Concerns about energy security are not deterring buyers of Russian gas
6 May 2019 – Sanctions are back in the news with the tightening of restrictions by the U.S. on Iranian oil exports. Iran’s economy has already been weakened by years of isolation and inflation is rising, as the IMF said last week. But some scepticism about whether the toughened measures will be effective is justified. And after my EMEA e-discovery review team finished an economics sanctions internal investigation last week (this has become sort of a niche market for us; it is our sixth such review in the last three years), lots of interesting things came to light. The stuff you can learn on a document review.
I won’t refer directly to the sanctions matter cited above but I had the opportunity to speak to in-house counsel, plus one of the experts involved, and do some of my own research. All of the following is public knowledge.
The expert consultant in the investigation I cited above (who chatted with me but did not discuss the instant case) detailed the strong scientific consensus on the failure of U.S. economic sanctions. Academics and subject experts cite various types of data and numerical evidence to suggest that U.S.-imposed sanctions have never succeeded in toppling rival regimes. But he noted that Washington continues to use sanctions as a tool to stifle the economies of what it calls “rogue” regimes. He has, arguably, produced some of the most influential work on the workings and effects of economic sanctions. And he is quite the expert in analysing what has happened (or rather, not happened) as a result of the extensive sanctions the U.S. has imposed on Russia, and that situation is more interesting due to the political play at work here in Europe.
There have been many studies on the economic impact of sanctions. When I used to run these economic sanction reviews (having an economics degree helps), the source everybody mentioned was “Economics Sanctions Reconsidered” published by the Peterson Institute of International Economics. It is now in its third edition. The key messages from the authors: (1) their research shows that sanctions work best when a large country picks on a small country; (2) they work even better if a number of countries gang up on a small country; (3) in the case of a large country imposing sanctions on another large country, when there is limited backing from other countries the sanctions will fail. So the results in the U.S. case against Russia were predictable.
Because simply put, anyone thinking that the regime of U.S. penalties is closing off trade and bringing “Mr Putin” to his knees should consider the international gas market.
And after all, Trump and Putin are bosom buddies.
Because despite the sanctions imposed after the annexation of Crimea, the interference in U.S. politics and the attempted murder of former double agent Sergei Skripal and his daughter on British soil, Russia continues to build the capacity to preserve and strengthen its grip on gas as the market becomes more competitive. The sanctions legislation passed by a bipartisan coalition in the U.S. Congress in 2017 was just the latest in a series of measures in the past five years designed to force Moscow to “accept the norms of international behavior” – an ironic pronouncement if ever there was one.
And last September, Ryan Zinke (then the U.S. interior secretary) talked of blockading Russian gas exports. Even Trump said that Nord Stream 2, the planned gas pipeline project bringing supplies across the Baltic from Russia to Germany, was “inappropriate” and a threat to Nato.
Why is this funny? Because the U.S. does not restrict the delivery of U.S. catalysts for Russian chemistry which greatly aids production. Nor is there are restriction on ethane export from the U.S. to Russia. As explained to me by a chemistry contact “it is possible to use the infrastructure (ethane VLEC vessels and tanks) to export ethylene that can also save some fuel for the pyrolysis process. It all aids their production, If you really want to punish Russia, why permit these sales?”
And as one source told me, if you really wanted to hurt Russia, then hit them where it will hurt. Exclude them from SWIFT. Cut off their financial pipeline. But, alas, Russian behaviour may not be so egregious as to warrant total exclusion from the international banking system.
As you may have read in the press, the Russians and their European allies took no notice of all this U.S. steam. The construction of Nord Stream 2 continues and is on schedule for completion by the end of this year. Supplies should begin to flow within months, rising towards a very large gas capacity by the early 2020s.
Why did Europe take no notice? Because whether U.S. concerns are legitimate or not, actions taken against Russia and Iran are never going to be sustainable due to long standing strategic alliances in Europe and the Middle East. The U.S. sanctions have minimal impact on U.S. economy but they have a huge impact to countries in the region which do not have the energy source luxury the U.S. has. Germany and France are highly industrialized nations. LGN will feed their extreme power needs. Commercial power needs are very different than residential. As I noted in a recent essay, I also expect Germany to start processing its own Rare Earth Elements in self-defense from China and this will demand higher power consumption. Europe needs energy imports from Iran and Russia. So you would think that rather than a hammer, the U.S. would somehow incentivise them to align with its sanctions. But, hey: “America First! Screw our allies!” Allies. What a quaint word.
