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A "Credible Threat" Approach to Long Run Deterrence of Russian-European Hegemony

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The recent occupation of Crimea in Ukraine by Russian military forces has been viewed by most as an outright violation of Ukrainian sovereignty. US President Barack Obama and US Secretary of State John Kerry have each responded firmly to these events. Kerry issued a warning to Russian President Putinof the isolation his country would soon face “politically, economically, and diplomatically.” Obama has spoken with Putin directly in attempt to diplomatically influence a reversal of Russia’s intrusion. Unfortunately, Putin has not yet reversed course.

Even if Russia withdraws from Crimea and things in the region do calm, diplomatic levers to influence Russian behavior in the region will continue to be explored. Indeed, given the relative inability to affect the current situation, a long run set of strategies ought to be fully engaged. A fundamental lesson of the Cold War is that détente is born of a credible threat. Therefore, if US foreign policy is to be successful in swaying Russian behavior – current and future – then such a lever must be presented. Otherwise, Putin is correct in his assertion that “all threats against Russia are counterproductive and harmful.” The United States has a very clear opportunity to present a credible threat to Russia’s long term dominance in Europe. Ironically, it involves the very commodity that Russia has used to its advantage in recent history: natural gas.

Natural gas is the patrimony of the Russian economy and a major source of its political, economic, and diplomatic leverage over the Ukraine, the European Union, and its other former Soviet neighbors. Indeed, threats to Gazprom’s market share in Europe are taken very, very seriously. This has been demonstrated in recent years by a concerted effort by Gazprom to defend its market, as seen in physical infrastructure investments (i.e. – the North Stream pipeline), plans to develop other infrastructure (i.e. – the South Stream pipeline), and a willingness to alter pricing terms over the past several years in the face of competitive threats. Each of these commercial actions has been undertaken to secure direct access to central and western European markets by avoiding transit country risk (in Belarus and Ukraine) and to maintain long term contractual relationships with customers in Europe.

Importantly, the US government cannot actually direct any LNG supply to Europe, as that is a commercial decision in the hands of LNG suppliers and consumers. However, the US government can exercise policy levers that could lower barriers to entry and more easily facilitate trade to Europe.More specifically, if the countries of the European Union (EU)were granted Free Trade Agreement (FTA) statusthen the pathway for investment in LNG export capacity with anability to deliver supplies within the EU would be less encumbered. In effect, a non-FTA license from DOE would no longer be required for investment to commence on various US LNG export facilities, particularly since there are multiple LNG import facilities in Europe already with an ability to expand import volumes. Thus, FTA status to EU nations would present a credible threat to Russia’s long term dominance of the European market.

While such a policy direction does not present a near term solution to the current situation, it does present Russia with a new set of circumstances it will have to deal with going forward. The credible threat of US entry into the European gas market can be viewed as a policy move in a dynamic game. Whether or not US-sourcedLNG actually ever flows to Europe is not the issue. Indeed, if Russia were to act to defend its market, as it has demonstrated it will likely take strides to do (see above), then it is likely that little to no US gas would actually end up in Europe. However, the reaction by the Russians prompted by the policy move in the US would facilitate surety of gas supply to Europe, likely at a lower price than would have otherwise been the case. In the end, this outcome benefits Europe. As far as Ukraine is concerned, ittoo would be provided with an alternative long term supply option – via backhaul from its western neighbors. Of course, any actual supply to Europe from the US would take a while to materialize as no capacity to execute this trade currently exists, but the idea here is to present a credible threat that alters long term behavior, strategic and commercial.

In point of fact, it is not very likely that US LNG exports would have a measurable impact on European independence from Russian gas, particularly in the near term. To begin, the profit on US trade to Asia far exceeds the profit on US trade to Europe. So, either the price in Europe would have to rise substantially or sales from US LNG suppliers to Europe would have to be subsidized in order for large volumes of trade to Europe to happen. The European market currently exceeds 50 billion cubic feet per day (bcfd), so we would have to see well over 1 or 2 bcfd of LNG flowing from the US to Europe for the impact to be noticeable. Importantly, the resource base in the US can facilitate larger volumes, but this is not the issue; rather, it is that the current barriers to market entry create delays and inject uncertainty around making such investments. FTA status removes this impediment. But, given the slow pace of the federal approval process for LNG export permits to non-FTA countries, US LNG suppliers will have little to no capability to send supplies to Europe for the foreseeable future, thus lending credence to the remarks ofEnergy and Commerce Chairman Fred Uptonearlier this week that "the Department of Energy's approval process for LNG exports is unnecessarily putting our allies at the mercy of Vladimir Putin.”

If the EU member states have FTA status, US exporters would have the ability to sell spot LNG cargoes in Europe without having to seek regulatory approval. Thus, such a commitment by the USgovernment signals a willingness to allow US suppliers to compete with Russia’s gas industry in Europe – a credible threat so dramatic that it could force a recalculation of all future Russian foreign policy moves vis-à-vis its western neighbors, even without ever sending any appreciable supplies of US-sourced LNG to Europe.

Post by Kenneth B Medlock III, Senior Director, Center for Energy Studies, Rice University’s Baker Institute, and Keily Miller, Research Associate, Center for Energy Studies, Rice University’s Baker Institute