```

[Senate Hearing 113-462]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 113-462

                       RENEWED FOCUS ON EUROPEAN 
                            ENERGY SECURITY

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON EUROPEAN AFFAIRS

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              JULY 8, 2014

                               __________

       Printed for the use of the Committee on Foreign Relations

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                COMMITTEE ON FOREIGN RELATIONS         

             ROBERT MENENDEZ, New Jersey, Chairman        
BARBARA BOXER, California            BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         JAMES E. RISCH, Idaho
JEANNE SHAHEEN, New Hampshire        MARCO RUBIO, Florida
CHRISTOPHER A. COONS, Delaware       RON JOHNSON, Wisconsin
RICHARD J. DURBIN, Illinois          JEFF FLAKE, Arizona
TOM UDALL, New Mexico                JOHN McCAIN, Arizona
CHRISTOPHER MURPHY, Connecticut      JOHN BARRASSO, Wyoming
TIM KAINE, Virginia                  RAND PAUL, Kentucky
EDWARD J. MARKEY, Massachusetts
               Daniel E. O'Brien, Staff Director        
        Lester E. Munson III, Republican Staff Director        

                         ------------          

                SUBCOMMITTEE ON EUROPEAN AFFAIRS        

           CHRISTOPHER MURPHY, Connecticut, Chairman        

JEANNE SHAHEEN, New Hampshire        RON JOHNSON, Wisconsin
EDWARD J. MARKEY, Massachusetts      JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland         JEFF FLAKE, Arizona
RICHARD J. DURBIN, Illinois          JOHN BARRASSO, Wyoming

                              (ii)        

  

                            C O N T E N T S

                              ----------                              
                                                                   Page

Chow, Edward C., senior fellow, Energy and National Security 
  Program, Center for Strategic and International Studies, 
  Washington, DC.................................................    46
    Prepared statement...........................................    48
Yee, Hoyt, Deputy Assistant Secretary of State for European and 
  Eurasian Affairs, U.S. Department of State, Washington, DC.....     8
    Prepared statement...........................................     9
Hochstein, Amos J., Deputy Assistant Secretary of State for 
  Energy Diplomacy, U.S. Department of State, Washington, DC.....     3
    Prepared statement...........................................     5
Johnson, Hon. Ron, U.S. Senator from Wisconsin, opening statement     2
Lucas, Edward, senior fellow and contributing editor, Center for 
  European Policy Analysis, Washington, DC.......................    33
    Prepared statement...........................................    35
Murphy, Hon. Christopher, U.S. Senator from Connecticut, opening 
  statement......................................................     1
Shaffer, Brenda, Ph.D., professor, Center for Russian, Eurasian 
  and East European Studies, Georgetown University, Washington, 
  DC.............................................................    40
    Prepared statement...........................................    42
Simonyi, Ambassador Andras, managing director, Center for 
  Transatlantic Relations, School of Advanced International 
  Studies, Johns Hopkins University, Washington, DC..............    25
    Prepared statement...........................................    27

                                 (iii)

  

 
                       RENEWED FOCUS ON EUROPEAN 
                            ENERGY SECURITY

                              ----------                              

                         TUESDAY, JULY 8, 2014

                               U.S. Senate,
                  Subcommittee on European Affairs,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:33 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Christopher 
Murphy (chairman of the subcommittee) presiding.
    Present: Senators Murphy, Shaheen, and Johnson.

         OPENING STATEMENT OF HON. CHRISTOPHER MURPHY, 
                 U.S. SENATOR FROM CONNECTICUT

    Senator Murphy. Welcome, everyone, to today's hearing on 
European energy security. This is not a new topic for this 
committee, but Russia's annexation of the Crimean Peninsula and 
military activity in eastern Ukraine has brought a new sense of 
urgency and focus to this debate.
    We are happy to have two great panels here today. I and 
Senator Johnson will give some very brief opening remarks. We 
will introduce our panel, let you give a summary of your 
remarks, ask questions, and then seat our second panel of 
experts.
