U.S. Policy Options

The crisis has now reached a point where pressure on the U.S. administration to take further steps has reached a boiling point. This pressure is particularly intense on Capitol Hill, and leading Democrats have joined the chorus of Republican lawmakers urging the implementation of further sanctions to inflict damage on the energy and financial services sectors of the Russian economy, as well as the defense, engineering and mining sectors.

How bad could it get? There is no question that the U.S.-Russian relationship has been seriously damaged, at least in the short run. The policy vectors now being debated will influence where the relationship goes from here, but not nearly as much as Russia’s policy choices will impact its relations with both the United States and Europe.

There are three primary scenarios that could unfold in terms of next steps for U.S. policy: a series of measures that stops short of sectoral sanctions (for example, limiting access to international financial markets, stricter enforcement of WTO and other trade rules affecting Russian exports, and a more activist stance on anti-corruption measures); the implementation of the sanctions on the five sectors outlined above; and a “sanctions-plus” variant that would employ sectoral sanctions as the departure point for a multifaceted response.

Some might argue that the recent cease-fire obviates the need for further U.S. sanctions, in that large-scale fighting has subsided and Russia and Ukraine appear to have begun a process of dialogue.  Thus far, however, U.S. (and European) officials appear to take the contrary view, imposing additional sanctions as a means to reinforce Ukraine’s negotiating leverage and to press Moscow to discourage cease-fire violations by rebel forces.

The congressional pressure is evident in legislation introduced to cancel the Pentagon’s current contract with Rosoboronexport (the arms trading unit of the state-owned corporation Russian Technologies) for the purchase of 30 transport helicopters for the Afghan air force, valued at more than a half-billion dollars. The draft “Russian Weapons Embargo Act” would also forbid any new contracts with Rosoboronexport and would prohibit cooperation with any company, domestic or foreign, that conducts arms transactions with Rosoboronexport.

This follows the pressure tactics pursued with respect to the Magnitsky List for human rights violations in Russia. Congress stipulated that additional names be appended to the original Magnitsky List of 18 persons by the end of 2013. With bilateral tensions escalating through the winter, the administration lengthened its review and then acted in May, following the implementation of the initial sets of sanctions.

Sentiment in Congress is squarely behind sectoral sanctions and possibly a sanctions-plus scenario. The push for sectoral sanctions evolved in two important ways in mid-June: the support became bipartisan, with Senate Foreign Relations Committee Chairman Robert Menendez (D-NJ) urging President Obama in writing to act, preferably with European support, but unilaterally if necessary.

The “sanctions-plus” faction is led by Senator Bob Corker (R-TN). An influential group of Republican senators has introduced S. 2277, the “Russian Aggression Prevention Act of 2014.” The bill calls for specific and severe sectoral sanctions on prominent Russian banks and companies, as well as direct military assistance to Ukraine in the form of anti-tank and anti-aircraft missiles and small arms. It further requires the President to accelerate the timetable for missile defense deployment in Europe and to increase U.S. and NATO military support for Poland, Latvia, Lithuania, and Estonia. The bill would also grant Ukraine, Moldova, and Georgia the status of non-NATO ally, similar to that enjoyed by Israel, South Korea, and Japan, and a select group of countries that frequently host U.S. bases. While technically outside NATO’s formal security guarantee umbrella, providing this support would fundamentally alter the geopolitical calculus on Russia’s periphery. In addition to the political-military measures, the bill also requires increased U.S. funding to support civil society and democratization promotion efforts inside Russia, which would clearly pose an irritant to Russia in the wake of increased scrutiny and control exerted by Russian authorities over NGO activities and the expulsion of USAID from Russia a year-and-a-half ago.

While the bill as currently structured may be unlikely to pass as a package, it is conceivable that key components could move forward or that variants of it could be adopted if Russia continues to provide materiel support to the separatists in eastern Ukraine. The Obama administration would face a difficult political dilemma if the Congress imposed measures harsher than its own.

