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December 12, 2019

INSIGHT: U.S. Opposition to Nord Stream 2 May Have Unintended Consequences

By Robert Dillon

Originally published on Aug. 29, 2019 by Bloomberg Environment

For all the concern of Kremlin kompromat, or blackmail, on President Donald Trump, Russia’s conduct has come under increased pressure and scrutiny during his presidency. 

Since taking office, Trump has tightened existing economic sanctions and signed additional restrictions on Russia’s energy sector, simultaneously striking at the Kremlin’s source of influence and its hard currency.

As its next move, the Trump administration—and a majority of Congress—want to impose sanctions to block completion of the $11.7 billion Nord Stream 2 pipeline by Russian gas giant Gazprom. While this effort may be a potent economic weapon against the Kremlin, it may also have the unintended consequence of drawing Russia closer to China.

Energy is central to Russia’s foreign and economic policies with the Kremlin’s political power closely tied to its ability to use revenues from oil and gas sales to fund social and military spending. These sanctions are designed to undermine Russia’s long-term energy growth with bans on foreign investment and technology-sharing. 

This strategy penalizes Russian aggression while handing U.S. producers a competitive advantage as shale oil and gas output increase and Russian output declines. It’s the kind of win-win Trump and his team of hawks rejoice in pulling off. It also represents rare alignment between the administration and Congress, although their reasons for supporting sanctions differ. 

Senate Committee Bill Advanced

Before leaving town for the August recess, the Senate Foreign Relations Committee advanced legislation by a sizable 20-2 vote that would penalize European companies involved in the construction of Nord Stream 2. 

While the bill is far from becoming law, the lopsided vote illustrates the bipartisan anti-Russian sentiment in Congress—even if it targets the economies and companies of long-time allies in the process.

Congressional opposition to Nord Stream 2 is not exactly new. What’s different this time is that the White House has something to sell. The administration is pushing Europe to buy more liquified natural gas (LNG) through the use of diplomacy and under threat of tariffs. Washington’s perspective is that “freedom gas” offers economic and geopolitical benefits to the U.S.—and Europe. 

Europe, however, is skeptical. 

For starters, the Russian-EU relationship is much more mutually dependent when it comes to energy than Washington appreciates. Europe has imported Russian gas for more than 50 years, with the first molecules arriving just two weeks after the 1968 Soviet invasion of Czechoslovakia. Russian supply is expected to dominate the E.U.’s market for at least the next decade. Declining production in the gas fields of the Netherlands and the North Sea means that trend will continue.

More than half of EU members are dependent on imports for more than half of their energy needs and import dependency for all of Europe is expected to reach 80% by 2030. And while overreliance on Russia may be a concern for some in Europe, so too is affordability. 

Competition With U.S. LNG

Volatile spot market prices for U.S. LNG and the additional cost of chilling and shipping it across the Atlantic put it at a disadvantage to Russian supply. Russia’s state-control of its energy sector—and its currency—allow it to push costs even lower if necessary to compete against U.S. LNG.

As for the Kremlin, it views U.S. efforts to strike at its connections to the global economy as an existential threat. 

Russia has responded to the encroachment of U.S. LNG by flooding the European market, filling storage and driving down prices to test the resolve of American exporters. Prices are so low now that many U.S. exporters are losing money on European cargos.

Russia is also building up its LNG capabilities to challenge U.S. producers directly, with eight projects on the drawing board that will all have the advantage of low production costs and state support.

Russia is also turning east for new markets—it has expanded its pipeline network with Asia and welcomed increasing investment from China and India in energy projects inside Russia. 

China’s Largest Supplier

Russia is now China’s largest oil supplier, accounting for roughly one-third of its total oil exports. Sino-Russian cooperation in the Arctic is especially troubling for the U.S. 

Moscow has established six new military bases above the Arctic Circle and is expanding its fleet of icebreakers to 50 vessels. The United States has six vessels. 

The legacy of U.S. sanctions against Russia may well turn out to be a strengthened Russia-China relationship with long-lasting repercussions for American hegemony around the world. 

While not inevitable—the Kremlin remains wary of Beijing—such an outcome would be especially disappointing given the historical efficacy of sanctions. Past U.S. attempts to interfere in Russian-E.U. trade failed to deter Kremlin adventurism, nor did it dissuade members of the European market from pursuing their economic interests.

Europe resisted U.S. pressure against Russian energy exports before, most notably during the 1960s embargo against Russia’s Druzhba oil pipeline and President Ronald Reagan’s opposition to Soviet gas shipments to Western Europe in the 1980s. Both times Europe got Russian energy supplies. There’s no reason to expect that the outcome for Nord Stream 2 will be any different.

Even if sanctions scare off the project’s European partners, nothing is stopping Russia from finishing the pipeline itself. With these sanctions, the U.S. not only risks alienating Europe without affecting the outcome, but may indirectly help bring about a stronger alliance between two of its biggest competitors.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners. 

Author Information

Robert Dillon is an associate fellow for energy security at the Rainey Center and the former communications director of the U.S. Senate Energy and Natural Resources Committee. He covered the economic and social transition of the former Soviet Union as a journalist based in Prague and Moscow after the fall of the Berlin Wall.

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