    Russia's status as a regional power is frankly commensurate 
only to their ability to blackmail and threaten Europe with 
Russian gas and oil as the weapon of choice. Europe imports 
about 30 percent of its gas and 35 percent of its oil from 
Russia. Political decisionmaking in Europe is dictated in part 
by the realities of running a continent on power supplied by 
one ornery, capricious, and unpredictable neighbor. The 
question is, How much longer will Europe put up with this 
reality and what can the United States do in the context of the 
transatlantic relationship to help Europe break free of Russian 
energy dependence?
    The European Commission's most recent energy security 
strategy reflects concerns that overdependence on Russia may 
expose governments and businesses to coercion, threats, and 
higher prices. The strategy proposes action over the medium to 
long term to increase Europe's own energy production, increase 
efficiency, decrease demand, pursue renewable energy 
alternatives, and diversify its supplier countries and routes.
    The strategy is admirable, but in today's hearing we will 
ask whether there is really political will and the funding to 
implement it. And we will ask whether some energy strategies in 
Europe, like reducing carbon emissions, actually increase 
rather than decrease dependence on Russian gas. We will also 
want to know how non-EU countries lying at the critical 
faultline between Europe and Russia, like Ukraine and Moldova, 
fit into Europe's plans for energy independence. We will 
principally examine what role the United States can play in the 
energy future of Europe.
    This is a complicated issue because complex questions of 
market dynamics and national sovereignty cloud the role 
sometimes that the United States can play in Europe's energy 
future. Yes, it makes sense to examine the role United States 
natural gas can play in weaning Europe off of Russian gas, but 
so long as the price in Europe is substantially lower than the 
price that companies can get in Asia, U.S. natural gas will 
simply flow with the market.
    And even when the United States is willing to lead, there 
is a question of whether our leadership is wanted. During a 
recent trip to Bulgaria, Senator Johnson, Senator McCain, and I 
stood with the Prime Minister as he announced a work stoppage 
on a gas pipeline opposed by the EU that would increase 
European dependency on Russian gas. It was a breakthrough, but 
one that was immediately criticized by some, due to U.S. 
involvement. It struck me that when it comes to showing 
leadership on an issue like global energy security America 
stands to be criticized if we do not lead and criticized if we 
do.
    So I look forward to hearing from our panelists today on 
all of these questions. With that, let me recognize Senator 
Johnson for his opening remarks.

            OPENING STATEMENT OF HON. RON JOHNSON, 
                  U.S. SENATOR FROM WISCONSIN

    Senator Johnson. Thank you, Mr. Chairman.
    I would like to thank the witnesses for, first of all, your 
thoughtful testimony. I received it ahead of time and had a 
chance to go through it.
    Mr. Chairman, you mentioned a word twice, ``reality,'' or 
``realities.'' I come from a business background. I have done a 
lot of strategic planning in my process, and that is always the 
first step: You have to recognize the reality of the situation. 
Once you have done that, you have to set achievable goals, and 
once you have set those achievable goals, you develop the 
strategy.
    What I am hoping to hear out of the testimony today--and I 
think we have a pretty good shot at it because it looks like 
that is what you want to talk about--is let us recognize what 
the reality of the situation is. If we are going to talk about 
Russia, we first have to recognize what gives Vladimir Putin 
power is his oil and gas resources and Europe's, quite 
honestly, growing dependence on those. So let us spend a lot of 
time talking about the reality of the situation. Then let us 
start talking about what are achievable goals and what are the 
priorities in which we need to address those possible 
achievable goals.
    With that, Mr. Chairman, thank you for holding this hearing 
and I look forward to the testimony.
    Senator Murphy. No overly excessive introductions here. We 
are very happy to have two administration witnesses with us. 
Our first panel is: Amos Hochstein, Deputy Assistant Secretary 
of State for Energy Diplomacy; and Hoyt Yee, Deputy Assistant 
Secretary of State for European and Eurasian Affairs. Both of 
your written statements will be included in the record in their 
entirety, so we would ask that you please summarize in about 5 
minutes so that we can proceed to questions.
    We are going to be joined, I think, by other members of the 
committee as we move forward. As always, a busy day here. We 
are thankful for your testimony.
