A rift over Rus­sian pipe­line

Why Europe is wor­ried U.S. sanc­tions may jeop­ar­dize Krem­lin project

Los Angeles Times - - THE WORLD - By Sabra Ayres

MOS­COW — The U.S. sanc­tions bill ap­proved last week in the House of Rep­re­sen­ta­tives has Euro­pean lead­ers wor­ried about how the leg­is­la­tion could af­fect con­ti­nen­tal di­vi­sions over de­pen­dence on Rus­sian oil and gas.

If Pres­i­dent Trump signs the bill, it would put into law sanc­tions ap­proved by Pres­i­dent Obama, which were largely cre­ated in col­lab­o­ra­tion with Euro­pean con­sul­ta­tion. But the new bill would ex­pand the list of tar­geted Rus­sian com­pa­nies and in­di­vid­u­als, par­tic­u­larly in the en­ergy sec­tor. That could sub­ject Euro­pean com­pa­nies to U.S. sanc­tions for do­ing busi­ness with Rus­sian com­pa­nies on the list, specif­i­cally jeop­ar­diz­ing a con­tro­ver­sial $10-bil­lion gas pipe­line project called Nord Stream 2.

What is Nord Stream 2?

The Nord Stream 2 pipe­line project fol­lows the first Nord Stream project, which was built in 2011 to pump gas from Rus­sia’s Baltic coast to Ger­many. The sec­ond phase would ex­pand the sup­ply of Rus­sian gas ex­ports to Europe.

The $10-bil­lion pipe­line project is the pride of the Krem­lin-con­trolled gas sup­ply com­pany, Gazprom, and was sched­uled to be com­pleted and pump­ing gas di­rectly to Europe by 2019.

The pipe­line project is fi­nanced par­tially by a con­sor­tium of Euro­pean in­vest­ment part­ners.

The route by­passes Ukraine, where pre­vi­ous dis­putes be­tween Mos­cow and Kiev over nat­u­ral gas prices and tran­sit fees have led to Gazprom shut­ting down sup­plies. This has caused stress in Europe, which de­pends on gas sup­plies from Rus­sia via Ukraine’s pipe­lines.

The Nord Stream 2 project has cre­ated rifts among the Euro­pean Union’s 28 mem­bers, some of whom fear the com­ple­tion of the pipe­line acts against the EU’s goal of di­ver­si­fy­ing its en­ergy sec­tor away from Mos­cow’s ex­ports.

Rus­sia cur­rently sup­plies a third of Europe’s nat­u­ral gas. With the Nord Stream 2 pipe­line, that could in­crease to more than 40%.

Crit­ics of Nord Stream projects say they will al­low Gazprom to in­crease its dom­i­nance of Europe’s en­ergy sup­ply, mak­ing en­ergy a geopo­lit­i­cal tool and putting the Krem­lin in greater con­trol than some Euro­pean lead­ers would pre­fer.

“The pipe­line pits the in­ter­ests of Ger­many and Aus­tria against Cen­tral and Eastern Euro­pean coun­tries, frac­tur­ing the EU at a mo­ment when the bloc is fi­nally gain­ing trac­tion as a geopo­lit­i­cal ac­tor,” wrote Kris­tine Berz­ina, a se­nior fel­low at the Ger­man Mar­shall Fund, on Thurs­day. “But by threat­en­ing to end the Nord Stream 2 project, the United States is de­priv­ing the EU of the op­por­tu­nity to ma­ture as an en­ergy se­cu­rity ac­tor.”

How has Mos­cow re­acted?

The Krem­lin was quick to point out that the U.S. sanc­tions would harm not just Rus­sia, but also “third par­ties.” Mos­cow re­sponded by seiz­ing two diplo­matic prop­er­ties and or­der­ing re­duc­tions in the num­ber of U.S. Em­bassy staff.

“It goes with­out say­ing that we and our Euro­pean part­ners at­tach great im­por­tance to fin­ish­ing th­ese projects, and we will work to­wards this,” Krem­lin spokesman Dmitry Peskov said last week. “That is why dis­cus­sions about sanc­tions, which could po­ten­tially ob­struct th­ese projects, are a cause of con­cern for us.”

