazprom has been desperate to hold on to the European gas market where it faces not only more competition but also a political backlash due to its previous heavy hand in energy trade exemplified by political gas pricing and threats of gas cuts. Eastern European, Nordic and Baltic states have denounced Nord Stream II as another monopoly effort by Russia in Europe and a security threat given Russia’s increased military presence in the region where the pipelines would be laid. Moscow’s suggestions that Europe’s gas supplies from Russia are threatened may convince other EU countries of the need to secure alternatives for Russian gas imports.

Nonetheless, some in Europe prefer more Russian gas imports via Nord Stream II as exemplified by German and Austrian criticism to the new sanctions. German Foreign Minister Sigmar Gabriel and Austrian Chancellor Christian Kern said, “Europe’s energy supply is a matter for Europe, not the United States of America.”

Russia’s threats can only backfire. As explained in my new book, The New Geopolitics of Natural Gas, the changing nature of the natural gas markets are increasingly chipping away at the Russian monopoly over Europe, with growing LNG trade, new US imports and a buildup of new infrastructure to bring alternative sources of gas from the Caspian. Russia no longer has the influence it once had over gas markets in Europe, and the new market realities will prove stronger than Russia’s sharp rhetoric.

Thus, European countries like Germany should not fear further US sanctions on Russia. Europe has alternative sources and future gas supplies will not depend exclusively on Gazprom and Nord Stream II. Likewise, the House of Representatives should take advantage of the historic transformation in the global energy market and feel free to press for Washington’s long-term goals in Europe and vis-à-vis Russia.

This article first appeared on YaleGlobal Online.

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