    Amos, why do we not start with you, and then we will go to 
Mr. Hochstein and then to Mr. Yee.

 STATEMENT OF AMOS J. HOCHSTEIN, DEPUTY ASSISTANT SECRETARY OF 
     STATE FOR ENERGY DIPLOMACY, U.S. DEPARTMENT OF STATE, 
                         WASHINGTON, DC

    Mr. Hochstein. Thank you, Chairman Murphy and Ranking 
Member Johnson and members of the subcommittee. I appreciate 
the opportunity to be here today to discuss European energy 
security during this critical time. The Department of State and 
the administration as a whole are committed to improving 
Europe's energy security and we are working closely with our 
partners in this effort.
    Let me begin with an update on the energy crisis in the 
Ukraine. Ukraine has been negotiating with Russia and the 
European Union to resolve the issue of price, debt, and future 
payment for Ukraine's gas imports from Russia. Russia 
unfortunately ceased supply of gas to Ukraine on June 15, 
showing little willingness to continue negotiations until 
Ukraine pays off its debt. The situation is urgent. While 
Ukrainian production is sufficient to cover summer demand, 
without Russian gas Ukraine will not be able to meet its 
consumption needs when the heating season returns.
    Although the United States is not party to the trilateral 
gas negotiations, we are working closely with Ukraine and the 
EU to identify solutions that will bring an end to the current 
crisis and make the Ukrainian and EU gas supply system more 
resilient in the future. EU Energy Commissioner Gunther 
Oettinger, his cabinet, and DG Energy have done an incredible 
job and we are in weekly contact with him and his staff, as 
well as with Minister Prudan of Ukraine, on this issue.
    Looking forward, part of the answer for Ukraine's energy 
security is its integration into the EU energy market. However, 
before this integration can happen successfully it is essential 
that Ukraine reform its energy sector. If it does not, if 
corruption and inefficiency continue along with crippling 
energy subsidies for consumers, Ukraine will be right back 
where we all started just a short while ago.
    We are working to develop and implement programs to 
increase Ukraine's energy production and efficiency. Our 
Bureau, the Energy Resources Bureau at the State Department, is 
overseeing projects to boost gas production from existing 
fields, strengthening transparency and management of operations 
and revenue management at Ukraine's state-owned oil and gas 
company. We are also working to build the government's capacity 
to manage the implementation of production-sharing contracts 
for unconventional gas exploration and development.
    To address energy efficiency, USAID's program is designed 
to enhance Ukraine's energy security as well as reduce and 
mitigate emissions resulting from the poor use of energy 
resources in Ukrainian municipalities.
    Fortunately, flows of gas through Ukraine to Europe have 
not been impacted yet. Russia and Ukraine have both promised 
not to disrupt transit and the short-term impact of this cutoff 
has been relatively small in Europe. But that is because it is 
not in the gas-intensive heating season and because we have 
just gone through a relatively mild winter, so stocks are 
unseasonably high. But it is critical that countries with 
storage capacity use these summer months to aggressively 
increase their supplies. We are working with the Department of 
Energy as they coordinate an effort to assist the most 
vulnerable central and southeastern European countries to 
assess contingency plans in case of a shutoff.
    Mr. Chairman, the lack of immediate alarm in Europe cannot 
lead us or the EU to become passive in addressing a long-term 
solution. While the media and others have focused on energy 
security in Europe only for the last several months, as you 
stated, Mr. Chairman, in your opening statement, this 
committee, Congress, and the administration have been working 
on this for quite some time.
    As early as the late 1990s, we were heavily engaged in 
negotiations that made the BTC, the Baku-Tbilisi-Ceyhan 
pipeline, a reality despite the skepticism of experts who said 
Azeri oil would never flow to European markets. It probably 
could not have happened without U.S. leadership.
    Our European energy security efforts intensified after 
Russia cut off gas supplies to Ukraine and European customers 
in 2009. Since then we have intensely focused on energy 
security in Europe, advocating energy diversification, 
particularly in central and Eastern Europe. We work hand in 
hand with the Commission and with our other allies and energy 
envoys in Eastern and Central Europe. In fact, DAS Yee and I 
just returned from Hungary and Croatia last week.