Note: there is another project, the TurkStream project, which will bring gas from Russia to the Turkish coast and then on to the European border, coming on stream late this year. Neither has been affected by the sanctions or rhetoric from the U.S.
Here is the Putin skill set in approaching the energy market: draw your international partners into the infrastructure associated with each project. This creates an incentive for importers to stick with suppliers even when the market is volatile, meaning Russia can avoid fierce price wars. This is particularly important in the European market, where gas demand over the past decade has fallen and is threatened by the growing penetration of renewables. The most recent EU targets suggest that renewables will be supplying almost a third of Europe’s electric power by the early 2030s. In Germany, the target is 65 per cent by 2030. Gas must provide some of the rest, but the competition to supply that gas will be keen. And in such circumstances none of the other gas producers – the U.S., Qatar or Egypt, for example – have the advantage of infrastructure like the network of pipelines being constructed between Russia and Europe.
And if you have followed any of this over the last two years, the risks for energy security are clearly not sufficient to deter consumers, in particular the Germans, from buying more. They may think, with some reason, that Russia is itself dependent on selling the gas and could never afford to play political games with supplies, even when relations are under stress. The dependence is mutual.
The justifiable concern about what is happening, therefore, is about the emptiness of sanctions as a tool of diplomacy. One of my researchers found that the U.S. Treasury website lists 30 sanctions programmes, whose targets range from North Korea to Venezuela to Zimbabwe. She ran this through the Axios energy analysis database that looks at sanctions and … well, it was hard to identify anybody changing their behavior, despite the U.S. noise level that rises with each new piece of legislation.
Of course, the Iranian situation is different. Iran’s reliance on oil revenue is even greater than Russia’s on gas sales. The Iranian economy is weaker and vulnerable to inflation. But U.S. sanctions will only work if they secure the full support of all Iran’s trading partners, including China, India and Turkey. And that is not happening. And while European companies will obey “the letter of legislation” in fear of U.S. action against them, their governments continue quietly to build bridges with Tehran in the hope of future access. The lack of backing suggests that the sanctions against Iran will be disruptive rather than decisive. Achieving a change in the country’s policy, or indeed regime change, will require a more direct and forceful intervention. War, anybody?
War in Iran. U.S. National Security Adviser John Bolton raised the spector over the weekend. The ultimate risk? Under pressure, Tehran takes retaliatory action that would be very damaging to the interests of the US and its allies in the region. Iran may be weakened but it will retain the ability to close the Strait of Hormuz – the key trade route for oil from all the Gulf states.
And if you take a hard look at the security element, nobody doubts Russia and its ability to perfect geostrategic weaponization of energy supply to pressure and threaten its neighbours. Really: this is not a country we should be doing any kind of business with and certainly not on this scale. One doesn’t need to exaggerate the Russian threat to know what they are capable of. If alarm bells are ringing about Huawei in the West, they should be absolutely deafening about the risks of this project. Dangerous, irresponsible and indefensible from which ever angle you look at it.
But if there is a good point in any of this it is that there is a surfeit of knowledge out there. In this marvellous 21st “information” century, trying to fool your own people … or the world … and assuming they’d buy whatever you say simply doesn’t work anymore. People can be aware of everything. Well, if you take the time to look. Even people with average IQs in the world are aware of the hypocrisy when Trump praises a dictator and terrorist financier like Saudi Arabia … his “ally” … but shows a baseball bat to Iran and its European “allies”.
Trump’s redneck foreign policy can be summarised quite easily: sanctions, trade embargos, isolation … and if they still don’t work, “then we’ll go and invade. Well, threaten to invade!” And what does that do? It just helps Russia and China gain new allies worldwide and allows even more new authoritarians to arise in world politics.
As Russia demonstrates, sanctions alone are likely to serve merely as an illustration of the current limits of American power.
