TROIKA REPORT: Washington ups the ante with sanctions on Gazprom

RBTH presents its weekly analytical program TROIKA REPORT, featuring a look at three of the most high-profile recent developments in international affairs.

 

1. Engaging the West

U.S. sanctions on Gazprom: Washington ups the ante

 

The Gazprom-owned semi-submersible 'Aurora Polaris' at the Yuzhno-Kirinskoye oil and gas field in the Sea of Okhotsk. Source: Gazprom

 

The recent move by the U.S. administration to restrict exports, re-exports and transfers of technology and equipment to the Yuzhno-Kirinskoye oil and gas field in the Sea of Okhotsk is the most painful blow against Russia so far in the series of sanctions imposed on Moscow by the West to punish it for its role in the Ukrainian conflict. The embargo targets one of the most lucrative and potentially profitable projects intended to boost production of Russian LNG for export.

The move raises the stakes in the ongoing Western campaign of sanctions against Russia. For Russian energy giant Gazprom, the licence holder for the Yuzhno-Kirinskoye field, this means barred access to offshore drilling and liquefaction technologies in possession of Western companies.

No wonder Washington’s attack on Gazprom has acquired political significance, with Russian President Vladimir Putin's spokesman, Dmitry Peskov, warning that the new U.S. sanctions would further damage bilateral relations.

This represents the first time that natural gas production has been targeted as part of the so-called U.S. “sectoral sanctions.” In the first year of sanctions, Gazprom’s long-term contracts and cooperation with European wholesale buyers and partners were never considered a suitable target since the national governments of Europe and the EU leadership felt vulnerable to potential counter-sanctions, given the absence of viable alternatives to Russian pipeline gas supplies.

The U.S. move against the Yuzhno-Kirinskoye field does not provoke concerns among the Europeans because the field is planned primarily as a source base for the production of LNG at the proposed Sakhalin-3 plant (if it comes on stream it will produce 5 million tons a year by the next decade). All gas produced at the field will be sold not in Europe but in Asia, increasing Russia’s LNG export potential by 50 percent.

Will these latest U.S. sanctions jeopardize Gazprom’s development of its LNG production facilities in the Far East? Mikhail Krutikhin, an energy expert and partner at the RusEnergy company and a reputed critic of Gazprom, had this to say to Troika Report:

“The Yuzhno-Kirinskoye oil and gas field is Gazprom’s last hope to expand its presence in the Asia-Pacific market. It contains, according to unconfirmed estimates, one trillion cubic meters of gas, and it can serve as a perfect source of producing liquefied natural gas, or LNG.

“Presently, Gazprom is producing LNG only at its Sakhalin-2 plant, with a volume of about 10 million tons per year. Gazprom hopes to build at least two more plants but it lacks gas. To produce gas from Yuzhno-Kirinskoye, Gazprom needs advanced technologies to work underwater – which are produced only by four companies in the world. All of these are Western companies. If sanctions come into force on this project, Gazprom will not be able to export any additional LNG to Asian countries in the future.”

Yet whether the American embargo will be effective enough to completely block work on the Yuzhno-Kirinskoye field is not a given. The U.S. sanctions will also be detrimental to Royal Dutch Shell, which has pegged its growth strategy on developing a full-scale strategic alliance with Gazprom. In June, Gazprom and Shell signed an agreement to enhance the scope and depth of their interaction covering a wide area: exploration, production, sales, and, possibly, asset swaps to strengthen tandem’s interlink dependency.

Immediately after the U.S. sanctions were introduced, the British-Dutch company made a public statement. “Shell remains committed to working in Russia and we value working with our Russian partners and colleagues,” the company’s spokeswoman said. In other words, Shell so far has no intentions of wrapping up its activities in Russia and heading for the exit.

Cynics may say there are certain unspoken motives behind the U.S. sanctions against Russia’s most profitable energy sector. In this case, it is aimed at plans by Gazprom and its partners, including Shell but also a number of Japanese companies, to increase LNG production in the Russian Far East.

Asia in general and Japan in particular, not to forget South Korea, Taiwan and even China, are insatiably hungry for LNG. It is worth noting that the price spread between Henry Hub (the American key sales point) and regional premium markets can reach up to $16-17 mBtu. With American LNG producers regarding the import potential of these markets with envy, it is hardly surprising that the U.S. government is doing everything possible to eliminate competitors.

Basically, there is a good argument to be made that sanctioning Gazprom by forcing it either to delay or even abandon its projects in the Far East amounts to the use of political tools and administrative leverages to facilitate access to the regional markets for American business.

 

2. Globally speaking

Iraq: Can U.S. administration afford a new troop surge?