    Energy diversification in Europe is critical. This concept 
includes having broad fuel mix and diversifying the routes as 
well as the sources of the imports. I am not suggesting that 
countries should eliminate Russian imports. Russia will and 
should remain a central player in the region as a producer and 
as an exporter. But alternative supplies and additional 
delivery routes will promote competition and increase security.
    We are therefore working with our friends and allies, with 
actions as well as words. Without U.S. engagement the Southern 
Gas Corridor from Azerbaijan would not be on the verge of 
becoming a reality.
    We agree with our European allies on the critical need for 
Europe to improve its energy infrastructure by constructing new 
pipelines, upgrading existing pipelines, upgrading 
interconnectors to allow bidirectional flow, building new LNG 
terminals to diversify fuel sources. We applaud the recent 
announcement of the Hungary-Slovakia Interconnector. Lithuania 
and Poland are completing their terminals that will come on lie 
by the end of the year. A proposed terminal on Krk Island in 
Croatia would bring in supplies from the south. With the 
completion of reverse flow from Hungary, Croatia could become a 
gas import hub for southeast Europe and the Balkan States.
    Hungary can provide an important link for alternative gas 
supplies to Ukraine from Croatia. When DAS Hoyt Yee and I were 
in Croatia and Hungary last week, we encouraged the two 
countries to work out their differences and to work more 
closely to address their mutual potential.
    We are working closely with our colleagues in the EU to 
advance this infrastructure buildout and we support the EU's 
efforts to identify and help fund the most critical projects.
    We also commend them for their legal reforms. The passage 
of the Third Energy Package that made sure that regulatory 
infrastructure was in place to make sure that destination 
clauses were not crippling their own energy security were put 
in place and now is the time to make sure that they are 
implemented.
    As Vice President Biden said in Budapest, the development 
of a secure, diverse, and interconnected energy market in 
Europe is the next big step for our European colleagues to 
initiate in the great project of European economic integration.
    Thank you, Mr. Chairman, Ranking Member Johnson. I welcome 
your questions.
    [The prepared statement of Mr. Hochstein follows:]

                  Prepared Statement of Amos Hochstein

    Thank you, Chairman Murphy, Ranking Member Johnson, and members of 
the subcommittee; I appreciate the opportunity to be here today to 
discuss European energy security during this crucial time. The 
Department of State and broader administration are committed to 
improving Europe's energy security and working closely with our 
partners to achieve that.
    Let me begin with an update on where the energy crisis in Ukraine 
stands. Ukraine has been negotiating with Russia and the European Union 
to resolve the issue of price, debt, and future payment for Ukraine's 
gas imports from Russia. Russia did not accept the compromise position 
developed by the EU after weeks of negotiations and unfortunately 
ceased supply of gas to Ukraine on June 16, showing little willingness 
to continue negotiations until Ukraine pays off its debt. The situation 
is urgent for Ukraine. While Ukrainian production is sufficient to 
cover summer demand, without Russian gas Ukraine will not be able to 
meet its consumption needs when the heating season resumes. As Ukraine 
is a key transit route for Russian gas to Europe, it is important to 
note that European supplies have not been impacted; flows of gas 
through Ukraine continue. The Russian Government has repeatedly said it 
would not cut supplies that flow onward through Ukraine to Europe, and 
Ukraine has also promised not to disrupt transit. The short-term impact 
of this cutoff has been relatively small in Europe because it is not in 
the gas-intensive heating season and because last year's winter was 
mild, leaving stocks unseasonably high.
    However, current mild alarm in Europe cannot lead us, or our EU 
allies, to become passive in addressing a long-term solution. On an 
annual basis, Russia supplies more than half the gas consumed in 
Ukraine and more than a quarter of the gas consumed in the EU. Although 
Ukraine is importing small amounts of gas through reverse flows from 
Hungary and Poland, Russian imports are required to meet increased 
demand during the winter heating season.
    So where does that leave us today? While the media and others have 
focused on European energy security only for the last several months, 
the United States Government has been focused on this issue for several 
years. As early as the late 1990s, we were heavily engaged in 
negotiations that made the Baku-Tbilisi-Ceyhan pipeline a reality 
despite the skepticism of experts who said Azerbaijani oil would never 
flow to European markets.
