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Ukraine crisis strengthens EU interest in US gas

20 March 2014

EU efforts to persuade the USA to agree a framework to allow imports of US LNG into the European Union via a transatlantic trade pact have acquired a new urgency following Russian moves in Ukraine. The existing framework for the EU-US trade negotiations does not cover energy issues, but the crisis in Ukraine has exposed the EU's dependence on Russian gas imports.

Russian troops in Perevalne, Crimea - /
Russian troops in Perevalne, Crimea - /

An EU-US trade accord, which negotiators aim to finalise by the end of 2014, would make approval of US LNG export licences automatic, ending current restrictions on imports.

This would have the effect of making European countries less dependent on Moscow, which has repeatedly shown a willingness to use energy exports to bend neighbouring countries to its will, presenting a credible threat to Russia’s long term dominance of the European market and reducing its ability to throw around its political weight.

Commenting in Forbes magazine, energy expert Kenneth B Medlock said the threat of US entry into the European gas market could be viewed as a policy move in a dynamic game,  facilitating surety of gas supply to Europe and in the long term providing an alternative supply option to countries as far east as Ukraine itself.

Medlock, the Senior Director at Rice University’s Center for Energy Studies, doubted much US LNG would in fact be shipped to Europe in the short to medium term because the profit on US trade to Asia would likely continue to be higher than that to Europe.

Nevertheless, if US exporters have the ability to sell spot LNG cargoes in Europe without having to seek regulatory approval, such a commitment by the US government would signal a willingness to provide direct competition to Russia’s gas industry in Europe.

This would be “a credible threat so dramatic that it could force a recalculation of all future Russian foreign policy moves vis-à-vis its western neighbours, even without ever sending any appreciable supplies of US-sourced LNG to Europe”, Medlock concluded.

Beyond the likely effect of US LNG exports to Europe, far-reaching sanctions by the US and the EU against Russia over its actions in Ukraine, if imposed, could well translate into multi-billion dollar losses for Russia, as well as Western companies with significant interests in the Russian economy.

This is why major EU economies have up until now resisted a tougher approach -  the UK is awash with Russian money, Germany's need for Russian gas is stronger than ever now that nuclear power is being phased out and the struggling French economy can ill-afford the loss of lucrative defence contracts with the Kremlin.

But if Russia continues its destabilisation of neighbouring countries – on March 19 the country expressed concern for Russian speakers in EU member Estonia, one of the major reasons given for its takeover in Crimea – calls for more stringent sanctions could become impossible to ignore.

Without doubt, the west could cause serious harm to what is already a shaky Russian economy. Growth slowed markedly during 2013 and is over-dependent on the oil and gas sector.

An escalation of the crisis in Ukraine carries real economic risks for Moscow, particularly if the west responds with export curbs and banking restrictions. As Iran has shown, sanctions can be very effective if they are stringent enough.

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