The Potential Impact of New US Sanctions Law on Pipeline Projects Connecting Europe and Eurasia

While expressing some “concerns,” United States President Donald Trump signed the “Countering America’s Adversaries Through Sanctions Act,” on August 2 (Whitehouse.gov, August 2)—legislation that was overwhelmingly approved by the US House of Representatives late last month. Among other provisions, the new law opens the door to expanding US sanctions on Russia’s energy sector. It empowers the Executive Branch, if the latter so chooses, to sanction any foreign company/person that invests in the construction of Russian energy export pipelines by selling, leasing, or providing “goods, services, technology [or] information” to Russia that could “facilitate the maintenance or expansion of the construction, modernization, or repair” of those pipelines. The law also prohibits persons/companies with a controlling/non-controlling interest of 33 percent or higher in these projects, from providing, exporting or re-exporting any “goods, services or technology in support of exploration or production” of deep-water fields (Docs.house.gov, Section 223, 232, July 21).

When a more stringent version of this bill was first passed by the US Senate, the European Commission urged Washington to minimize the “unintended unilateral effects” of the sanctions for the European Union’s energy security. In addition, Brussels weighed the possibility of passing its own law to limit the legal effects of the US action. The EU also considered retaliatory measures and trade defense instruments within the World Trade Organization (WTO). Lastly, Brussels sought a public declaration from Washington that the US sanctions would not target EU member states. However, each of those measures required the consensus of all EU members, some which are in fact quite opposed to many of Russia’s new energy projects that the US sanctions could affect (Politico.com, July 24; Europa.eu, EurActiv, EUObserver July 26). Instead, the EU can use the Council’s “blocking statute” regulation, which protects the European bloc “against the effects of the extra-territorial application of legislation adopted by a third country” (Eur-lex.europa.eu, November 29, 1996), to make the US law’s provisions non-applicable for member states.

One of the biggest concerns coming out of Europe regarding the earlier Senate bill was that the US sanctions could seriously undermine the Southern Gas Corridor (SGC) and, in particular, derail the timely natural gas shipments from Azerbaijan’s Shah Deniz II (SDII) field through the South Caucasus Pipeline (SCP)—Russian LUKoil owns a 10 percent stake in each. While the bill applies specifically to oil and not gas extraction, the SD field will produce oil condensate in addition to the Europe-bound natural gas that will pass through the SGC. No US companies participate in the SDII, but the consortium is heavily dependent on equipment and services provided by US firms for construction/development activities (Financial Times, July 18, 24). This would have undermined the US’s political support for the SGC and hampered the EU’s energy diversification plans. Another serious protest—particularly from Berlin—regarded the Nord Stream II pipeline, which will deliver additional Russian gas beneath the Baltic Sea directly to Germany. However, with the EU’s lobbying in Washington, the key wording was amended in the bill’s preliminary draft text, raising minimum Russian participation in a possibly sanctionable project from 10 to 33 percent (EurActiv, July 25, 26).

The US sanctions could have also challenged international financial institutions (IFI) that allocate financing not only for LUKoil’s shares in the SDII, but also for Azerbaijan’s State Oil Company (SOCAR). The European Bank for Reconstruction and Development (EBRD), for instance, has already allocated a large number of loans for the development of LUKoil’s stakes in the SDII and the SCP (Ebrd.com, June 27, 2005; January 15, 2014; July 22, 2015; Trend, July 26, 2017). However, due to the above-mentioned reasons, the US sanctions law is unlikely to affect the SGC’s ability to attract external financing from IFIs. Moreover, while the law prohibits investment in projects involving Russia, it excludes “financial services” in that regard (Docs.house.gov, Section 223, July 21). Thus, IFIs’ financial support might not fall under that category of sanctionable activities.

On the other hand, the Countering America’s Adversaries Through Sanctions Act could be used to challenge Russian Gazprom’s plans to export its gas to Europe via the Trans-Adriatic Pipeline (TAP)—the planned westernmost link in the SGC, extending from the Turkish-Greek border to the southeastern coast of Italy. Russia had expressed plans to pump gas transmitted by its own Turkish Stream pipeline (under construction) into TAP. But the threat of new US sanctions could compel TAP’s stakeholders to think twice before allowing Gazprom or Russian gas in (though the TAP consortium had not ruled out this possibility for the second stage of gas deliveries). Gazprom’s penetration of the Southern Gas Corridor could counter the real purpose of the project, which explicitly aims to diversify European imports away from Russian gas (see EDM, February 16), and would presumably undermine any further political backing for the SGC from Washington.

The August 2 sanctions law could be much more straightforwardly applied to three particular pipeline projects: 1) Russia’s Turkish Stream pipeline (Carnegieeurope.eu, July 25), developed with Turkey’s BOTAŞ and currently under construction, which envisages delivering Russian gas to Turkey and further to Europe; 2) Gazprom’s plans to use the Interconnector Turkey–Greece–Italy (ITGI)/Poseidon, together with Italian Edison and Greece’s DEPA, for gas deliveries across to Greece and Italy (see EDM, August 2, 2016); and 3) the Blue Stream pipeline, in which Italy’s Eni is jointly involved with Gazprom. Additionally, US energy-sector sanctions on Russia could particularly hit companies/entities from Italy, Greece and Turkey that are involved in Turkish Stream’s construction, financing and logistic maintenance. This might further roil US relations with Turkey—and also damage relations with Greece and Italy. According to Mikhail Krutikhin from RusEnergy, Swiss Allseas, which is engaged in pipe-laying, may refuse further activities because of sanctions, and “other contractors would be unlikely to agree to replace it” (Vedomosti, July 11). The construction of Turkish Stream’s first (marine) section started in May (Gazpromexport.ru, accessed July 30); work is proceeding ahead of schedule, with hopes to complete the project before sanctions set in.

The United States plans to facilitate shipments of American liquefied natural gas (LNG) to Europe, which would compete not only with Russian gas but also with the moderate volumes transiting through the SGC in the future. Although US LNG would be an alternative source for European gas imports, it is not advantageous due to its higher prices. Cheaper Russian gas continues to control the largest share of the market. The EU’s regulatory measures have been instrumental in pushing Russian Gazprom to behave under normal market rules. Yet, in Russia and some countries in Europe, the newly possible US sanctions are seen as the politicization of energy (Valdaiclub.com, EurActiv, July 26).