    Our European energy security efforts intensified after Russia cut 
off gas supplies to Ukraine and European customers in 2009. Since then, 
the State Department, spearheaded first by the Special Envoy and now by 
the Bureau of Energy Resources, has been intensely focused on energy 
security in Europe, advocating energy diversification across the 
European Continent, particularly in Central and Eastern Europe. We work 
hand in hand with the EU Commission as well as with the Energy Envoys 
in Eastern/Central European countries, and meet often with the 
Visegrad-4+ (``V4 plus'') states (Poland, Slovakia, Czech Republic, and 
Hungary, plus Bulgaria, Romania, and Croatia). In fact, DAS Yee and I 
just returned from Hungary and Croatia last week.
    When we talk about supply diversification in a European context, 
there are several components that must be addressed. First is fuel 
mix--countries should use less by increasing energy efficiency and 
advancing low carbon energy sources like renewables. A diverse fuel mix 
could also include nuclear energy and domestic production of gas, 
including pursuing unconventional supplies if the conditions are right, 
including subsurface (geologic) potential and above-ground 
considerations like a strong regulatory regime and environmental 
safeguards.
    Second, it is crucial to diversify import routes: ultimately, 
Europe must build an interconnected pipeline system that allows gas to 
flow freely throughout the continent. Finally, European countries must 
pursue diversification of sources away from a dependence on a single 
supplier. I am not suggesting that countries should eliminate Russian 
imports--that is neither necessary nor reasonable and Russia will and 
should remain a central player in the region--but introduction of 
alternative supplies will promote competition in the energy market. 
This will ultimately increase energy security while also benefiting 
consumers.
    We, as a government, are working actively with our friends and 
allies in Europe to promote diversification with actions as well as 
words. We are supporting their efforts to ensure the Southern Corridor 
becomes a reality. We are pleased the project achieved the key 
milestone of securing a Final Investment Decision (FID) in December 
2013. We strongly supported the creation of the Greece-Bulgaria 
Interconnector, which will allow gas from the Southern Corridor to 
supply Southeast Europe rather than just enter Central and Western 
Europe via Italy. For the same reason we are supportive of proposals to 
build an extension of the Southern Corridor from Albania all the way to 
Croatia via the Ionian-Adriatic Pipeline, once enough gas becomes 
available, ultimately supplying neighbors Hungary, Ukraine, and others.
    We are working closely with colleagues in the EU's Directorate-
General for Energy (DG Energy) to advance east-to-west and west-to-east 
interconnections of infrastructure in Central and Eastern Europe. These 
efforts are already producing successful projects such as the recent 
announcement of the Hungary-Slovakia interconnector. We also support 
proposals to build liquefied natural gas (LNG) terminals at critical 
points on European coasts, from Poland to Croatia to the Baltics. In 
short, Mr. Chairman, we agree with our European allies on the critical 
need for Europe to improve its energy infrastructure by constructing 
new pipelines, upgrading interconnectors to allow bidirectional flow, 
and building new LNG terminals to diversify fuel sources.
    We commend the European Union for legal reforms that accelerate 
market integration and promote diversification of fuel types, sources, 
and routes. Known as the Third Energy Package, these reforms laid the 
foundation for a common, regulated, and transparent gas market across 
the EU. The Third Energy Package separates control of energy supplies 
from the infrastructure that delivers that energy, so natural gas 
suppliers, for example, must either divest from ownership of pipeline 
infrastructure or allow an independent operator to manage the pipeline. 
It gives any purchaser of gas full control over the product, allowing 
whoever holds title to the energy the right to sell it onward to any 
other interested customer, thus eliminating destination clauses. And 
obligatory third-party access eliminates monopoly control over 
pipelines, allowing any entity to compete to use gas infrastructure to 
deliver its product to any consumer who seeks to purchase it.
    Part of the answer for Ukraine's energy security is its integration 
into the EU's energy market. However, before this integration can 
happen successfully, it is essential that, Ukraine reform its energy 
sector. If it does not, and if corruption and inefficiency continue 
along with crippling energy subsidies for consumers, Ukraine will be 
right back where it started before long.
