In a matter of a week, the cards in the geopolitical exchange between the US and Russia have been dramatically shuffled. The new bill, which passed by an overwhelming (97-2) majority in the US Senate, signals potential tectonic moves in transatlantic, EU and West-Russia relations.
Long before the EU public could read into the fine print of the US draft legislation, German Foreign Minister Sigmar Gabriel and Austrian Chancellor Christian Kern warned in a joint statement that Europe’s energy supplies were “a matter for Europe, not for the United States.”
It is worth looking deeper into the semantics and the fallout of this bitter exchange.
First, energy supplies and energy security are an indispensable part of national security, i.e. of the national and collective defense systems on both sides of the Atlantic, whether we admit it or not. The pursuit of egocentric national interests in Nord Stream–2 or its analogues, at the expense of shared and balanced defense policies at a NATO and EU level, plays into the hands of rivals and opponents. The allusion to the predominant economic and business denominator in those infrastructure projects, generated by German and Austrian high officials, is not only overtly simplistic but misleading. Both recent history and Russia’s track record of use of energy weapons as a foreign policy tool are an eloquent proof that when it comes to gas the Kremlin means geopolitics first, business later.
Second, the US Senate bill transcends party lines and is a pivot in an emerging legitimate US self-defense response to a threat to both the US and the NATO collective security system. Whether President Trump is implicated or not in the Russian probe, is irrelevant. We are yet to see the details and the charges, if any, but there is a consensual line and proof that Russia has interfered in the in US electoral process, trying to influence both the outcome of US presidential elections and the future direction in US foreign policy. This has immediate repercussions to the US’s ability to underwrite its security guarantees to other NATO members. To claim that pipelines from Russia into the heart of the EU, bypassing the whole of CEE, denying these countries legitimate financial proceeds and honoring essential part of the foreign policy and energy strategy of the Kremlin, are a purely commercial deal is sheer nonsense. At best.
The unfolding investigation in the US clearly alludes to an operation that has been designed and executed deliberately targeting key institutions. This is ipso facto an act of war – the fact that a hybrid instrument is involved does not alter much – the US has every right to protect itself against hostile actions and to expect sympathy and support from its allies at least within the confines of the mainstream reading of basic NATO solidarity.
Whether NATO’s article 5 is formally triggered or not is metaphysical. The threat to US national security is considered real and codified in an act of the highest legislative power level – the US Congress. German and Austrian politicians should be able to reach out beyond the trivial and immediate plan behind Putin’s moves.
The European public does not need to be convinced of the authenticity of the threat from the Kremlin. French, German, British, Dutch and many other EU citizens and politicians have been the victim of Russia’s hybrid operations. And some of them have preferred to appease instead of directly confront the Russian threat, paying the political price.
Second, both Germany and the EU rely on US defense guarantees, sparing themselves the burden of self-sufficient military budgets, while not meeting even the modest 2 percent of GDP criteria. Against this backdrop, the German defense minister’s stated support for a separate European army fall flat on the reality check of what EU countries are willing to share and spend. This critical dependence on US security guarantees, amidst a volatile global and regional risk environment and an insolent and aggressive Kremlin, can neither be ignored nor easily alternated. If the US Congress deems it a must to confront a Russian threat to core US national interests, by proposing a sanctions’ upgrade in an area where Russia would be hurt most, the least EU leaders should do is to carefully assess options and repercussions. The German and Austrian governments’ open pro-Gazprom stance are not only egocentric, but premature and counterproductive.
Bonn and Vienna have every right and duty to protect their consumers and gas contracts with Gazprom – which jointly taken constitute 57 bcm per annum. The security of these supplies has not been an issue in recent years. A second line of Nord Stream, however, would not be about energy supply security, but about extra profits from brokering services for Russian gas in Europe. Nord Stream-2 would add 55 billion cubic meters, the bulk of which will not serve to meet internal German and Austrian gas demand, but will be destined to neighboring and mostly CEE markets. These countries have never asked, nor authorized Germany, for this brokerage for Gazprom.
On the contrary, most to them are seeking to develop alternative supply chains sourced out to the Caspian, Black sea, East Med and global LNG, including US shale gas. Germany’s Nord Stream-2 ambitions are undercutting their ability to diversify away from a monopoly supplier, as the Nord Stream will shield Gazprom’s EU market shares and privileged access to CEE markets. By extending credits and investing in securing new channels for penetration of Russian gas into the heart of the European gas market, Gazprom’s EU partners in the project are openly opposing the EC’s attempts to clear the EU gas market to competition and equal treatment for new suppliers.
Critical dependence on Russian gas for supplies and routes has been a key barrier to EU gas market liberalization, integration and price harmonization. CEE governments and consumers have regularly been subjected to Russia’s political blackmail and gas overpricing, with Gazprom sharing part of the surcharges’ proceeds with its EU partners and brokers. Whatever value is added to German, Austrian and other EU energy companies Russian bypass gas pipeline projects like Nord Stream–2 bring, benefits to the tune of $ 10 billion per annum, most of the bill is paid by CEE consumers and businesses. Such a blind pursuit of self-interest does not qualify for even the loosest EU solidarity benchmarks.
