Ambassador Morningstar’s Remarks
Global Energy Center Event: Russia Sanctions Revisited
July 19, 2016

Given Russia’s actions in Ukraine, along with the meddling in our election, some form of sanctions is certainly warranted. 

I would also say that energy projects should not, as a category, be immune. I disagree with many who say that when you are talking about energy projects that they should only be treated from a commercial standpoint and that geopolitics should not get involved. From a historical standpoint, projects have time and again become inextricably intertwined with geopolitics. If that were not the case, then there would be no need for any kind of energy diplomacy.

Having said all that, the question is: what form should sanctions take? My concern is that I do not think you can just, with little thought, put into effect a broad sanctions policy encompassing, theoretically anyway, every project where a Russian company is involved all over the world. This could lead to very unintended, serious consequences, which could be very problematic. 

First issue, I think there has to be appropriate targeting to avoid counterproductive results. Shah Deniz is a perfect example- bringing Caspian gas and Caspian resources to Europe, and in the case of oil to the rest of the world, through the Southern Corridor has had bipartisan support here in the United States for years. In the case of gas, it will certainly help diversify European gas supply away from a single source, at least in part of Europe that is reliant on a single source. Okay, but Lukoil, as luck would have it, owns ten percent of Shah Deniz. A Russian company, a private company that actually has two American directors and one British director, that could bring the Shah Deniz project under the sanctions legislation. The point is, even the threat of sanctions could seriously undermine the project and affect its financeability. And what a gift! Can you imagine a better gift to the Russians than to eliminate a source of competitive gas?

So, in this case, there needs to be a carve-out. A scalpel is necessary to avoid potentially ridiculous, counterproductive results.

And there is a precedent for this, and that is that a subsidiary of the National Iran Oil Company also owns ten percent of Shah Deniz. There was a carve out for Caspian gas going to Turkey and Europe that was put in the Iran sanctions act. The same thing has to be done, I think, with this bill. I might also add that there is a lot of Kazakh oil in which there is Russian ownership in projects that cross the Caspian and goes into the Baku-Tbilisi-Ceyhan pipeline, which could be affected. There are a lot of consequences that people have not thought about.

Second, we have to recognize that unilateral sanctions generally do not work. It is necessary to have the support of allies. That is why Russian sanctions, with respect to Ukraine, have been able to stick until now. That is why Iran sanctions worked to help bring about the Iran nuclear agreement. It was that the United States and Europe were together on Iran sanctions, and even without opposition from Russia and China.

We have learned in the past the difficulty of enforcing unilateral sanctions, and we have learned the hard way. We learned it in the nineties with respect to the Iran and Libya Sanctions Act and Helms-Burton. The extraterritoriality of those sanctions brought about major disputes with the EU, to the extent that, at that time, the EU actually enacted legislation forbidding EU companies to comply with US sanctions. This resulted in non-enforceability of Helms-Burton in certain instances, and with respect to ILSA we were forced to make deals with the Europeans and with European companies to avoid a major fight. And all this did was to allow European companies to do more in Iran while American companies could not. Some might say “too bad” when you are dealing with Iran, but it does create something that really needs to be thought through.

So, unilateral sanctions on energy projects with Russian involvement will raise very difficult issues. What about Nord Stream 2, which I think all of you know will bring Russian gas across, or underneath, the Baltic directly to Germany.

I will not get into the ins and outs of Nord Stream 2, but I have certainly been very outspoken about it and have been very clear about my opposition to it. I think it is a very bad idea. Now, there are a lot of people here who would disagree with that. I feel so strongly about Nord Stream 2 that if Santa Claus were to ask me what I would like for Christmas, one of the things on my list would be for Nord Stream 2 not to happen. At the same time, I do not think unilateral sanctions are the way to accomplish this. The United States can and should advocate because the United States does have an interest, from a geopolitical standpoint, but it must ultimately be a European decision. The US should not unilaterally try to stop it and it is questionable whether we could. The downside would create several unintended results: (1) a major dispute with Europe (2) a much better chance that the EU would back off from existing sanctions, which could create real problems and inequalities among European and American companies, and (3) a possible fight in the WTO over the national security exemption, something we have been trying to avoid for all the years of the WTO. 

So, the bottom line is that we really do have to, as strongly as I think about some of these issues, that we really do have to proceed with caution and I do not think we can act alone.

Ambassador Richard Morningstar is the Chairman and Founding Director of the Atlantic Council’s Global Energy Center. He also served as the US Ambassador to the EU, Azerbaijan, the special envoy for Eurasian energy, and special adviser to the President and Secretary of State for Caspian Basin Energy Diplomacy. 

Related Experts: Richard L. Morningstar