US sanctions: trade war or much worse?

By Alex Davidson

United States President, Donald Trump, signed into law new sanctions against Russia, Iran and North Korea on 2 August 2017. He did so grudgingly over the Russian sanctions, indicating the deep divisions between the White House and Congress. In his signing statement to the bill he wrote,

I have expressed my concerns to Congress about the many ways it improperly encroaches on Executive power, disadvantages American companies, and hurts the interests of our European allies…the bill remains seriously flawed – particularly because it encroaches on the executive branch’s authority to negotiate. Congress could not even negotiate a healthcare bill after seven years of talking.  By limiting the Executive’s flexibility, this bill makes it harder for the United States to strike good deals for the American people, and will drive China, Russia, and North Korea much closer together. [i]

The Russian Prime Minister, Dmitry Medvedev, called the sanctions tantamount to a “full-scale trade war”. He added, “The hope that our relations with the new American administration would improve is finished.”

Sergei Lavrov, Russia’s Foreign Minister said in a statement that while Russia has been doing “everything possible” to improve the relationship with the US, “recent events showed that US policy was in the hands of Russophobic forces, pushing Washington to the path of confrontation.”

The United States unilateral increase in sanctions against Russia has put it into serious conflict with Germany as well as Russia and further divided the EU. The bill steps up sanctions against Russia over its involvement in the wars in Ukraine and Syria as well as allegations it interfered in the 2016 US Presidential election. However, the EU has warned that this may cause upheaval in Europe’s energy market as the new sanctions target any company that contributes to the development, maintenance or modernisation of Russia’s export gas pipeline, known as Nord Stream.

The day after the Senate voted overwhelmingly [ii] to impose new sanctions against Russia, Germany and Austria - two of Russia's biggest energy clients in Europe – strongly criticised the latest U.S. sanctions, saying they could affect European businesses involved in piping Russian natural gas via the Nord Stream pipeline.

The Nord Stream pipeline carries natural gas from Vyborg in Russia to Griefswald in Germany under the Baltic Sea. The first pipeline was officially inaugurated on 8 November 2011 by German Chancellor Merkel, Russian President Medvedev, French Prime Minister Francois Fillon and Dutch Prime Minister, Mark Rutte. The pipeline, 759 miles in length is the longest sub-sea pipeline in the world and has a capacity to carry 55 billion cubic metres of natural gas.

Nord Stream AG shareholders are the Russian company Gazprom (51%), the German companies E.ON (15.5%) and Wintershall (15.5%), the Dutch company Gasunie (9%) and the French company Engie (9%). The Chair of Nord Stream’s Board is Gerhard Schroder, former German Chancellor (1998-2005).

Nord Stream 2 will double the capacity to 110 billion cubic metres and is scheduled to come into operation in late 2019. Nord Stream AG signed a financing agreement for the Nord Stream 2 pipeline project with the German company UNIPER, the Austrian company OMV, Royal Dutch Shell, the German company Wintershall and the French company Engie. 

GERMANY AND AUSTRIA CONDEMN US SANCTIONS

In a joint statement (15 June 2017) Austria's Chancellor Christian Kern and Germany's Foreign Minister Sigmar Gabriel said:

“It is in the common interest of the EU and the US to take resolute and unified action with a view to resolving the conflict in Ukraine. We cannot, however, accept the threat of illegal extraterritorial sanctions being imposed on European companies that are participating in efforts to expand Europe’s energy supply network!

The draft bill of the US is surprisingly candid about what is actually at stake, namely selling American liquefied natural gas and ending the supply of Russian natural gas to the European market. The bill aims to protect US jobs in the natural gas and petroleum industries.

Political sanctions should not in any way be tied to economic interests. Threatening to impose penalties on companies in Germany, Austria and other European countries with regard to their business in the United States if they participate in, or fund, natural gas projects involving Russia, such as Nord Stream 2, impacts European-American relations in a new and very negative way. This is about the competitiveness of our energy-intensive industries, and about thousands of jobs.

Europe’s energy supply network is Europe’s affair, not that of the United States of America! We decide who supplies us with energy, and how they do it, and we do so based on transparency and on free market principles.

It would not only be highly regrettable, but would also diminish the effectiveness of our stance on the conflict in Ukraine, if we were to no longer take joint action, and if completely separate interests were to prevail, such as the US’s economic pursuits in the field of gas exports. Foreign policy interests must in no way be linked to economic interests! There is still enough time, and opportunity, to prevent this!” [iii]

In the joint statement there are no fewer than four exclamation points underlining the sharpness of the German/Austrian opposition. Three of them are worth repeating:

  • “We cannot accept the threat of illegal extraterritorial sanctions being imposed on European companies that are participating in efforts to expand Europe’s energy supply network!”
  • “Europe’s energy supply network is Europe’s affair, not that of the United States of America!”
  • “Foreign policy interests must in no way be linked to economic interests! There is still enough time, and opportunity, to prevent this!”

German Chancellor Angela Merkel backed up the joint statement and Jean-Claude Juncker, President of the European Commission, said “We will respond with counter-measures if need be, hoping that this is not actually necessary. We are willing to take up arms if need be.”