 

Shiite fighters, who have joined the Iraqi army to fight against Islamic State militants, take part in field training in the desert in the province of Najaf. Source: Reuters


Iraq is back as a hot potato issue for the U.S. 2016 presidential race. Politicians are locking horns on whether or not to get the military involved in the fight against Islamic State (ISIS) militants and make a second stab at installing law and order in a country still teetering on the brink of collapse. However, any unilateral action is unlikely to succeed given the interdependence of conflicts ravaging Iraq and Syria, and the involvement of local actors such as Iran and Russia. 

The debate in the U.S. was reactivated when two prominent candidates, Jeb Bush and Donald Trump, sent up trial balloons calling for the re-deployment of the U.S. military in Iraq – the first such call since the withdrawal of American troops in 2011. Is the unpredictability of the ISIS challenge changing the priorities of the Republican camp?

Former Florida governor Bush blamed the Democrats and personally President Obama for the withdrawal of troops from Iraq after the eight-year U.S. military occupation, calling it a “fatal error.” He added that it forfeited the “success, brilliant, heroic and costly,” of the 2007 U.S. troop surge.

Then Donald Trump, still the frontrunner in Republican primary polls, said that the United States should send ground troops into Iraq to fight ISIS and seize the oil fields under the control of the radicals. Trump claimed he had the correct solution to the ISIS problem: All that is required is to “take away their wealth, that you go and knock the hell out of the oil, take back the oil. We take over the oil, which we should have done in the first place."

At the same time, a member of the U.S. top brass, General Raymond Odierno, who is retiring as Chief of Staff of the army, also said the U.S. forces should be sent back to Iraq – not to be directly involved in the fight against ISIS, but to provide comprehensive assistance to the American-trained and equipped Iraqi troops.

All of this is a surprising return to the old tune, so popular back in 2003. How likely is a genuine turnaround in U.S. foreign policy in the Middle East? Yury Rogulyov, director of the Franklin Roosevelt Foundation for U.S. Studies at Moscow State University, made this comment to Troika Report:

“If the next president comes from the Democrats, for instance if it is Hillary Clinton, I doubt there will be any drastic changes in the policy towards Iraq. But if Jeb Bush becomes president, it may happen, because in the course of the election campaign he is trying to part with the defensive stance on Iraq. He says it was not a bad idea to ‘take out’ Saddam Hussein. If Bush becomes president, it may happen because all military experts agree that only air strikes cannot bring victory over Islamic State.”

“I think that the United States would not do it alone. They would opt for a coalition; in fact, they are doing it right now.” 

— Talking about a coalition to fight ISIS. This is exactly what Russia is proposing. Could the changing realities on the ground bring the U.S. and Russian approaches to Iraq closer?

“There is such a possibility, provided Washington takes a more positive attitude towards the Syrian regime.” 

Basically, and “globally speaking,” this is a dilemma of either unilateral or synchronized multilateral action against ISIS. Conflict resolution in the region is hardly feasible without a coalition of the willing. The dangers of U.S. unilateralism cannot be underestimated, and neither the expediency of concerted efforts.

In the hypothetical scenario of a return by U.S. troops to Iraq — but not as part of a wide international coalition — several basic questions need to be answered. Will the White House and the Ministry of Defense attempt to duplicate the success of the much-lauded “troop surge,” which has seen the largest accumulation of ground forces overseas since the Vietnam War?

Will military actions on the battlefield be accompanied by a subtle maneuvering by the Americans on the political side? Will they try to make friends and influence people in all three Iraqi communities, namely, the Shiites, constituting the majority of the population, the Sunnis as the disgruntled minority which lost its privileged position it had enjoyed under Saddam Hussein, and the Kurds, disappointed that Obama has given Turkey carte blanche to bomb, hunt down and kill their kin, the militants of the Kurdish Workers’ Party?

Would a second U.S. “troop surge” produce tangible results leading to the exhaustion and ultimate defeat of Islamic State? Or will it accelerate the break-up of the complex and composite nation that is Iraq? Will the next U.S. administration — following the simple and naturally appealing call of Donald Trump — be satisfied with placing the Iraqi oil fields under its protection and, subsequently, under its jurisdiction?

Finally, would the full-scale military involvement of the United States in the current Iraqi quagmire, exacerbated by the ISIS factor, eventually enhance peace and stability in the region? Or would it produce an adverse effect? So far, the answer to all of these questions is unclear, as is the likelihood of a fresh deployment of U.S. troops in the Middle East.

And then there is the issue of how the U.S. would interact with Shiite Iran, which has become a major stakeholder in internal Iraqi politics. It all adds up to a sense that solidarity will be required among the international actors opposed to ISIS if they are to have a chance of forging a solid peace in the region.

