The European Union announced on June 22 the extension of its financing and sectoral sanctions against Russia by six months, upto 31 January, 2018.These sanctions are directly linked to implementation of the Minsk agreements of 2015. Unlike the US sanctions, this did not arouse much reaction in Russia. As this Review has noted in earlier issues, the economic engagement between Europe and Russia has been deepening in recent months, with increase in trade and investment.
Major European countries were, however, incensed by the US Congress legislation proposing extra-territorial application of the Russia sanctions. Their application to the gas industry would directly hit European economic interests. Europe still sources about 35% of its natural gas from Russia. Imports increased in 2016 and a number of additional gas pipelines are under discussion. This is the reason why European sanctions against Russia have not included the gas sector (American sanctions include the gas sector, but exclude the space sector because of NASA’s ongoing cooperation with Russia). The new US Act (if passed) would shackle European companies’ investments in Russia. The explicit motivation, spelt out in the Bill, is to promote American LNG exports to Europe, in replacement of Russian gas.
In an unprecedented move, the Foreign Minister of Germany and Chancellor of Austria issued a joint statement, declaring that Europe’s energy supply is Europe’s affair, not America’s and that the “threat of illegal extraterritorial sanctions” is not acceptable. German Chancellor Merkel’s spokesman confirmed that she shared the concern of her Foreign Minister, “with the same vehemence”.
The immediate context of this outburst is the ongoing negotiations with the Russians on the proposed Nord Stream 2 pipeline across the Baltic Sea to Germany. French, German, Austrian and Dutch companies are investors in this project, along with Russia’s Gazprom. This mothballed project is now being revived; the CEO of Royal Dutch Shell visited Russia for discussions and was received by President Putin.
There has been a divide within EU on such gas pipeline projects from Russia, bypassing Ukraine. Countries which would lose transit fees on existing routes are joined by others seeking to restrict Russia’s dominance in the European energy market. Others (like Germany) have generally been in favour of the most economical and reliable gas supply route. The former group have prevailed in the debate over the past decade or so, with more than a bit of encouragement from the US Administration. The South Stream project for a pipeline across the Black Sea to Bulgaria was a victim of this.
With recent developments in Europe and the perceived loosening of the trans-Atlantic hold, Nord stream 2 proponents seem to feel the tide has turned in their favour. Chancellor Merkel confirmed Germany would be going ahead with the project, dismissing suggestions that it needed EU approval, since it was “a purely economic project”. European energy analysts estimate that the price of Russian gas, whether supplied through the Baltic or the Black Sea, is likely to be more competitive than LNG from USA.
The course of this project would be a pointer to the evolving balance of forces within post-Brexit Europe and the influence of the Trump Administration on it.
Meanwhile, Russia and Turkey have commenced construction of the Turkish Stream, which would pipe gas from Russia, via the Black Sea. The planned capacity of this pipeline is 31.5 billion cubic meters (bcm), of which Turkey will consume about 15.5 bcm. If this project fructifies, it may raise a clamour from Southern Europe for its extension to EU.
June 30, 2017