Cecilia Malmstrom, EU Trade Commissioner, warned of a challenge in the World Trade Organisation (WT0), saying “if global trade rules are not upheld the EU will retaliate.” A similar challenge led to the roll-back of tariffs imposed by US President George W Bush in 2002.

The aim of the US sanctions is to block Russian gas supplies to Europe in order to sell shale gas from the United States.

UKRAINE

The Nord Stream pipeline bypasses countries like Ukraine, Poland and the Baltic States. 9 EU countries signed a letter criticising the project. [iv] Ukraine, in particular, fears the loss of transit revenue if Russian gas supplies don't pass through their territory anymore once the new pipeline is built.

Lithuania’s state-owned gas trader Lietuvos DUJU Tiekimas (LDT) signed a deal in May 2017 to buy liquefied natural gas (LNG) directly from the United States for the first time and expects to receive a delivery in the second half of August. The deal is with a unit of Cheniere Energy and is part of Lithuania's efforts to diversify its gas suppliers and reduce its reliance on Russia's Gazprom. LDT, part of state-owned energy group Lietuvos Energija, signed a deal last year with Koch Supply & Trading for LNG supplies throughout 2017.

The LNG terminal at the Klaipeda port broke Russia's Gazprom gas supply monopoly in the Baltic States when it came online in 2014 and now provides Lithuania with roughly half of its gas. Gazprom supplies the rest.

State-run Polish gas firm PGNiG received its first U.S. spot delivery of LNG from Cheniere Energy in June 2017. Croatia is planning to complete the building of an LNG terminal in 2019.

THREE SEAS SUMMIT

12 countries [v] bordering the Baltic, Black and Adriatic seas formed a consortium, dubbed the “Three Seas Initiative”, in 2016 to develop regional infrastructure, trade and energy projects. On 6 July 2017 a summit of the presidents of the countries involved gathered in Warsaw, hosted jointly by Poland and Croatia.

 The Three Seas Initiative is seen as a Polish bid to carve out influence outside the European Union with which the nationalist government has repeatedly clashed.

US President Trump visited Poland for one day - en route to the G20 summit in Hamburg, Germany - to take part in the “Three Seas Summit” of leaders from central Europe, Baltic states and the Balkans. The summit was moved from its original location in south western Poland to Warsaw to accommodate Trump’s attendance.

At the “Three Seas Summit” Trump promoted U.S. natural gas exports to the leaders from central and eastern Europe, a region currently heavily reliant on Russian supplies. The following is an extract from President Trump’s address to the summit:

“We're here at this historic gathering to launch a new future for open, fair, and affordable energy markets that bring greater security and prosperity to all of our citizens. We are sitting on massive energy and we are now exporters of energy. So, if one of you need energy, just give us a call. On behalf of the American people, let me say that we stand with the Three Seas nations. Beautiful nations, by the way. Beautiful country. We support your drive for greater prosperity and security. We applaud your initiative to expand infrastructure. We welcome this historic opportunity to deepen our economic partnership with your region.”

“I congratulate your nations for already beginning the critical projects that open us up to greater access, and you'll be totally open and have access to energy markets and remove barriers to energy trade, such as the floating LNG terminal on the Croatian island of Krk. Did you ever hear of that? Right? Huh? You know all about that. I bet you know all about it. And the Greece-Bulgaria Interconnector. These projects and many others are crucial to ensuring that your nations continue to diversify your energy sources, suppliers, and routes. I also applaud Bulgaria, Romania, Hungary, and Austria for pursuing a pipeline from the Black Sea. The United States is proud to see that our abundant energy resources are already helping the Three Seas Nations achieve much- needed energy diversification. In fact, I want to take this opportunity to congratulate the government and people of Poland for receiving their first shipment of U.S. liquefied natural gas last month. And you made a very good deal, I understand. America will be a faithful and dependable partner in the export and sale of our high-quality and low-cost energy resources and technologies. We make the best technology and we make the best, best technology for fighter jets and ships and equipment, military weapons. There's nobody even close, and that's acknowledged. All over the world they talk about the greatness of our military equipment. Nobody comes close. So when you buy and as you buy military equipment, hopefully you'll be thinking only of the United States.” [vi]

[i]   https://www.whitehouse.gov/the-press-office/2017/08/02/statement-president-donald-j-trump-signing-countering-americas

[ii]  The vote in the Senate was 98-2. Democrat Bernie Sanders and Republican Rand Paul were the two senators voting against.

[iii]  https://www.auswaertiges-amt.de/EN/Infoservice/Presse/Meldungen/2017/170615_Kern_Russland.html

[iv] The EU countries are the Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia, Romania, Lithuania and Ukraine.

[v] The 12 countries are Poland, Hungary, Czech Republic, Slovakia, Romania, Bulgaria, Lithuania, Estonia, Latvia, Croatia, Slovenia, Austria.

[vi]  http://time.com/4846780/read-donald-trump-speech-warsaw-poland-transcript/

 

Nov. 2011: Nord Stream opening ceremony (left to right, hands on table) France's Francois Fillon; Germany's Angela Merkel; Holland's Mark Rutte and Russia's Dmitry Medvedev