Be Careful What You Wish For

The United States makes a mistake by trying to force Europe, first of all Germany, to abandon energy cooperation with Russia.

WHAT WE THINK
In 1985, Ronald Reagan made Japan revalue the yen against the US dollar. This became known as the Plaza Agreement.

The Japanese started buying depreciated US assets while the sales of Japanese goods fell. A few years later, Japan's stock and property markets collapsed, interest rates plummeted to zero and for decades Japan’s economy plunged into stagnation.

Today, another conservative president Donald Trump wants to do the same with Europe. Europe can see through this and resists. This time, history will repeat itself as a farce: attempts to press on Europe will backfire and the United States will lose.

President Trump’s politics are often criticised as erratic. Yet, as far as energy cooperation between the EU and Russia is concerned, he continues Obama’s policy: he wants to stop the Nord Stream 2, a direct gas pipeline that connects Russia and Western Europe bypassing transit countries.

The reason, the Americans say, is that the pipeline will become an instrument of the Kremlin's influence. “As many people know, we oppose the Nord Stream 2 project, the US government does,” said State Department spokeswoman Heather Nauert. “The Nord Stream 2 project would undermine Europe’s overall energy security and stability. It would provide Russia [with] another tool to pressure European countries, especially countries such as Ukraine.”

This is only partially true. In recent years, the United States has become one of the largest energy exporters. By 2020, it will be producing 100 billion cubic meters of gas more than it needs for domestic consumption. Thus, the desire of the US President to clear a place in the European market is understandable and noble.

The need to promote gas exports “in order to create American jobs, help United States allies and partners, and strengthen United States foreign policy" is enshrined in law (Article 257 (a) (10) of Countering America's Adversaries Through Sanctions Act, CAATSA).

Against this background, the reports of the German media that Donald Trump offered Angela Merkel to lift duties on steel and aluminium in exchange for stopping Nord Stream 2 seem plausible.

We can also gather some useful hints from the room for manoeuvre the US President has: apparently, there are many issues where Donald Trump does not have authority or support in American society. He can neither abolish anti-Russian sanctions nor recognise Crimea as Russian territory.

It is significant, therefore, that the legislative framework, first of all the CAATSA, gives him the right to impose sanctions against companies involved in the construction of the Nord Stream 2. We, therefore, can have some idea of where the negotiating efforts of Donald Trump are directed.

In the early 1980s, the Soviet Union and the Federal Republic of Germany agreed on the construction of the West-Siberian Pipeline linking Europe with the gas fields in Western Siberia.

Ronald Reagan strongly opposed the plan, alleging that the pipeline would become a means of Soviet influence in Europe. He imposed a ban on supply of technological equipment to the USSR and announced sanctions against European companies taking part in the project.

It may be hard to believe but the governments of Germany, Britain, France and Italy did not obey. They stood by their companies and denounced American sanctions. The US had to back off.

It's tempting to become a hostage of history and consider today’s situation as a repetition, albeit at a new level, of what happened forty years ago.

It is true that forty years ago, as Russia today, the Soviet Union was in great need of a hard currency and agreed to the humiliating gas in exchange for pipes scheme. For Europe, the deal was so good that it justified a conflict with the United States.

This is how most analysts see Nord Stream 2. Europe is likened to a buyer in a supermarket choosing between more expensive American liquefied gas and cheaper Russian natural gas. Attempts are being made, with accounting pedantry, to assess the benefits of both options: cheap Russian gas or US market of $800 billion.

We believe this is wrong. This approach misrepresents the Russian position and belies the real choice for Europe.

For the first time in its history, geography will play into Russia's favour. Moving on with the supermarket analogy, Russia is no longer a seller and Europe is not a buyer. Rather, Russia is the key which is going to open the European markets to the Asia-Pacific economies, first of all China.

This key consists of two elements.

First is the New Silk Road, a transport system for moving cargo and passengers from China to Europe. The route includes Russia’s Trans-Siberian Railway and the Eurasian Continental Bridge in Kazakhstan. Through the New Silk Road goods from China would reach Europe at least two times faster than by sea through the Suez Canal.

The second is energy.

It's not just that Europe is no longer the sole buyer of Russian gas: the material point is that today, unlike in the 1980s, Europe is in the direct competition with fast-growing Asia.

Energy as a commodity is unique in that its cost is a part of price of goods. If Europe decides not to buy Russian gas, the latter will have to redirect surplus to China flooding it with cheap energy. This would mean that Europe will have to compete with Chinese imports on unequal terms. This would be especially painful for Germany which gets around 55% of its energy from Russia.

Let’s now try to see the US’s proposal the way Germans see it. They are being offered to subsidise American liquefied gas which, on the one hand, will lead to an increase in the cost of German goods, and on the other, to even cheaper imports from Asia. What is more, the Americans will continue to use cheap energy of their own production. In other words, German goods will become expensive not only in relation to Chinese imports but also to goods from the United States.

It is, therefore, understandable why Germans will not yield to pressure even under the threat of a large-scale trade war.

It is curious, however, that it is not in the interests of the US itself, if they are correctly understood, to put pressure on Europe to stop the Nord Stream 2.

The US, most likely, will not succeed, facing humiliation as forty years ago. The defeat will strengthen those forces in Europe that advocate distancing from the Atlantic patron.

This is, however, not the main point. In the long run, it is difficult to imagine how the strengthening of China and the weakening of Europe can play into the hands of the United States.

If the US succeeds and gets what it wants, it will be a disaster. As strange as it sounds, the Europeans seem to understand better than Americans what the interests of the US are.

Published: July 10, 2018