Sanctioning the Pipelines: Implications for Russia, the EU and the U.S.

Russian energy export pipelines have been a potential target for U.S. sanctions for a long time. In 2017, Congress provided the U.S. President with the power to determine and sanction those who economically support such projects. This norm is a part of CAATSA (sec.235) — a Public Law on comprehensive restrictions against Moscow. Since 2014, the Administration has shown a tough stance whilst dealing with Russia and imposed a wide-range of sanctions as a response to the events in Ukraine, supposed election interference and other issues of the U.S.-Russia rivalry agenda. However, executive authorities have not yet implemented sec.235 against Russian pipeline projects, where Nord Stream 2 (NS2) is of paramount importance. One of the reasons could be a concern with the position of Berlin, which has repeatedly manifested its discontent with any U.S. interference in the NS2.

Russian energy export pipelines have been a potential target for U.S. sanctions for a long time. In 2017, Congress provided the U.S. President with the power to determine and sanction those who economically support such projects. This norm is a part of CAATSA (sec.235) — a Public Law on comprehensive restrictions against Moscow. Since 2014, the Administration has shown a tough stance whilst dealing with Russia and imposed a wide-range of sanctions as a response to the events in Ukraine, supposed election interference and other issues of the U.S.-Russia rivalry agenda. However, executive authorities have not yet implemented sec.235 against Russian pipeline projects, where Nord Stream 2 (NS2) is of paramount importance. One of the reasons could be a concern with the position of Berlin, which has repeatedly manifested its discontent with any U.S. interference in the NS2.

Ivan Timofeev:
Europe Under Fire from US Secondary Sanctions

For the whole 2019, Congress has been debating legislation to make sanctions against Russian pipeline projects mandatory or at least more obligatory for the Administration. Finally, Congress fixed them as a part of NDAA for the 2020 fiscal year (sec. 7503). Now, the executives shall submit regular reports on companies and individuals who provide vessels for the construction of Russian export pipelines and consequently sanction them. Sanctions imply visa bans and, what is more painful, bans on any transactions within U.S jurisdiction. A company facing these sanctions would inevitably have grave problems to further participate in the international market since any deal in the global U.S dollar-dominated financial system would be impossible.

The key question is, would these sanctions really work and would Europeans abide by the U.S. restrictions? In the short-term, sanctions would slow-down the NS2, which is almost complete. "Allseas", a Swiss operator of vessels to construct NS2, has temporarily halted construction to clarify details on new legislation. It is unlikely that other operators would risk getting sanctioned too. However, Russians would seemingly be able to finish construction even without foreign operators. There is a Russian anchor barge "Fortuna" in the Baltics, capable of such works. It has limits for works in stormy seasons and may not meet Denmark's technical standards. Another Russian pipe layer, "Academik Cherskiy", would meet these standards, but it is now in the Far East and would need at least two months to get to the Baltics. Both vessels and their Russian owners are at risk of sanctions too, although it this case this would hardly prevent them from stepping in. Technically, NS2 has strong chances to get launched though with a delay, while the U.S. sanctions do not prohibit foreign vessels from participating in further repair or maintenance works.

Meanwhile, Germany and the EU have already voiced strong discontent with the U.S. sanctions. Indeed, they benefit from the project. Russia has agreed to preserve a considerable part of its gas transit via Ukraine — this has been one of the key demands to support the project. The European Union has never invited the U.S. to protect them from the NS2, though there was a heated debate inside the EU. Apparently, sanctions emerge as an instrument of towering market competition for the European gas market. Donald Trump has repeatedly and explicitly voiced his ambitions to promote a more expensive American LNG to Europe and knock out Russians from the market. However, this theory does not explain why Trump had not sanctioned NS2 himself before. At the current point, sanctions are rather driven by politics than the market.

Ivan Timofeev:
A Bumper Year for OFAC

Still, sanctions against NS2 are another reason to bolster European concerns. The EU is a dedicated part of the sanctions coalition against Russia on Ukraine. It imposed both personal and sectoral sanctions, involving Russian defence, energy, and financial spheres. It supported the U.S. on supposed election interference, the Skripal case and other issues. However, EU companies turned to be significant targets of the U.S. secondary sanctions. From 2009-2019, the U.S. Treasury Office of Foreign Assets Control (OFAC) imposed financial fines at least 205 times against American and foreign companies and individuals for the violation of the U.S. sanction regime. In 40 cases, these were European companies, which paid more than 80% of overall fines (4,67 bn. U.S. dollars). Most of the violations have no relation to Russia. Europeans violated U.S. sanctions against Iran, Cuba, Sudan, etc. However, the very use of exterritorial sanctions by the U.S. raises concerns in Brussels. It appears that European business has to follow the U.S. and not the EU legislation. Ursula von der Leyen — the new President of the European Commission — has recently tasked Valdis Dombrovskis — the Executive Vice-President for an Economy — to "… develop proposals to ensure Europe is more resilient to exterritorial sanctions by third countries". This would hardly affect the transatlantic solidarity on crucial issues. But the EU efforts to ensure its economic sovereignty would increase. NS2 sanctions may serve as additional motivation to promote this course, especially if any European company would be fined or blocked by U.S. authorities.  

First published in the American Herald Tribune.