To deter Russia, threaten its role in the green economy

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Russian landfall of Nord Stream 2. [Nord Stream 2 website]

Nord Stream 2 is a poor lever to deter Russian aggression in Ukraine. To hit Russia where it hurts, Europe should instead leverage its regulatory might, in partnership with the United States, and threaten to shut it out from the new energy economy, writes Nikos Tsafos.

Nikos Tsafos (@ntsafos) is the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies (CSIS).

As tensions over Ukraine escalate, the United States and Europe need to deter Russian aggression. The energy sector is a logical target given its centrality to Russia, with the controversial Nord Stream 2 gas pipeline that links Russia and Germany has emerged as a likely avenue for pushing back.

That is unfortunate. Nord Stream 2 is a poor lever to pull on – and even if played well, it will offer a limited reprieve.

The United States and Europe need to think bigger: they should target Russia’s role in the new energy economy. Without long-term access to the European energy market, Russia is barely an economically viable country. This makes the new energy economy an ideal domain to combat Russian adventurism. And it is a strategy that delivers pain today and offers a framework for engaging with Russia for years, if not decades.

The logic for targeting the new energy economy, as opposed to hydrocarbons, is informed by history. The United States has tried to stop Europe from buying Russian hydrocarbons for sixty years. These efforts have failed because the commercial logic of this trade is too strong. The current moment is no different. Germany has said it might target the recently completed Nord Stream 2 pipeline if Russia invades Ukraine. On the face of it, that seems like a serious theat.

But delaying the start-up of Nord Stream 2 is a short-term fix. Delay approval for too long, and Russia might conclude that the pipeline is doomed regardless of its actions in Ukraine. The deterrent threat is lost. Nor is stopping Nord Stream 2 the prize it is often portrayed to be. Stopping the pipeline forces Russia to deal with Ukraine but does not change Russia’s dominant position in the European market. If Nord Stream 2 never operates, Russia will lose face, but this is a Pyrrhic win for the West.

Worse, if Nord Stream 2 starts operating, it will be nearly impossible to stop. No government will cease imports, and certainly not at times, like today when high prices. So Europe is in a conundrum: delay Nord Stream 2 long enough, and Russia writes off the pipeline; stop the pipeline and celebrate the victory without changing the geopolitical balance between Europe and Russia; or approve Nord Stream 2 and lose all leverage. None of these options is attractive, making Nord Stream 2 the wrong target.

The new energy economy, by contrast, offers new avenues for engaging with or punishing Russia. Over the next three decades, the European Union will overhaul its energy system. This is an existential issue for Russia: without access to the European market, Russia’s economy will wither. But unlike the hydrocarbon era, where trade routes followed geology, the low-carbon era will be driven by the ability to innovate, write and enforce rules, and govern complex networks of private industry, public institutions, and civil society. This is not a world where Russia has natural advantages– its role is precarious.

The West can shape Russia’s participation in the energy transition. Russian companies own or have access to refineries, gas storage facilities and gas stations across the Continent. These assets will need to evolve to compete in the new energy system. For example, Russia has said that Nord Stream 2 might one day carry hydrogen, part of Russia’s ambitions to become a global hydrogen player. How and whether these Russian assets retain their value in the energy transition will depend on European rules and policy. That gives Europe power.

Foreign firms also operate in Russia’s energy sector, and access to Western technology and finance remains important. Sanctions in 2014 targeted this collaboration and helped undermine Russia’s ambitions to develop oil in the Arctic (as did lower prices), even if they did not stop the country’s expansion in liquefied natural gas.

Restricting foreign investment will hamper Russia’s chance to participate and be competitive in industries like hydrogen, offshore wind, batteries, carbon capture and storage, and others. Without these technologies, Russia’s industrial might will atrophy.

Europe’s most potent weapon is the ability to write rules. European regulations on methane will affect Russia, as will Europe’s proposed carbon border adjustment mechanism, differentiating goods based on how much carbon was emitted in their production.

Europe will write rules on what is green and sustainable. Russia could be part of this new market, attracting foreign capital, investing in European industrial clusters, accessing cutting-edge technologies, and integrating its own industries – iron and steel to aluminium and fertilizers – in a low-carbon trading system. Or Europe could interpret rules narrowly and shut Russia out.

This is a multi-year strategy. Today, the West could restrict technology transfers and transactions in areas like hydrogen, ammonia, and carbon capture – where existing relationships are limited and easier to target. The United States and the European Union are negotiating a trade agreement on low-carbon steel and aluminium. Whether Russia sits at that table should depend on its behaviour.

Europe should also think strategically about rules governing what assets a country like Russia can own in Europe. These rules can give Europe discretion and leverage. The Continent should articulate how and where Russian interests will be curbed if its aggression persists.

The stakes are very high. Without a military counterweight to Russia, Europe should leverage its economic and regulatory might in partnership with the United States. The message should be clear: play by the rules and sit at the energy transition table. Break the rules and miss out on an energy transformation that could attract $4 trillion in annual investments by 2030.

If Russia is not a part of the new energy economy, no one will take it seriously on the world stage – the prize that most animates Vladimir Putin. This is how to hit Russia where it hurts.

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