 

3. Going Eastward

Moscow and Tehran align prior to U.S. Congress vote

 

Russian Foreign Minister Sergei Lavrov, right, escorts his Iranian counterpart Mohammad Javad Zarif to their meeting in Moscow, Russia, on Monday, Aug. 17, 2015. Source: AP


It is now two months since the landmark deal on Iran’s nuclear program was signed, and while U.S. Congress is still due to vote – by September 17 – on approving the accord, Russia is raising its profile with some high-flying diplomacy. The visit to Moscow this week by Iranian Foreign Minister Mohammad Javad Zarif — his first visit after the deal was signed in Vienna — is a testimony to Russia’s desire to capitalize on the positive momentum and multiply its gains.

Tehran’s intentions are similar. As Zarif said in Moscow, “We are confident that the Vienna agreement will have an enormous impact on developing ties between our two countries.” Russia has no objections.

The outcome of the visit to Moscow was an accord to further cooperation in the high-tech field, with Russian technologies to be used in the future production of stable isotopes at the Fordow nuclear facility. Additionally, Russia will exchange Iran’s low-enriched uranium for natural uranium. On top of all this, there could be an additional bonus in the form of new blocs to be constructed at the Bushehr nuclear power plant. This means that Russia will play a key role in the implementation of the Vienna agreement.

Media reports claim that the two sides also discussed the delivery of Russian S-300 surface-to-air missiles.

Yet the lion’s share of attention was centered on the intensified diplomatic maneuvers around the fate of the embattled regime of Syrian President Bashar al-Assad. At a joint news conference with Russian Foreign Minister Sergei Lavrov, his Iranian counterpart specifically noted that “our states hold a common position on regulating the Syrian crisis… The Syrians must themselves decide their fate and their future, and foreign states should only make this easier.”

This announcement came in the wake of the meeting Lavrov had last week with Syrian opposition leaders while Zarif held talks with al-Assad in Damascus. Defying the West, both sides again dismissed calls for al-Assad to step down as a precondition for the end of the civil war in Syria.

This reactivation of Russian and Iranian diplomacy did not go unnoticed in the United States, where congressmen and senators are expected to vote on the ratification of the Vienna accord. Zarif’s visit took place right after a barrage of speculations about an alleged trip to Moscow undertaken in late July by Major General Qassim Suleimani, commander of the Iranian paramilitary elite forces known as Quds. The rumors had an impact: They brought U.S. critics of the deal with Iran to the barricades.

Since General Suleimani is on the persona non grata list, as stipulated in the United Nations travel ban on people linked to Tehran’s nuclear and ballistic missile programs, opponents of the Vienna deal declared Russia culpable of violating the sanctions regime, which has not yet been lifted.

However, Moscow denies that Suleimani has set foot in the Russian capital. His rumored visit made little sense, as one local expert explained, since there are two or even three higher rank military commanders, to whom General Suleimani is subordinate, who are not on the blacklist and could freely travel to Moscow.

Speaking at a press conference in Moscow, Zarif dismissed these rumors, linking them to the ongoing battle among political clans in Washington. At the core of the debate is the divergence of views on the crucial dilemma: Who stands to win and who to lose from the emergence of a desanctioned Iran?

While Obama’s team has opted for a policy of positive engagement towards Iran in view of a possible alignment when the Ayatollah’s rule softens and evolves into a more opportunistic regime, skeptics lambast this approach as illusionary and naïve.

In Moscow, politicians and experts are no less divided on the opportunities offered by the Vienna deal. Igor Morozov, a member of the foreign affairs committee of the Federation Council (the upper house of the Russian parliament) stresses the ambiguity of Moscow’s position: On the one hand, there are plenty of benefits in cooperation in nuclear power generation, on the other hand, Iranian oil and gas sweeping the global markets would depress prices, reduce Russia’s revenues from energy exports, and have a bearish effect on its national currency.

For Russia, there is also the geopolitical and military dimension of the Vienna deal. Pavel Zolotarev, deputy director of the Moscow-based Institute of American and Canadian Studies, emphasizes the advantages of strengthening strategic stability both regionally and globally. The absence of a nuclear threat from Tehran devalues claims that the U.S. needs to deploy an anti-ballistic missile system in Eastern Europe, close to Russia’s borders, on the pretext of establishing a shield against a hypothetical Iranian attack. 

Is Moscow’s political linkage with Tehran a trump card vis-a-vis the West? Andrei Kortunov, director general of the Russian International Affairs Council, made the following comment for Troika Report:

“One should not limit Russia-Iranian relations to Iran’s nuclear portfolio. The two nations are neighbors and have a track record of bilateral relations, complex as they are. Now they share common interests in certain regions: the Middle East, Central Asia, Afghanistan, and the Caspian Sea. This goes beyond the nuclear dossier. It all ties the two countries together. It is no coincidence that Tehran is considering joining the Shanghai Cooperation Organization. It is a manifestation of the proximity of our national interests.”

“I would also like to say that Russia’s relations with Iran cannot be based on opposition to the West or to any other group of countries.”

 

The opinion of the writers may not necessarily reflect the position of RBTH or its staff.

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