Until very recently, Russian gas supplies to the EU had no or few alternatives. Nord Stream–1 was deemed essential to insure gas supplies to Germany in a force majeure event. This energy security line has been often repeated by the German and Austrian high officials. However, the EU gas market has attracted considerable alternative suppliers via both land pipelines and LNG terminals, which are ready to compete with Gazprom and offer EU consumers viable alternatives, tough competition and low prices in the nearest future. Not only to German but to all EU consumers.
Alternative gas supply infrastructure – pipelines, interconnectors, terminals, storage facilities, trading platforms – away from Gazprom’s reach, are not going to happen overnight. They won’t fix immediate short-term supply problems in the CEE, but are crucial to determine future strategic options and market set-up.
European gas history unequivocally tells us that routes determine gas market competition, notably in countries without access to alternatives to Russian gas. They rely on the EC’s guidance and honest member countries’ interest arbitration. Regardless of what Bonn and Vienna pledge, the net impact of their policy line is to effectively sideline the EC as the prime decision-making level in relations with Gazprom and deny Brussels the role of the honest broker, balancing off extreme peaks of national egoism.
Fourth, Germany and Austria might cherish a zone of comfort with Gazprom, but their political preferences for Nord Stream–2 run counter to prevailing trends in the global gas market. The expected global LNG gas glut and the low oil prices are giving Europe a unique chance to interconnect and integrate its national gas markets, without picking favorites, in the process of harmonizing gas prices and terms of trade.
Nord Stream-2, instead, would lead to further EU market fragmentation and the emergence of a gas islands of privileged Gazprom treatment. Sustained price differentials add insult to injury resulting in enhanced centrifugal undercurrents undermining and shattering the EU to the core. This is a suicidal line to pursue after the Brexit.
Although the US Senate bill contains general provisions on new sanctions, there is little new as most of the content is copying the bill introduced in January by a group of senators. At that time, they thought that President Trump could repeal the decrees of Barack Obama on sanctions against Russia.
Contrary to statements made by Vladimir Putin about the allegedly weak influence of these sanctions on the Russian economy, the fact is that their impact is devastating. Prior to the annexation of Crimea, Russian corporations and banks used to borrow on the international capital markets, each year, to the tune of $660 billion. These funds played an instrumental role for the recovery of the Russian economy after the crisis of 2008-2009. These days the total portfolio has sunk to $450 billion with no signs of recovery, against the background of dramatically lower oil and gas sales revenues. This in turn limits the restructuring and modernization resource base in vital sectors, like oil and gas, and the resource base for sustaining Russia’s hybrid warfare. It also drains essential social programs, which buy Mr. Putin peace and votes at home.
Today Russia is desperately short of long money (above one year), which in all but name constitutes an international credit embargo. New money is not coming in, old debts are difficult to impossible to refinance. Neither China nor the rich Arab Gulf states could step in to make up for the loss of access to credits in the West. It is sufficing to look at the fate of joint gas infrastructure projects with China that relied on Chinese funding.
There are a couple of provisions in the proposed new US sanctions that warrant a closer look – reducing the length of loans available in the West to 14 days, imposing sanctions against Russia’s private armies and spies, oil and gas companies from third countries working with Russia and possible sanctions against new export pipelines.
It is plausible that the US threat to go after EU energy companies, that have agreed to finance the Nord Stream-2 project, has provoked the wrath of German and Austrian leaders. The obvious objective is not only to block the Nord Stream-2, but to add Washington’s weight behind the critics of the pipeline among EU members states.
Chancellor Merkel has openly challenged the EC’s role in the process and has rejected the latter’s call for a mandate to negotiate with Gazprom the Nord Stream-2 compliance with EU law. When and if top EU companies, such as Engie, OMV, Shell, Uniper and Wintershall, face sanctions by the US, then the likelihood of a EU-US spat skyrockets. This time it will be no more about penalizing Russia and its politicians, oligarchs or companies for Crimea and Ukraine, but directly hitting at EU majors and EU governments for helping Russia sustain its financial base for its political and hybrid warfare against the US and the West in general. What happens with Nord Stream–2 will be echoed in Turk stream’s entry into the EU gas market, in allowing Gazprom in the TAP and other projects, or acquiescing with its tight grip on the CEE market, blocking competition.
It is impossible to differentiate between the financial resources base for Russia’s internal and foreign policy operations. Whatever money ends up with Gazprom could be further traced funding hybrid attacks both against targets in the US and in the EU.
This is no time for leniency and double talk on both sides of the Atlantic.
Push has come to shove and the US and EU leaders must make up their mind on the ambiguity of the economic and political footprint on transatlantic relations of their dealings with Russia.