Killing Europe: US launches Sanctions War 2.0 against Old World

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August 2, 2017 – Fort Russ – 

By Eduard Popov – translated by Jafe Arnold (J. Arnoldski) –

On July 25th, the House of Representatives of the US Congress voted to pass HR 3364, or the Countering America’s Adversaries Through Sanctions Act. The bill has since been approved by the Senate and even signed off on by US President Donald Trump. While other countries of the “axis of evil”, namely Iran and the DPRK, are singled out in the act, the future law’s main target is Russia, the pretext for such being allegations that Russia interfered in the American presidential elections.  

Besides the important political dimension of this law which calls on Russian authorities in the form of an ultimatum to curtail their political, military, and media activity beyond Russia’s borders, the main aspect of this legislative initiative is its targeting of the Russian energy and banking sectors. The bill limits the maximum volume of investments allowed in oil and gas projects to the point that any company investing more than $5 million a year in Russian energy projects will automatically be subject to sanctions. 

In other words, this aspect of the sanctions is also directed against European energy companies, in particular those party to the Nord Stream 2 project. The new sanctions also prohibit companies doing business in the US from participating in energy projects in which the Russian side owns less than 1/3 of shares. 

Trump signs the sanctions bill

These “sanctions 2.0” can confidently be called anti-European. For example, they could also hit European partners of Gazprom and German E.ON, British-Dutch Shell, French Engie, and a number of other Nord Stream 2 participants. For now these companies have affirmed that they will finance the Nord Stream 2 pipeline, whose construction is set to begin in 2018, and the companies are seeking out lawyers to defend their interests in court. But what will happen next?

Who benefits? 

A freeze or altogether cancelling of Nord Stream 2 first and foremost benefits Ukraine. In sec. 257, HR 3364 specifically provides for a “plan for increasing Ukraine’s energy security.” The commissioning of Nord Stream 2 would, after all, deprive Ukraine of around $2 billion dollars in annual revenues. What’s more, Ukraine would practically cease to exist as a transit state, thus sharply limiting its capacity to blackmail and steal Russian gas, and rendering obsolete the extensive network of gas pipelines stretching approximately 30,000 kilometers across the country, including internal networks, most of which were laid over 30-40 years ago. 

Back in 2013, then Chairman of the Cabinet of Ministers of Ukraine, Nikolay Azarov, wrote in an article for the German newspaper, Frankfurter Allgemeine Zeitung wrote that the modernization of the Ukrainian gas transport system (GTS) would cost 4.5 billion euros (or $6 billion). Today specialists estimate the cost of modernizing Ukraine’s GTS at $7.7 billion, and the cost of pumping (in today’s pricing) at $2.70 per thousand cubic meters. The cost of constructing the Nord Stream 2 pipeline is estimated at $9.9 billion, and the cost of pumping at $2.10 per thousand cubic meters. Nord Stream 2 is exactly two thousand kilometers shorter than the Ukrainian route and pumping fuel through it will be 20% cheaper. Moreover, a large part of this route is in international waters, which significantly reduces the costs of transit fees.

Even if the Ukrainian transit of Russian gas to EU countries is maintained (yet Gazprom has announced that it will not extend the contract from 2019), then it will still be very difficult for Ukraine, if not impossible, to raise funds for modernizing its severely worn out GTS. Back in 2010, Russia proposed creating a joint venture with Ukraine and unifying Gazprom’s fields and Ukraine’s gas pipelines. However, the pro-American leadership of Ukraine at the time (when Viktor Yushchenko, who led the country as a result of a color revolution, was president) rejected the project, seeing such as a “threat” to “national dignity”, i.e., Ukraine’s GTS. 

Taking into account the US Senate’s approach to relations with Russia, the former will likely in one way or another try to impose the costs of modernizing Ukraine’s GTS on Russia. In the author’s opinion, one such possible scenario could be sharply increasing tariffs for pumping Russian gas to the point of production costs. As for other forms of “gas rent”, Ukraine will consume Russian gas essentially at the price that it imposes on Russia and lobbies with the aid of its American ally. Even this, however, does not count out the constant risk of Russian gas simply being stolen from the Ukrainian GTS. 