Energy Dynamics

The 2014 Russian Aggression Prevention Act also seeks to enhance Europe’s energy security—and thus reduce Russia’s energy leverage—by providing authority for the U.S. to export gas to Europe (and to WTO member countries more specifically). The inclusion of this provision is but one example of a growing transatlantic consensus that both policy changes and infrastructure investments are necessary as part of a multi-pronged response to change the energy dynamics in Europe.

The early June G-7 discussions demonstrated a new level of resolve to alter the energy dynamics between Russia and Europe, such that initial steps in 2014 are virtually assured, irrespective of other short- and long-term approaches to resolving the crisis in Ukraine. The G-7 leaders discussed a U.S. plan to lift restrictions on the export of shale gas, while European officials outlined support for building several LNG terminals in Europe and substantial investments in reverse-flow technology from West to East. “The diversification of sources and routes for fossil fuels is essential,” the G-7 communique stated. While longer-term solutions are finalized and implemented, the leaders agreed to develop an emergency response plan for the coming winter of 2014-15, the necessity of which became more apparent when Russia halted gas supplies to Ukraine in mid-June.

The twin challenges of increasing supply and diversification of routes have elicited a strengthened commitment to construct new pipelines to transport supplies to Europe from sources other than Russia. The EU is pursuing closer ties to Azerbaijan as it steps up its support for expanding the Southern Gas Corridor for Azeri gas delivery through the Trans-Anatolian gas pipeline through Turkey, as well as the Trans-Adriatic Pipeline running across Greece and Albania to Italy. One interconnector will ship gas from Greece to Bulgaria, and further interconnectors are under discussion.

The G-7 meeting in June confirmed support for building additional energy infrastructure on an accelerated timetable, specifically regional and national interconnectors and metering stations to facilitate “reverse flow” of gas through existing pipelines. The reverse flow strategy began with small shipments from Hungary to Ukraine a little over a year ago. By April 2014, Germany began reverse-flow gas shipments to Ukraine via Poland, and at the end of the month, Ukraine and Slovakia signed a deal for reverse-flow deliveries to begin this fall. Taken together, the two projects could eventually supply one-third of Ukraine’s annual gas consumption. Since Slovakia has the capacity to expand its reverse-flow commitment, the U.S. and EU will no doubt try to persuade the Slovaks to do just that once the project is up and running.

Senior EU officials have also highlighted the need to facilitate gas imports from the U.S., in order to route some of the shale boom production for LNG export. European Council President Herman Van Rompuy has suggested the inclusion of this issue in the U.S.-EU Transatlantic Trade and Investment Partnership (TTIP) negotiations. Though it would take several years to implement given the infrastructure requirements on both sides of the Atlantic, a bold step could be taken this year to amend the U.S. legal framework with bipartisan support. The signal itself, years before the first deliveries would reach the European market, would help facilitate a revamped European energy policy and would alter the equation from the Russian side. Of course, these projects will ultimately succeed only if they are commercially attractive to U.S. and European companies.

Though the European energy dilemma primarily centers on natural gas supplies, calls for action similar to lifting the ban on U.S. oil exports are surfacing frequently, with the obvious endorsement of American energy companies.

These measures to increase and diversify supply will likely be accompanied by stricter interpretation and implementation of the EU’s Third Energy Package and further constraints on Gazprom’s influence, especially as it concerns the unbundling of ownership and transmission capacity.

Conclusion

U.S. and European leaders were quick to recognize that there can be no military solution for the crisis in Ukraine. This made international isolation and economic leverage the primary tools deployed to exert pressure on Russia to change course after assessing the costs associated with its destabilizing activity. Russia may have changed tactics, but it is not at all clear that it has backed away from a strategy of promoting instability to influence the shape and direction of post-Yanukovych Ukraine.

U.S.-Russia relations have been badly damaged by the crisis in Ukraine, and the mutual grievances felt on both sides increase the probability of sharp responses and further setbacks. Proposals in Congress and elsewhere demonstrate the potential for a downward spiral leading to talk of “containment” or “Cold War Lite.” But the damage is not necessarily irreparable. The international isolation of Russia will continue and intensify, though the door to renewed engagement with Russia could reopen if Russia takes concrete steps to deescalate the crisis and facilitates tangible, sustainable progress toward a peaceful and unified Ukraine.