20 years under Putin: a timeline

The poisoning of Alexey Navalny and political consequences it entails for Russia have caused heated political debates in the West. At the center of discussion is the question of whether or not to cancel the Nord Stream-2 gas pipeline project that many of the Kremlin opponents have been campaigning against. However, there are reasons to believe that such sanctions will not have the desired effect on Moscow’s politics, but instead will result in ordinary Russian citizens paying the price.

 

August 2019: construction site of the Nord Stream 2 gas terminal nearby the German coastal town of Lubmin. Photo: Paul Langrock (Nord Stream 2)

 

The recent assassination attempt aimed at Russian opposition leader Alexey Navalny and the subsequent accusations by Western leaders of the Kremlin for its repeated usage of chemical weapons, without a doubt, demand a resolute answer from the West whose response to the recent developments in Russia and Belarus has so far been sluggish. Since it was German authorities who took responsibility for Mr. Navalny’s transportation to a Berlin clinic and German specialists who played a key part in finding the traces of poison in the oppositionist’s body (the allegations that it was a nerve agent from the Novichok group are quite plausible), it is not surprising that Berlin is expected to take the most radical action against Moscow. One of the potential measures is Germany’s cancellation of the construction of the Nord Stream-2 gas pipeline—an ambitious joint project of Russia’s Gazprom and Germany’s Wintershall and Uniper, as well as Royal Dutch Shell (Britain/The Netherlands), Engie (France), and OMV (Austria). The fate of this epochal construction, which was suspended in December 2019 due to US sanctions, is to be discussed by the EU leaders in Brussels in the coming weeks. 

In today’s Russia, everyone who opposes the Vladimir Putin regime seems likely to join the campaign to cancel the pipeline, while several independent experts consider the project “dead and buried.” I have repeatedly voiced my skepticism on the issue, and not without cause. The international media is discussing several options of legally preventing the Nord Stream-2 from being constructed—ranging from purely Germany’s actions to the intervention of the European Commission to additional sanctions imposed by the USA. I do not doubt that the sheer possibility of ending this project is there. Moreover, I agree with the opinion that cancelling Nord Stream-2 will have a minimal effect on German economy and that a potential gas shortage on the German market is unlikely due to a considerable demand drop this year and, as expected, next year, too. Gazprom should also be fine, as long as the company fulfills its contractual obligations by supplying gas to the pipes that have already been operating. However, I am not at all sure as to whether the Nord Stream-2’s cancellation will have that same effect on the Kremlin’s behavior, as proponents of this measure anticipate.

Let me point out an obvious circumstance. Those who call for the cancellation of Nord Stream-2 claim that it will make Europe less dependent on Russia’s gas resources. Unfortunately, it is not true. In 2017-2018, Russian gas supply to the EU was relatively stable, and Russia’s share in Europe’s total gas imports amounted to about 33-38 percent. More recently, however, supply has been decreasing. In the second quarter of 2020 Gazprom’s share fell to 27,8 percent—its minimum level in the past twenty years. The new gas pipeline—whether it’s finished or not—will have nothing to do with alleged Europe’s dependence on Russia’s gas. If anything, cancelling Nord Stream-2 will mean that Ukraine remains a transit country for Russian gas for many years to come, which actually helps the victim of Kremlin’s aggression financially. There is also another side to this issue that is never mentioned in the debates about Europe’s dependence on Russian gas. In 2019, the share of Russian gas in European consumption was 31,2 percent, whereas the EU’s share in the Russian exports was 77,5 percent. By the end of this year Moscow will face even more challenges with its gas exports, as Turkey’s purchases of Russian gas have decreased more than ninefold, while another Russian megaproject with China—gas pipeline Sila Sibiri (“Strength of Siberia”)—currently operates at no more than 10 percent of its capacity. In other words, in terms of gas imports, the launch of Nord Stream-2 does not increase Europe’s dependence on Russian gas, but vice versa—Russia will become more dependent on Europe as its key customer. This fact which could have been used by Western politicians in their policy-making toward Russia, but is somehow ignored.

