The Fuse

Energy Implications of Tighter U.S. Sanctions on Russia

by Nick Cunningham | August 02, 2017

The U.S. Congress passed legislation in late July that tightens sanctions on Russia in response to Moscow’s alleged interference in the 2016 U.S. Presidential election. The bill targets Russia’s energy sector, forbidding U.S. companies from working on projects in which Russian firms own more than a 33 percent stake.

The bill codifies into law U.S. policy left from the Obama administration, solidifying what have been, up until now, merely executive orders, which can be easily reversed. In 2014, in response to Russia’s intervention in Ukraine, the U.S. government slapped sanctions on Russian energy companies, forbidding American companies from cooperating with or selling equipment to Russian firms for Arctic, deepwater, and shale projects. The latest legislation seeks to put the framework of those orders into law, while adding new provisions and at the same time making it more difficult for the U.S. President to unwind them. President Trump signed the bill on Wednesday.

The bill codifies into law U.S. policy left from the Obama administration, solidifying what have been, up until now, merely executive orders, which can be easily reversed.

The full potential effects of the sanctions are unclear. Since 2014, Russia has begun to go it alone in the Arctic. Furthermore, the country has also welcomed European firms into Russian-led ventures, as European sanctions are not as burdensome as those implemented by the U.S. Without coordination with international allies, unilateral sanctions from the U.S. will have less bite. At the same time, however, the U.S. sanctions could ensnare a key pipeline project in Europe, testing the Trans-Atlantic alliance while also escalating tensions between the U.S. and Russia.

Sanctions target Russian energy sector

The sanctions passed the U.S. Congress with a last-minute concession that exempts projects with less than a 33-percent ownership by Russian firms. A prior draft of the bill was much more restrictive, barring American companies from working on projects with even minimal Russian ownership. After several U.S. oil and gas companies protested, the language of the bill was softened, allowing certain projects to go ahead, such as BP’s natural gas venture in the Caspian Sea, which includes a 10 percent stake by Russian oil form Lukoil.

But the bill will still tighten the screws on Russia’s energy sector, altering how Russia does business with the global energy industry and increasing risks of partnering with Russian companies.

Sanctions now include restrictions on oil and gas pipelines, a provision clearly intended to target the Nord Stream 2 pipeline, a massive and controversial project in Europe that would expand the volumes of Russian natural gas flowing into Germany.

Specifically, the sanctions will now include restrictions on oil and gas pipelines, a provision clearly intended to target the Nord Stream 2 pipeline, a massive and controversial project in Europe that would expand the volumes of Russian natural gas flowing into Germany. The expansion would double the capacity of the existing pipeline. Critics say this would lock in dependence on Russian energy at a time when the EU has been seeking energy diversification.

But the project is supported by several Western European countries, most notably Germany, which sees the Nord Stream 2 expansion as a reliable source of natural gas supplies. In addition to Russian state-owned firm Gazprom, which is the lead on the project, several large Western European firms—Engie, OMV, Royal Dutch Shell, Uniper and Wintershall—have significant stakes in the remaining portion of the proposed pipeline. Several Eastern European countries, though, are vehemently opposed to the pipeline, including Poland, but the support of Germany, among others, is pushing the project forward.

Not only are EU officials angry about Nord Stream 2; they say that an array of other legitimate projects involving Russia would also be undermined by sanctions.

Against that backdrop, new sanctions that target Nord Stream 2 have angered Brussels. Not only are EU officials angry about Nord Stream 2; they say that an array of other legitimate projects involving Russia would also be undermined by sanctions, including pipelines in Ukraine, for example. Jean-Claude Juncker, the president of the European Commission, has called for retaliation against the U.S. policy. The FT reported in July that several options have been under consideration. On the moderate end, the EU would seek “reassurance” from the U.S government that the sanctions wouldn’t hit EU interests. But bolder action would include “WTO-compliant retaliatory measures” from the EU or preventing U.S. sanctions from being “recognized or enforceable” in Europe, according to a memo viewed by the FT. European officials have since downplayed the significance of such proposals, but the leaders of several countries, including Germany, are clearly irate.

New tensions with Russia

Although the country’s economy has taken a hit from penalties imposed by the U.S. and the EU, along with lower oil prices, Moscow has adapted to life under sanctions. Since 2014, Russia has been forced to do more with less, Russian firms have had to find capital and expertise domestically while also working to improve oil drilling technology. Three years ago, Russian companies leaned on their international partners, such as ExxonMobil, for their offshore drilling prowess before coming under American sanctions. But since then, Russian oil giant Rosneft is pushing deeper into the Arctic by itself. In that context, it is unclear how much of an effect new sanctions will have.

Nevertheless, the overwhelming vote in both chambers of Congress demonstrate a bipartisan desire to retaliate against Russia over its alleged election meddling. And while Western Europe has misgivings, leaders from Eastern Europe welcomed the move. U.S. Vice President Mike Pence traveled this week to several Baltic States to reassure them about the U.S. commitment in the region, demonstrating a more confrontational approach toward Russia.

Russia is not pleased with the harder line the U.S. has taken recently. Moscow responded by expelling American diplomatic personnel and conducting military exercises with 100,000 troops in Belarus at the eastern edge of NATO’s border. Tensions are clearly on the rise. But even with sanctions in place, Russian oil and gas will continue to flow largely unfettered as before.

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