    That's why we are working with Ukraine on internal reform, 
governance, and efficiency improvements. A major precondition for the 
financial package from the IMF, and for U.S. and European assistance, 
is Government of Ukraine action to reform its domestic price and 
subsidies. The interim government is to be commended for passing and 
beginning to implement these reforms, but it will be up to the 
Poroshenko government to see them through. It will be necessary to 
fight corruption in the energy sector, unleash private investment, and 
stick to consumer price increases to incentivize energy efficiency 
improvements, all of which will have a major impact on Ukraine's energy 
security and economic growth. Ultimately, it is up to the Ukrainian 
people and their government to achieve this level of domestic reform, 
but the administration believes it is our responsibility to provide 
what tools we can to assist them--and ensure the political space to 
maneuver--wherever possible.
    Getting back to the current state-of-play, the United States, 
although not party to the trilateral gas negotiations, is working 
closely with Ukraine and the EU to identify solutions that will bring 
an end to the current crisis and make the Ukrainian and the EU gas 
supply systems more resilient in the future. EU Energy Commissioner 
Gunther Oettinger, his Cabinet and DG Energy have done an incredible 
job, and we are in weekly contact with Commissioner Oettinger and his 
staff, and with Ukrainian Energy Minister Yuriy Prodan, on this issue.
    We have worked closely with the governments and pipeline operators 
of Ukraine, Hungary, Poland, and Slovakia and with European energy 
companies to see gas flowing west to east from Europe into Ukraine. 
Thanks in part to these efforts, gas is now flowing from both Poland 
and Hungary into Ukraine. In late April in Bratislava, with close 
involvement of the EU and the State Department, the Governments of 
Ukraine and Slovakia also signed an MOU on reverse-flow--an agreement 
which will allow gas to begin to flow from Slovakia into Ukraine as 
soon as September. Although the volumes will be small initially, they 
could increase significantly over the next year and help Ukraine 
benefit from Europe's competitive energy market.
    In view of the risks to European gas supplies during a dispute 
between Russia and Ukraine, the G7 energy ministers also agreed to 
collaborate in support of contingency planning by vulnerable countries 
for the upcoming winter season met in Rome on May 5-6, 2014. We are 
working with the Department of Energy as they coordinate an effort to 
assist the most vulnerable central and southeast European countries to 
assess their situation and share best practices.
    We are also working to develop and implement programs to increase 
Ukraine's energy production and efficiency. The Bureau of Energy 
Resources is overseeing a U.S. Government and donor effort to increase 
private investment to boost gas production from existing fields, 
strengthen transparency and management of operations and revenue 
management at Naftogaz, Ukraine's state-owned oil and gas company, and 
build the Government of Ukraine's capacity to manage the implementation 
of production-sharing contracts for unconventional gas exploration and 
development. Within 1 year, we could introduce improved technologies to 
increase production in existing gas fields. Additionally, the European 
Bank for Reconstruction and Development (EBRD) will be a primary 
partner to pilot a new tender to open existing fields up to private 
sector investment and increase domestic gas production. On 
unconventional gas, through the Bureau of Energy Resources' 
Unconventional Gas Technical Engagement Program (UGTEP), we are working 
with the Government of Ukraine to assist them in preparing and 
implementing their responsibilities under contracts with international 
oil companies to increase unconventional gas production in a 
commercially and environmentally sustainable manner. The U.S. 
Government also is sending a petroleum geologist to provide advice 
about unconventional gas exploration. Finally, it is critical that 
Ukraine reduce the country's energy intensity. Thankfully, the United 
States has a long history of support for energy efficiency in Ukraine. 
Most recently, USAID's Municipal Energy Reform Project (MER Project) is 
designed to enhance Ukraine's energy security as well as to reduce and 
mitigate GHG emissions resulting from the poor use of energy resources 
in Ukrainian municipalities.
    These efforts complement the work of our European partners. We have 
encouraged Europe to take other steps. It is critical that countries 
with storage capacity use the summer months to aggressively increase 
their supplies.
