By Nick Cunningham
The U.S. Congress is set to approve legislation that will tighten sanctions on Russia, but more importantly, it will gut the President’s authority to unilaterally remove those sanctions.
The sanctions come in response to the Russian interference in the U.S. 2016 presidential election, and they will target Russia’s oil and gas industry. “It will rearrange the way the global energy industry does business with Russia and significantly increase the risk around dealings with Russia,” Elizabeth Rosenberg, a senior fellow and director of the energy, economics and security program at the Center for a New American Security, said on July 23, according to S&P Global Platts.
The bill is intended to deter investment in Russian energy projects, forbidding U.S. companies from investing in shale, deepwater or Arctic oil and gas projects in which Russian companies control a greater than 33 percent stake. By and large that will affect mostly Russian projects, but a handful of projects outside of Russia’s borders will also be targeted.
The bill is a setback for U.S. President Donald Trump, who has repeatedly signaled his desire to soften relations with Russia. The legislation strips him of his power to remove sanctions on his own, instead requiring some consent by Congress. The President could still veto the pending legislation, but with supermajorities likely, his position will be all but irrelevant. Acknowledging this reality, the White House suggested over the weekend that the President might agree to sign the bill into law. The U.S. House of Representatives is slated to vote on Tuesday.
But President Trump is not the only one with reservations about the new sanctions. The European Union is angry that the legislation could damage major energy projects in Europe, hitting European companies doing business with Russian firms. According to a memo written by the European Commission, and reported on by the FT, “the measures could impact a potentially large number of European companies doing legitimate business under EU measures with Russian entities in the railways, financial, shipping or mining sectors, among others.” Brussels says the sanctions could impact natural gas production off the coast of Egypt, gas pipelines in Ukraine, and gas projects in the Caspian. The impact would be “wide and indiscriminate,” the European Commission said.
But it is the Nord Stream 2 pipeline that is likely receiving the most attention, a major project that could also become ensnared in the new U.S. restrictions. The proposed pipeline would double the capacity of the existing Nord Stream 1, which moves natural gas from Russia to Germany via the Baltic Sea.
The European Union is reportedly discussing retaliatory measures against the American legislation, according to the FT, should it become law. These measures consist of several options, including requesting assurances from the Trump administration that European companies would not be affected, or more aggressive actions such as preventing “the U.S. measures from being ‘recognised or enforceable’ in Europe, and preparing ‘WTO-compliant retaliatory measures,’” the FT wrote.
The Nord Stream 2 pipeline is controversial, even within Europe. Critics argue that it would increase European dependence on Russia for their energy needs, while Germany and several Western European oil and gas companies are supportive. About 40 percent of Germany’s gas consumption is imported from Russia, a reliance that will balloon to 50 percent by 2025. But Nord Stream 2 will also make Germany a larger energy hub, allowing for the country to act as the crossroads for energy distribution to other parts of Europe. And with major German firms involved in gas pipeline, it is seen as strategically and economically important.
Many nations in Eastern Europe are more circumspect – Poland, for example, is one of the most vociferous opponents.
The American legislation will be one more issue that widens the growing rift between Washington and Brussels, with the American-German relationship particularly rocky these days. The Trump administration is reportedly considering new trade restrictions on imported steel, another area where Europe promised retaliation. “We are concerned the measures discussed in the U.S. Congress could have unintended consequences, not only when it comes to Transatlantic/G7 unity, but also on EU economic and energy security interests. This impact could be potentially wide and indiscriminate, including when it comes to energy sources diversification efforts,” the European Commission said in a statement.
For Russia’s part, they have voiced concern about the impact on Nord Stream 2, although said it would take a wait-and-see approach.
By Nick Cunningham of Oilprice.com