There is an issue that is never mentioned in the debates about Europe’s dependence on Russian gas. In 2019, the share of Russian gas in European consumption was 31,2 percent, whereas the EU’s share in the Russian exports was 77,5 percent.

Another factor is no less important. In order to be effective, sanctions must negatively affect those whose decisions caused them in the first place. The cancellation of Nord Stream-2 will have two key consequences. First, Gazprom and several European companies will experience financial loss. Since 2018, the shares of the Nord Stream 2 AG—the projectcompany established for the pipeline construction—are pledged to the European corporations that have financed it; if the construction is cancelled, these companies will become the owners of high-quality scrap metal lying at the bottom of the Baltic sea. But, if we are to assume that Putin and his closest friends are behind Navalny’s assassination attempt, it would be bizarre to punish Gazprom, whereas its contractors, Arkady Rothenberg’s Stroymontazh and Gennady Timchenko’s Stroytransneftgaz, have already reaped huge profits from Nord Stream-2’s construction, whose costs are estimated at $31 billion just on Russian territory. Both these companies were acquired by Gazprom when the main construction work had been completed—but before the US introduced its sanctions against Nord Stream-2. If the pipeline is terminated, these companies or other, similar to them, will earn additional billions of dollars on its dismantling.

Next, Gazprom will be compensated for these lost billions (which were “distributed” by Putin’s henchmen) by the increase in gas prices for ordinary citizens. In fact, on August 1, 2020, gas prices for personal use were already raised by 3-5 percent. Therefore, the cancellation of Nord Stream-2 will have a negative impact on the well-being of most Russian citizens, while the money stolen during its construction will be fully written off as losses—to the Russian kleptocrats’ pleasant surprise.

Finally, it is evident that the entire narrative on “battling with the Russian imperialism” looks quite bizarre given the US interests on the global gas market. In 2016-2019, the US export of liquefied natural gas (LNG) to Europe has increased by about 75 times and, although it only accounts for 4 percent of the EU total gas imports, it is clear that Americans see a lot of potential in the European market. Even before “the Navalny factor,” Washington had been pressuring Germany to end the Nord Stream-2 construction, even this approach had been causing visible discontent in Berlin. When US sanctions forced European companies to suspend Nord Stream-2, Germany initiated what were essentially separatist negotiations with the US offering to employ its state budget to build the first regasification terminals in the country and thus admitting that the issue at the core is purely economic—not political. Against this backdrop, it is hard to fight the impression that political rhetoric regarding Nord Stream-2, which revolves around the need to punish Russia, seems artificial and discredits the Western politicians rather than highlights their claims in support for democracy and human rights.

Wrapping up this part of the discussion, I will reiterate: cancellation of Nord Stream-2 will, firstly, signify that the West is moving towards “asymmetrical” sanctions against an indefinite range of individuals in Russian politics, but not necessarily aimed at punishing those involved in the chemical attack against Navalny. Secondly, such sanctions will primarily harm ordinary Russian citizens, who will end up paying for Gazprom’s losses out of their own pockets. Finally, this approach will provide Moscow with additional arguments in favor of an “economic turn” towards China, which will make Russia less dependent on exports to from Europe, and not vice versa.

Besides, the Nord Stream-2 cancellation entails a number of political and legal problems. The European Union has already applied rounds of sanctions against Russian companies that were not directly linked to those “guilty” of bad political behavior. Case in point is measures taken against Russian banks in the aftermath of Crimea’s annexation (the sanctions’ objective was to limit their access to foreign finance, not to fully disrupt their activity). Sanctions, such as assets-freezing or property- seizure, were also applied against Almaz-Antey—Russia state-owned arms company—although it is not clear if its assets were in fact blocked in the European jurisdiction. Crucially, the EU has a history of adhering to agreements, which had been made before sanctions were introduced. In the case of Nord Stream-2, all construction permits had been granted a long time ago, while the pipeline itself is nearly finished. Finally, to impose sanctions the EU requires a consensus by member states, which is difficult to reach even under present circumstances, given that some European countries have rather close ties to Russia.

