March 19, 2014

Time to Pull the Transatlantic Economic Lever

The escalating crisis between Russia and the West is reinvigorating Europe’s efforts to diversify natural gas supplies and shrink Russia’s powerful economic influence. In the United States, it has provoked sanctions and jump-started a bipartisan debate over broad economic statecraft to put abundant domestic energy resources in the service of national security interests.

The United States has more economic and energy levers to check Russian influence in Europe than many people realize. New U.S. and European Union sanctions are targeted and immediate in their ability to expose and punish aggressive and destabilizing activity.

Particularly in the case of U.S. sanctions on Russia, there is broad scope for the administration to quickly tighten the financial handcuffs. The administration could cause a lot of economic pain by targeting officials and government agencies key to Russia’s military control and state revenue management. This should be a dire warning to international investors in Russia—particularly in its lucrative energy sector—about the risks and possible punishment of economic engagement with an aggressor.

In the long game, the United States can wield a very big economic stick, and help create more transatlantic energy leverage, if it helps Europe develop and diversify its energy supplies. This critical work energy work can’t offer a quick fix for Ukraine or Europe, but in several years time it could begin to cause a very meaningful, permanent impact.

Russia, a global energy power-house, supplies roughly one third of European gas, and well over half of Ukraine’s gas. Following politicized and economically damaging cut-offs of Russian gas to Ukraine in 2006 and 2009, Europe accelerated efforts to reduce dependence on Russian gas, and the supply insecurity and uncompetitive pricing that go along with it.

The current crisis signals the need for a much harder push to shrink Russian gas and economic influence in Europe. Politicians from the United Kingdom, Poland, the Czech Republic, Slovakia and Hungary, among others, have called on the U.S. to hurry LNG supplies to their aid. Brussels gave European shale development a boost last week in new energy legislation and Poland recently adopted new tax breaks for shale. Energy efficiency and greater European energy market integration are enjoying a fresh look.

These steps will promote European energy diversity and security, but they aren’t enough to seriously erode Russia’s energy influence. That requires a breakthrough in enigmatic European energy production, access and infrastructure challenges. As a transatlantic ally and rising energy superpower, the United States should help Europe break the Russian stranglehold.

Accelerating and encouraging the permitting of U.S. natural gas exports to Europe, as has been hotly debated by Congress in recent days, is a step towards greater European diversity and energy security. It is well past time that the U.S. break from the “energy independence” mindset and dispense with policies that enable or encourage energy hoarding. 

To encourage gas exports to Europe the Department of Energy should hurry up consideration of some 20 proposed liquefied natural gas (LNG) projects in the queue. It also means weighing more heavily the specific LNG recipients, such as those in Europe, in its “national interest” determination for green-lighting projects.

Energy companies won’t decide to go ahead with every proposed U.S. LNG project. U.S. LNG won’t flow in substantial volumes for several years and exactly who receives the gas is ultimately a commercial—not government—decision. However, even if market forces send U.S. LNG flows to Asia, rather than Europe, those exports will free-up LNG cargoes that would have gone to Asia for European consumption. This will help chip away at Russia’s gas pricing power.

The U.S. can also help weaken Russia’s energy grip by facilitating financing for expensive LNG receiving terminals in countries, like Ukraine, that struggle to fund the long-term deals standard in the LNG market. Ukraine’s poor credit and bleak fiscal picture are primary impediments to securing LNG supplies. Another serious problem for Ukrainian LNG access is Turkey’s unwillingness to allow LNG tankers to transit the Bosphorus, another issue the U.S. could help resolve.

The United States can also help diversify European energy supplies by lending legal, tax and regulatory energy sector expertise to shale development. New American shale know-how can be marshaled to help Europe craft smart investment regimes. The U.S. State Department runs a flagship program assisting foreign countries in navigating shale gas development, but this effort is far from commensurate with global need for this assistance or the ability of the U.S. to provide broad technical aid in this area.

International oil companies have made some big shale bets on central European projects, including in Ukraine and Romania, but greater transparency and predictability in energy investment will help make these projects a success--not a speculative bet. 

No European reprieve from Russian gas dependence is imminent. But the powerful effect of Russian gas price control —its aggressive stance in Ukraine and threat to Europe—would be diminished by a serious transatlantic expansion of energy trade and technical cooperation. Coupled with targeted financial sanctions, this is the right long-term economic approach to make European allies more secure and weaken Moscow’s hand.

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