    All of these actions and issues do not operate in a vacuum. To 
better understand prices and security concerns in Europe, let me say a 
few words about the global energy context. First, energy demand is 
rising rapidly in non-OECD countries, particularly in Asia. So 
developed energy markets will need to content with this increased 
competition from emerging markets. Second, we anticipate significant 
new supplies of natural gas coming onto the market in coming years. 
This jump in natural gas production is led by the United States and 
Australia, but could soon include dramatic increases from exciting 
recent discoveries along the eastern coast of Africa, in such places as 
Mozambique and Tanzania, from Canada, and in the Eastern Mediterranean. 
These supplies can and should be included in the medium- and long-term 
diversification plan for Europe. But to make that happen, Europe must 
implement the kinds of infrastructure improvements I discussed earlier.
    We encourage Europe to build new liquefied natural gas (LNG) 
terminals to increase its import capacity from these emerging 
suppliers. LNG import capacity is especially needed on the Baltic and 
Adriatic coasts to bring non-Russian supplies to the Baltic and Central 
European markets. Lithuania has built an LNG terminal that will become 
operational in December 2014. Poland's LNG terminal could start 
operations in early 2015. Estonia and Finland must agree by this summer 
on a location for a Baltic regional terminal to remain eligible for 
partial EU funding of the project. A proposed terminal on Krk Island in 
Croatia would bring in supplies from the south. With the completion of 
reverse flow with Hungary, Croatia could become a gas import hub for 
Southeast Europe and the Balkan States. When DAS Hoyt Yee and I were in 
Croatia and Hungary last week, we encouraged the two countries to work 
together more closely to address their mutual energy potential. Hungary 
can provide an important link for alternative gas supplies to Ukraine 
from Croatia. We urge these three countries to conclude an MOU that 
commits to deliver of gas from Croatia to Ukraine via Hungary.
    The EU has created a list of Projects of Common Interest (PCI) to 
prioritize trans-European energy projects that cannot be built with 
commercial financing alone. Projects will be partially funded from a 
=5.85 billion fund for 2014-2020. We support the EU efforts to identify 
and help fund the most critical projects. It is essential that the EU 
and individual countries coordinate and implement these projects 
without delay. We have been in close discussions with the European 
Commission and with EU Member States from Finland to Hungary to Greece 
to sustain this momentum.
    Mr. Chairman, the United States is committed to improved energy 
security in Europe, because it is in our own national security interest 
to do so. This is an administration-wide effort. The Secretary of State 
and the White House are also directly involved. At the fifth U.S.-EU 
Energy Council, Secretary Kerry underscored the need to advance 
diversification efforts for the EU's security and to work in 
partnership with the EU on Ukraine. President Obama discussed energy 
security with Polish President Tusk and other regional leaders on his 
visit last month. And I traveled with Vice President Biden to Romania 
and Cyprus in May, where he discussed energy security with the leaders 
of those countries. Mr. Chairman, I'd like to conclude my remarks by 
quoting what Vice President Biden said publicly in Budapest: ``the 
development of a secure, diverse and interconnected energy market in 
Europe is the next big step for our European colleagues to initiate in 
a great project of European economic integration.''
    Thank you. I welcome your questions.

    Senator Murphy. Mr. Yee.

STATEMENT OF HOYT YEE, DEPUTY ASSISTANT SECRETARY OF STATE FOR 
   EUROPEAN AND EURASIAN AFFAIRS, U.S. DEPARTMENT OF STATE, 
                         WASHINGTON, DC

    Mr. Yee. Thank you, Chairman Murphy, Ranking Member 
Johnson, for inviting us to testify before the subcommittee on 
European energy security and for the personal interest you have 
taken in this issue.
    The Ukraine crisis has demonstrated that security has 
multiple dimensions. Vulnerabilities can come in many forms--
the threat of military intervention, the danger of 
overdependence on energy from an unreliable and at times 
hostile neighbor, or the cancer of corruption that weakens 
institutions and undermines security 
and sovereignty. Russia's provocative actions in Ukraine have 
reaffirmed the continued importance of NATO's solemn commitment 
to collective territorial defense enshrined in article 5 of the 
NATO Treaty. In response, all NATO members have reaffirmed our 
collective commitment to preserve the security and territorial 
integrity of the NATO area.