Thus, the plan for “increasing Ukraine’s energy security” contained in HR 3364 means turning Ukraine into a transit monopolist under the control of American companies. Accepting the Americans’ conditions is economically disadvantageous to Russia and renders it politically dependent on the unpredictable transit that is Ukraine. Not to mention the humiliation which Russia would face by renewing its contract with Ukraine.

If this act is implemented, American energy companies will be able to participate in the privatization of Ukraine’s GTS (as provided by the Third Energy Package) and profit off of the transport of gas across Ukrainian territory. Thus, the main revenue from transiting Russian gas would not go to the Ukrainians, but to their overseas overlord. 

Yet “supporting” Ukraine’s GTS is not even the main idea of the bill’s energy-related aspect. Parallel to the imposition of sanctions on European companies engaged in Russian energy projects, the act also pushes the interests of American liquefied natural gas producers on the European market. The latter is losing price-wise by about two times to the Russian alternative and is leaving the European economy unprofitable. Since the mid 1980’s, the European economy has depended on cheap Russian gas. 

The famous German political scientist Alexander Rahr sees the American sanctions against Russian energy companies as essentially forcing the European Union to buy American shale gas. He writes: “The Americans want to expel Russian gas from the European market and fill it with their shale. This is so obvious that it is causing serious outrage in Germany insofar as it borders on arrogance.”

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Yet another potential beneficiary from the sanctions is Poland. Just before the G20 summit, Donald Trump visited Warsaw where, among other things, Polish authorities proposed that Poland be turned into a gas hub for all of Europe. Warsaw proposed that the infrastructure be built for receiving and distributing American liquefied natural gas to replace Russian natural gas. Let us recall that the Third Energy Package appealed to by American senators urges such a “diversification” of gas supplies to Europe. 

If the energy bloc spelled out in the bill materializes, then the US would essentially become the gas monopolist in Europe via its liquified natural gas supplies to EU countries and its control over the privatized Ukrainian GTS. Poland would act as the American Trojan horse within the European stronghold. On this issue, Poland is thus a direct competitor to Germany, which controls the European Opal gas pipeline.

Two birds with one stone? 

Attention should be paid to one curious detail. Three days after the bill was adopted by the US Senate, on July 29th the European Commission initiated sanctions procedures against Poland, demanding that it cancel its controversial judicial reforms. According to the EC’s position, such reforms do not suit European legislation as they deprive the Polish judiciary of independence. On this matter, as well as on issues of migration policy, a deep seated civilizational and political contradiction has emerged between “old Europe” (led by Germany) and “new” or “post-communist” Europe led by Poland. In the opinion of some European observers, Brussels wants to  deprive Warsaw, the main lobbyist of US interests in the EU, of its voting rights through which it could advance the Americans’ energy interests on the European continent. If these two events – the US Senate vote and the resolution on sanctions against Poland – are interconnected, then the latter can be considered an EU retaliation in confrontation with the US.

What has driven US Senators to impose new anti-Russian sanctions at a time when Europe is already seriously thinking about doing away with the old sanctions? The calculation is a win-win: strangle Russia by blocking its access to roundabout paths of supplying energy resources to Europe (which the Russian budget vitally depends on) and thereby compelling Moscow to renew the gas transit contract with Ukraine. At the same time, the US can strike a severe blow to Europe’s economy by forcing it to buy expensive American liquefied natural gas, which would also instantly increase the costs for European producers, rendering them uncompetitive. Thus, the Americans would at once stifle their political opponent and maximally weaken their economic competitor. 

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Does Europe understand this? They sure do. 

Displeased Europe 

The President of the European Commission, which fulfills the role of a ministry of foreign affairs for the European Union, Jean-Claude Juncker, has insisted that the EU is firmly committed to sanctions against Russia, but demands that this issue be deliberated in close coordination between member-states. According to him, the American sanctions in their current form threaten Europe’s energy security. 