German chancellor Angela Merkel is under pressure by US officials who insist that Europe abandon Nord Stream-2. On September 21, 2020, US Secretary of State Mike Pompeo told told Bild  that this pipeline project “endangers Europe because it makes it dependent on Russian gas and endangers Ukraine... We are working on a coalition to prevent this from happening.”  According to German analysts, however, as of today, the project is unlikely to be abandoned, given that it's “94% completed after almost a decade’s construction that involves major German and European companies.” Photo: kremlin.ru

 

Having considered all these factors, I believe that Western politicians should come up with a different response to the Kremlin’s actions.

In oil and gas sector, it would be more feasible to insist on the application of norms proscribed in the EU’s Third Energy Package to Nord Stream-2, instead of blocking it entirely, and overall make Russia give up limiting the competition in the energy industry. For example, the EU could announce a systematic reduction of Russian gas imports by 15-20 percent annually—up until Moscow revokes Gazprom’s export monopoly rights. This measure has the potential to lead to an actual, not a fictitious, reduction in the EU’s dependence on its only gas provider from the east.

Furthermore, the Europeans could boost the building of gas pipelines from the north to the south in the Eastern part of the European continent in order to ease the transportation of LNG from the Mediterranean and Baltic Sea terminals to the midland countries that are currently fully dependent on Russian gas. It would also be feasible to promote the construction of regasification terminals in Ukraine, since, as of now, its “independence” from Russian gas is illusory: the gas transported to Ukraine through Slovakia via reverse routes is not American or Qatari—it is of Russian origin. On balance, Europe should transition toward spot gas markets and open up its market to providers from any region who can offer a fair price, instead of trading its politicized dependence on Russia for an equally politicized dependence on America.

In 2016-2019, the US export of LNG to Europe has increased by about 75 times and, although it only accounts for 4 percent of the EU total gas imports, it is clear that Americans see a lot of potential in the European market.

A more radical response to the Kremlin’s actions would imply elimination of the Western rhetoric on the “need” to include Russia in solutions of global problems. Moscow is unable to solve any problems facing Europe and the US today, including created by it in the first place—e.g. crises in Ukraine and Syria. The intended effect of the sanctions regime is nullified if Vladimir Putin, Sergei Lavrov, and other high-ranking Russian officials are excluded from the sanctioned persons lists or if Washington arranges meetings with Alexander Bastrykin of Russia’s Investigative Committee for the purpose of “improving security.” Given that political assassinations and assassination attempts undertaken by the Kremlin both domestically and abroad, Russian intelligence services, such as GRU and FSB, as well as other law enforcement agencies, could be designated as terrorist organizations, all cooperation with them ceased. Systemic pressure could be applied on Russian capital so that it would be squeezed out of the Western safe havens; information on all known purchases of large Western assets and property by the Russian government officials should be made public; all opportunities for Western politicians to be corrupted by Russians must be eliminated; pro-Kremlin media in the Western countries should be banned.

In my opinion, the West should have an adequate, symmetrical response to any of the Kremlin’s provocations. If the US passed the Magnitsky Act, which targets individuals implicated in the outrageous cases of Russian judicial corruption and human rights violations, it can also imply that any judicial verdict issued in Russia should not be considered by the West as a viable basis for legal action. If there are grounds to believe that the cyberattacks on Western institutions are launched by direction of Russian officials, counter-attacks must follow—e.g. businesses associated with the perpetrators could be denied SSL-certification (if such action would have been taken against the Rossiya Bank, which is linked to Putin’s inner circle, it would completely destroy its business of processing all types of credit cards). Responding to Navalny’s poisoning with measures that would only punish millions of ordinary Russian citizens, who will have to pay for Gazprom’s losses out of their own pockets, is, in my opinion, neither just, nor effective.

 

*Vladislav Inozemtsev holds a PhD in economics and is the director of the Centre for Research on Post-Industrial Societies.

 

Russia under Putin

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