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Misdirected US Sanctions for Nord Stream 2: Empower European consumers instead

The US is getting ready to impose sanctions on Russia and companies building the Nord Stream 2 pipeline, running between Russia and Germany under the Baltic Sea. According to the Wall Street Journal, the US is aiming sanctions against firms and banks building and financing the construction. This would affect European based firms as well. The imposition of sanctions is a blunt and weak tool for the US to exert its influence over European energy policy. In particular, a limp response to extract Eastern Europe away from Russia’s leverage over European gas supplies.

There are two divisions in Europe over Nord Stream 2. The pipeline is opposed by most East European countries taking delivery of Russian piped gas through the Soviet era gas system. It will enable Ukrainian transit to be discontinued, resulting in higher priced gas shipped from Germany to be delivered to the Central Eastern European (CEE) region. The former Eastern bloc countries vehemently oppose the construction (except for Hungary, which weakly does – but as a enabler of Russian policy in NATO, the EU and the world, we shouldn’t be surprised).

The German argument for the expanded pipe, is Germany (and Austria) have been buying Russian gas since the Cold War. This co-dependency attempts to exert some financial influence over Russia by enabling important market access to West European markets. In addition, energy relations provide important areas of cooperation and relationship building between countries. The resource of gas and the pipelines provide an important area of cooperation between countries.

The US government is attempting to interfere in this relationship. This is consistent US policy. President Reagan imposed export restrictions on US technology for compressor stations used to build the original pipelines from the Soviet Union to Germany and Austria. This slowed down the building and operation of the pipelines (the Soviet replacements kept breaking down), but it did not stop it. Potential US sanctions will have the same effect. They will slow down but not stop the energy relation between Russia and Germany – or the EU perspective supporting Nord Stream 2. In fact, due to the deteriorated relations between Trump and Merkel, US opposition will only reinforce German (and French) support for Nord Stream 2.

The US opposition is self-serving due to the attempt to increase LNG exports to Europe. Consistency in policy is apparent in this, but so is the self-interest to increase US LNG exports to Europe. Which is a bit short sited, since LNG is market based and only limited bilateral relationship can overrule market prices to force countries and companies to take US gas. US LNG must still be globally competitive for European firms to buy and trade US gas over other LNG sources or against Russian pipeline gas.

A view from the deck of the LNG regasification ship (FSRU) Independence sitting in the harbor in Klaipada, Lithuania

If the US move is a geopolitical gesture to ensure the CEE region, from the Baltic states to the Hungary continue to have gas deliveries via Ukraine – and bring in transit payments to Ukraine, then the US should build a new energy strategy directed at the CEE region. One of the reasons I’ve stopped writing about Russian pipeline politics is the palm on the face idea of ‘why should we even use Russian gas?’ US policy should be directed at diversification of CEE energy technology and resources. The goal should be to reduce the need for Russian gas and use alternative American (or European) energy technologies.

Obviously, this includes supporting and encouraging the building of LNG facilities. The LNG terminal in Lithuania is a great example of diversification that erodes Russian leverage over the country and places Russian gas on a market basis with LNG. The US support for the Krk LNG terminal in Croatia is also a long standing one. LNG, just as US shale gas and hydraulic fracturing technology is also obviously self-serving examples of US attempting to export technologies and services to make money. It has a hegemonic ring to it. With the CEE region already balancing EU energy market rules with Russian resource dependency, US gas exports add an extra layer of complexity which only deliver superficial moral support to the idea of gas diversification.

Instead, the US needs to more actively engaged across the whole energy system. The EU has already linked the idea of energy security to energy efficiency and innovation. In the Energy Union, the core tenet for diversification and increase of security of supply is to create a competitive integrated energy market. Investment into energy innovation (as broad and undefined as this is) is a priority. Energy efficiency measures are also pushed on countries. However, policy implementation compared to the huge scale of needs is a drop in the bucket.

Sixty-eight percent of EU imported gas is used in the heating sector, according to the European Commission. If the US wants to counter Russian influence in the CEE region, then it needs to address directly what matters to the region’s politicians and citizens. Heating bills hold a direct leverage over political decision making. A disagreement with Russia holds the potential to aggravate and increase the price of gas – and heating. Lithuania directly challenged Russia and was met with higher import prices compared to its Baltic neighbors. The answer of Lithuanian politicians and business community was building up a biomass heating industry, from forest to city. A plethora of existing (US) technologies exist to alter and lower heating bills. From solar water heating to energy efficiency measures.

Importantly, the US should engage financially with consumers in the CEE region. The US government should invest through international financial institutions, such as the European Bank for Reconstruction and Development (EBRD) and private national and regional banks, to create a ‘green’ fund for consumers to borrow or receive grants to modernize their heating (and cooling) systems. EU and national institutions are failing to make an impact in this area. The US has an opportunity to build on EU policy initiatives and through a simple financial engagement go directly to the consumers of Russian gas. Rely on the already established financial system and infuse the region with the financial resources necessary to diversify and reduce the demand for Russian gas.

The cherished ‘masonry heater’

I can speak from my own personal experience attempting to renovate my flat and install a new electricity and gas central heating system. There is government and private bank financing available, but both the terms and complexity of getting it and paying it back can be difficult for the average consumer. My main heating unit sitting in the corner of the living room dates to 1925, when the building was built. My solidarity with the average CEE citizen is deeply felt in the wintertime. There is a lack of practical and affordable funding to modernize both individual flats and buildings (as I also know with my neighbors, as retired residents are unable to take out loans).

If the US is serious about countering Russian influence and re-engage with the CEE region then they should engage financially. For example, my simple idea is to set up a €1 billion fund for the CEE region to be distributed through private banks where a mortgage and home energy improvement loan can be distributed together. The idea of how this funding facility could work is not original nor difficult to implement. The financial risks are very small for funders. But if imported gas and the politics behind it are such an issue, than reducing this dependency at the source of demand needs to be done. The other advantage of working directly with commercial banks, through international financial institutions, local politician can be avoided who have a strong track recording of stealing and misdirecting funds (Hungary, again is a very good example of this).

A €1 billion investment is certainly less complex than sanctions and enforcement of these on European financial firms. Why €1 billion? It can be more, but invest a sufficient amount that begins to change consumption patterns and puts a dent into gas consumed for heating purposes and reduces the social pressure on politicians to ensure good relations with Russia exist just to assure low energy prices in the CEE region. But by all means, find a way to avoid the dirty hands of politicians. Incentives banks that must comply with international oversight.

Avoiding the pitfalls of politics enables a direct connection to the people and undermines politicians maintaining the status quo with Russia. Hungary’s close relation is an example of a country ideologically aligned with Russia’s interests. It also must keep gas prices low to prevent social pressure for political change. Economically, the Hungarian regime is dependent on Russian energy prices. Hungarian consumers are forced by the government to maintain their serfdom to Russia through gas prices. Relieving this price pressure reduces Russia’s political leverage in the CEE region.

US interests in the CEE region should extend beyond LNG exports and terminals. The US should draw on its established strength in financial markets and begin to engage directly in the CEE region through energy investments. Reagan attempted to prevent the expansion of Soviet and Russian gas in Europe. Gas geopolitics will not go away. The US can work to undermine the long term impact gas prices have over European consumer and politicians. Constructive engagement through construction and renovating heating systems holds a larger policy impact than sanctions.