Last week, the chair­man of Gazprom’s board sug­gested that the U.S. sanc­tions could threaten Europe’s Rus­sian gas sup­ply if Nord Stream 2 were not com­pleted.

“In Europe, the re­gion’s gas sup­ply is be­ing threat­ened. Wash­ing­ton pur­sues purely eco­nomic in­ter­ests by lob­by­ing for Amer­i­can en­ergy com­pa­nies in Europe,” the Gazprom board chair­man, Vik­tor Zubkov, said at a busi­ness fo­rum in Vi­enna.

The Krem­lin’s sug­ges­tion that Europe’s sup­ply of Rus­sian gas is un­der threat be­cause of the U.S. sanc­tions bill is “ei­ther empty bluff or dan­ger­ous mis­cal­cu­la­tion,” wrote Ag­nia Gri­gas, a se­nior fel­low at the At­lantic Coun­cil, in a pa­per for Yale Univer­sity’s Yale Global On­line. Gri­gas is a spe­cial­ist on en­ergy and se­cu­rity is­sues in Europe and post-Soviet states.

“At the end of the day, the global nat­u­ral gas mar­kets have trans­formed with much greater sup­ply and liq­uid­ity from boom­ing U.S. nat­u­ral gas pro­duc­tion and ris­ing U.S. liq­ue­fied nat­u­ral gas ex­ports,” Gri­gas said.

On Thurs­day, the Ger­man Com­mit­tee on Eastern Euro­pean Eco­nomic Re­la­tions ac­cused the United States of us­ing the sanc­tions bill to stim­u­late U.S. en­ergy ex­ports to Europe.

How else would the new sanc­tions bill af­fect Rus­sia’s en­ergy sec­tor?

Rus­sia’s econ­omy is dom­i­nated by rev­enue from its oil and gas sec­tor. Since the breakup of the Soviet Union, econ­o­mists have warned Rus­sia that if it didn’t di­ver­sify its econ­omy and dis­tance it­self from be­ing a petro state, its econ­omy would fal­ter. In­deed, in 2014 Rus­sia’s econ­omy was hit by two ma­jor fac­tors: a de­crease in world oil prices and a pack­age of sanc­tions placed on Rus­sian com­pa­nies and in­di­vid­u­als in re­tal­i­a­tion for Mos­cow’s an­nex­a­tion of Crimea and in­ter­fer­ence in eastern Ukraine.

The 50% drop in global prices of oil, Rus­sia’s most lu­cra­tive ex­port, pushed the econ­omy into re­ces­sion, from which it has slowly emerged this year.

The harsh­est sanc­tions made it dif­fi­cult for Rus­sian com­pa­nies to get long-term loans from in­ter­na­tional lenders. With very few ways to bor­row cap­i­tal for in­vest­ment, many large in­fra­struc­ture projects were put on hold while de­vel­op­ment in other sec­tors stalled.

Rus­sia re­sponded sto­ically, say­ing the self-re­liance on its home­grown prod­ucts would only make it stronger. Ma­jor state-con­trolled en­ergy com­pa­nies such as Gazprom, Lukoil and Ros­neft said they would turn to do­mes­tic in­vestors and rely on in-house tech­nol­ogy in­stead of for­eign ex­perts.

The new sanc­tions bill would in­crease the num­ber of Rus­sian com­pa­nies and in­di­vid­u­als af­fected, es­pe­cially tar­get­ing the en­ergy sec­tor. The bill would also re­strict U.S. in­vestors from buy­ing or fa­cil­i­tat­ing the pur­chase of Rus­sian as­sets worth more than $10 mil­lion as part of any Rus­sian pri­va­ti­za­tion schemes.

sabra.ayres@la­times.com Ayres is a spe­cial cor­re­spon­dent.

Sean Gallup Getty Im­ages

NORD STREAM 2 fol­lows the first Nord Stream pipe­line, above. The sec­ond phase could boost Rus­sian gas ex­ports to sup­ply 40% of Europe’s nat­u­ral gas.

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