France, the second leader of “united Europe” after Germany, for its part considers the American sanctions legislation to be illegal from the standpoint of international law. France’s foreign ministry believes that the extraterritorial character of the new American sanctions law does not meet the norms of international law, and claims that France intends to discuss this situation with the European Commission and EU partners. 

Germany’s economic minister, Brigitte Zypries, has echoed this view: “This is simply a violation of international law. America cannot fine German companies for pursuing economic operations in another country.” In the words of the German foreign minister, the Social Democrat Sigmar Gabriel, Washington is specifically using this sanctions legislation to boost American energy companies by prohibiting Europeans from cooperating with Russian entities. Gabriel emphasized that before proceeding with such measures, the US should consult its European partners. “But our position is that we will not tolerate the extraterritorial use of US sanctions against European companies,” he stated. 

On August 1st, Gabriel also issued a special statement in which he expressed hope that the US would change its position: “There is still time. Obviously, President Trump has not yet decided whether or how he will tighten the sanctions against Russia. In any case, the law provides for prior consultation with us, Europeans, before anything happens.”

Thus, Europeans feel that the Americans are lining their pockets and outright humiliating their “ally.” Indeed, there has been no shortage of negative assessments of the sanctions law in Europe. Yet the question remains: can Europe resist Washington’s pressure? 

In pro-government Russian media that have covered the conflict, there tend  to be optimistic views on the future of the European-American confrontation. In the author’s opinion, more realistic are the opinions of those European observers who point to the Old World’s dependency on the US and the “docility” of the German business community in dialogue with the government.

In a telling instance, on July 17th, before the vote in the American Senate, Germany agreed to suspend the Nord Stream 2 project. The German federal government explained that its refusal to join the prospective plans for projects tied to the Nord Stream 2 pipeline were conditioned by too high risks. It was demanded that five technical issues be addressed. The projects will be back on track if a permit for the pipeline’s construction is obtained. Before, the Angela Merkel government had staunchly resisted pressure from the US’ Trojan horse in the EU, Poland. But something changed and Mrs. Merkel unexpectedly changed her position on Nord Stream 2. The subsequent refusal to continue with the project deals a heavy blow to German business. The complaisance of the Federal Chancellor, however, should come as no surprise. The famous political thinker and vice chairman of the Communist Party of Bohemia and Moravia, Dr. Josef Skala, voiced to the author what we believe to be an interesting explanation, namely, that Germany’s agreement to participate in the anti-Russian sanctions which are so harmful to its economy are a consequence of a “Chancellor Pact” imposed on post-war Germany by the American side. In this view, Germany’s sovereignty is strictly controlled despite the country’s economic prowess.

Let us quote Alexander Rahr once again: “America controls the world’s financial system and will maintain a hard line against Western companies working on the American market. And the majority of European firms which work in Russia are also represented on the American market as well.” We should add that America also controls the mechanisms of political decision-making and the personnel of European politics.

Thus, the realization of the bill’s proposed energy bloc would lead to the international humiliation of Russia unprecedented in level since the collapse of the USSR, leaving her at the mercy of superpower #1, the US, and even decaying Ukraine with its militantly Russophobic regime. Russia would be left helpless within its own borders because of its critical dependence on exporting gas to Europe. 

No less damage, however, would be incurred by the US’ allies in the Old World. Having almost unanimously supported the first round of anti-Russian sanctions, Europeans have now split into “old Europe”, which is categorically against imposing sanctions 2.0 that are just as anti-European as they are anti-Russian, and, on the other hand, the countries of “new”, “post-communist” Europe, mainly Poland and the Baltic countries, who support the sanctions 2.0. Both for Russia and the EU, meanwhile, sanctions 2.0 means colossal economic damage and reduced political sovereignty. And in a definitely harsh manner. 

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How might Europe and Russia’s elites respond to this? We will examine this question in the second part of our article. 

Continued in Part 2

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