Sanctions on Nord Stream 2? Free markets are better Author

Sanctions on Nord Stream 2? Free markets are better

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In the 2020 National Defense Authorization Act, set to be passed by the House and Senate before the end of December 2019, lawmakers have included a section imposing sanctions on individuals, ships, and companies that partake in subsea pipe-laying of the Nord Stream 2 or TurkStream pipeline project. Both pipelines are being built by Gazprom, originate in Russia and aim to bring natural gas to Europe. These sanctions were designed in S.1441, the “Protecting Europe’s Energy Security Act of 2019” to slow or stop construction of these pipelines by Gazprom by targeting the few European firms capable of laying underwater pipes. It was a bipartisan bill, originally introduced on July 31.

On December 4, I briefed staff and Members of Congress about the longstanding American interest in European energy security at an off-the-record briefing organized by the House Energy and National Security Caucus, led by Chairman of the House Foreign Affairs Committee Elliot Engel. As the event was behind closed doors, I won’t speak about questions or comments from others, but the discussion that follows is taken from my presentation.

I questioned whether the United States can or should want to impose its will on American allies through punitive sanctions. Instead, the U.S. should provide alternative sources of energy – after all, energy security comes from a diversity of supply options – and is not simply about percentages of import dependence.

Ever since the Trans-Siberian Pipeline was first proposed in the late 1970s to link Soviet natural gas to Western European markets via Ukraine, American policymakers have warned European leaders about excessive dependence upon Soviet, and then Russian, energy. Events since then have shown that American policymakers are right to be worried about Russian energy dominance in Eastern Europe. In the winters of 2006 and 2009, Russia cut off gas through Ukraine over pricing disputes between Russia’s Gazprom and the Ukrainian state energy company, NaftoGaz. These disputes were as much geopolitical as they were economic. As the Russians reduced gas sent through Ukraine, the effect was to cause shortages for European customers further downstream on the pipeline.

In 2014, the Ukraine Maidan crisis saw an even worse rupture in relations between Ukraine and Russia. Since then, after Russia cut all gas sales to Ukraine, the war-torn border state has not bought any gas from Russia but continues to allow Russian gas to flow through the country to European customers. Ukraine receives significant fees for allowing these transit rights. It is clear from these events over the last 13 years that Russia was not afraid to use their “Energy weapon” against border states, even as European customers were collateral damage.

However, although American concerns about Russian energy supplies to Europe have been justified by Russia’s actions, that does not mean that American policy should impose U.S. priorities on European allies. Back in the early 1980s, the Reagan administration placed an export embargo on supplies for the Trans-Siberian then being built by the Soviet Union, and imposed sanctions on Western European companies that helped build it. This led to one of the most difficult transatlantic disagreements of the Cold War, with UK Prime Minister Margaret Thatcher, saying she was ‘deeply wounded’ by America’s pipeline policy. In the end British, French, and West German firms defied President Reagan’s sanctions and honored contracts for the Soviet gas pipeline. The pipeline was built, while a rift was opened between America and its allies.

The United States is far more effective as a champion of a free global trading system. After all, what Russia is trying to do is build monopoly power so that it can extract economic (and political) concessions from former Soviet and Eastern-bloc states.  The most important thing American diplomacy can do is to help build an open trading system— with U.S. energy as a part of that system. Throughout the last three Administrations, American policy on European energy security has been to promote alternative supplies of energy to Europe. The predominant method for this has been to promote the building of a pipeline for gas through the “Southern Corridor” through Turkey, which would provide gas from Azerbaijan outside of the Russian pipeline network. Increasingly, as the American natural gas revolution has taken hold, American diplomacy has also focused on securing American exports of Liquified Natural Gas (LNG) to terminals across Europe.

American diplomatic support for European Energy security, combined with a clear view of the Russian threat, has been remarkably successful in building a more resilient energy system in Europe.  Since the 2014 Russian invasion of Ukraine, the EU and the Eastern European countries have taken great strides to address the challenge of Russian energy supplies, even as they have done little to actually reduce consumption of Russian energy. Four notable examples include:

  1. The EU has strengthened its anti-monopoly rules to prevent Russia’s Gazprom from attempting to use its energy dominance.
  2. The European Commission has instituted an “Energy Union” strategy that encourages the growth of a real internal market for energy — not one separated by national borders.
  3. National governments have built new infrastructure like pipeline interconnectors (so the gas does not have to solely flow from East to West) and new LNG terminals in Poland and Lithuania, and proposals in Croatia to enable imports of LNG to eastern countries. These all matter: When Lithuania’s new LNG import terminal came online, Gazprom almost immediately agreed to renegotiate prices down.
  4. Even NATO, a defense alliance without a core competency in energy security, was moved to address the energy security risks of dependence on Russia, creating an “Energy Security Center of Excellence” in Lithuania.

I think it is not in the U.S. government’s interest to use trade restrictions or sanctions as a “weapon.” In doing so, the U.S. is only playing the same game as Putin. Instead, American advocacy for a free and open trading system is more powerful than any energy “weapon” Putin could build. American energy in a free global market will neuter the weapons that other countries think they have built.