'Business as usual' with Russia defeats sanctions

'Business as usual' with Russia defeats sanctions
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The Trump administration continues to put sanctions on Russia using its executive powers, even as it refuses to implement congressionally-mandated sanctions. On Jan. 26, 2018, Washington sanctioned 21 individuals and nine entities for their connection to the Russian takeover of Crimea. On the diplomatic front, the United States and NATO allies have expelled scores of Russian diplomats for Russia’s alleged poisoning of double agent Sergei V. Skripal in the United Kingdom.

Despite these efforts, Russia shows no indication of altering its behavior. Sanctions have failed to influence President Vladimir Putin, because Russia’s ability to earn massive amounts of foreign currency through the sale of oil and gas remains untouched.  All countries are involved in this: the European Union, China, even the United States.

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In the European Union, as Germany expelled Russian diplomats, it quietly approved the construction of the Nord Stream 2 pipeline on its territory. This pipeline will increase Russia’s ability to ship natural gas to Europe, while bypassing Ukraine. The long-term effect of this measure will be to deprive Ukraine of transit revenues after that country’s contract with Gazprom expires in 2019. British Conservative Member of Parliament Bob Seeley declared Germany’s action a big victory for the Kremlin, which would increase Europe’s energy dependence on Russia. The European Union taps Russia for 40 percent of its natural gas.

 

Russian sale of gas to Europe increased 8 percent in 2017, and Gazprom anticipates this trend continuing. “Europe completely miscalculated when they assumed that they won’t need much additional gas, and if they need some it can be supplied from outside Russia,” said the deputy chief of Gazprom, Alexander Medvedev.

The West’s “business as usual” attitude has convinced the Kremlin it can wait out the expulsions and sanctions. When French President Emmanuel Macron announced he still would visit the St. Petersburg International Economic Forum, Kremlin spokesman Dmitry Peskov immediately labeled the action a constructive position. Further, according to Alexei Pushkov, the head of the information policy committee in Russia’s upper house of parliament, German approval of Nord Stream 2 shows Chancellor Angela Merkel is trying to limit the damage in relations. Another parliamentarian cynically noted that transatlantic solidarity lasts only until it affects a country’s pocket.

In China, Russia is the largest supplier of crude oil, surpassing Saudi Arabia. In January and February, Russia shipped 20 percent more oil to the Middle Kingdom than the year before. The increase is the result of a second East-Siberia-Pacific Ocean (ESPO) pipeline opening between Siberia and Daqing, China. “We estimate that Russian crude inflows to China will grow by at least 11 percent in 2018,” said a senior analyst with S&P Global Platts China Oil Analytics.

Russia is shipping so much crude oil to China that the quality of the crude it is sending to Europe is declining. European refineries are threatening to reject the heavier Ural blend that remains.  Energy traders already are thinking about a fix, however. “There is only one way out,” said one buyer.  “… which is to cut Urals purchases and get supplies of lighter grades for blending.”

In natural gas, China currently gets its pipeline gas from Central Asia but that could change. The new “Power of Siberia” pipeline is over 75 percent complete, and Gazprom has a contract to deliver 1.3 trillion cubic feet (tcf) of gas per year for the next 30 years.

China is not the only country in East Asia poised to provide the Kremlin with more cash. In America’s ally South Korea, Foreign Minister Kang Kyung-wha has begun speculating about connecting to the Russian gas grid via a Trans-Korea gas pipeline. America’s other ally in the area, Japan, is considering similar plans. While most energy experts consider it unfeasible, Prime Minister Abe has held talks with President Putin about building a gas pipeline from Sakhalin Island to the Japanese main island of Honshu.

The problem is not just with American allies but with America itself. The French energy company Engie has shipped a couple of tankers full of LNG to Boston. Under U.S. law, the gas is French despite its Russian origins.

If the United States and the West want to be serious about pressuring Russia to change its actions, it must begin to implement serious sanctions. Keeping the occasional oligarch from vacationing in Disneyland while continuing to prop up the Russian hydrocarbon economy through purchases is not enough. A first step — but not the last — would be American implementation of the congressionally-mandated sanctions the executive branch is obligated by law to impose.

James J. Coyle is the author of “Russia’s Border Wars and Frozen Conflicts,” and a senior, non-resident research fellow at the Atlantic Council.