    The United States has led in this effort. We have deployed 
750 troops to Estonia, Latvia, Lithuania, Poland, and Romania. 
We have stepped up our fighter jet deployment to Poland and the 
Baltic region, and we have maintained a continued naval 
presence in the Black Sea. As the President announced in Poland 
last month, we are seeking congressional approval for $1 
billion of European Reassurance Initiative to build on our 
current efforts.
    Just as the United States has strengthened its presence in 
the region, each of the other 27 NATO allies has committed 
personnel and resources to NATO's reassurance efforts. In the 
runup to the NATO summit in Wales, we are encouraging all 
members to sustain this demonstration of alliance solidarity 
and to reverse the worrying slide in defense budgets.
    The United States is working hard with Central and Eastern 
European countries and the European Union to shore up energy 
security. We have been working to help Ukraine reform its gas 
sector, increase energy efficiency, develop domestic sources, 
including shale gas production, and integrate more fully to 
European energy markets. We are also working with our European 
allies to increase Ukraine's access to gas through reverse 
flows in countries like Slovakia.
    At the same time, the Ukraine crisis has given new impetus 
for countries across Europe to step up efforts to diversify 
their energy sources and supplies, boost storage, develop 
networks of interconnectors and reverse flow capacity.
    As we work with our European allies to shore up a secure, 
reliable, and competitive supply of energy, the United States 
is devoting greater resources to fight corruption in the 
region. In the wake of the situation in Ukraine and Russia, it 
is time that we treat corruption as a threat to national 
security and sovereignty. Corrupt elites and oligarchic 
interests are reaching across national boundaries to support 
each other and manipulate decisionmaking in strategic sectors. 
They hollow out border security and military services, leaving 
countries vulnerable and exposed to outside interference.
    That is why we are empowering our embassies to work with 
governments, civil society, and the business community across 
Central and Eastern Europe and the Balkans to develop tailored 
action plans best suited to local conditions. Multilaterally, 
we are addressing corruption at the G8, the G20, and the OECD. 
We are supporting regional law enforcement and anticorruption 
training centers in Prague and Budapest, and we are encouraging 
all of our European partners to ratify and implement the U.N.'s 
Convention Against Corruption.
    Our national interest is vested in a Europe in which 
countries are confident that their borders are respected and 
secure, their access to energy is reliable and ready, and their 
government is transparent and accountable to the people. We 
remain committed to working with this subcommittee and Congress 
in a bipartisan manner toward achieving these objectives.
    Thank you.
    [The prepared statement of Mr. Yee follows:]

                     Prepared Statement of Hoyt Yee

    Thank you for inviting me to testify today before this subcommittee 
on European energy security. I would particularly like to thank 
Chairman Murphy and Ranking Member Johnson for the personal interest 
you have taken in this issue. The visits to key European capitals by 
members of this committee reaffirm that the United States is as 
committed as ever to security, sovereignty, and dignity of the people 
of the region. And your most recent visit to Poland, Romania, Bulgaria, 
and Ukraine demonstrated that bipartisan engagement on the ground can 
help focus the attention of our allies on strategic issues, like 
adequate defense spending and energy diversification.
    Just over a week ago in Brussels, the world witnessed two important 
milestones on the road to a Europe ``whole, free, and at peace.'' 
Moldova and Georgia signed the Association Agreements/Deep and 
Comprehensive Free Trade Areas with the European Union. Ukraine signed 
the remaining economic chapters of its AA. All three countries did this 
in the face of Russia's persistent attempts to derail the process. The 
same day, Albania was granted EU candidate status--recognition of the 
hard work and determination by successive governments to make tough 
choices including economic and political reform. These achievements 
demonstrate that European capitals from Kyiv to Chisinau, from Tirana 
to Tbilisi see greater European integration as the best path to 
security, prosperity, and a better future for their people.
    Yet Russia's occupation and attempted annexation of Crimea, its 
continued destabilizing actions in Donetsk and Luhansk, and Gazprom's 
gas delivery cutoff to Ukraine are reminders of the acute security 
risks that the region faces. Europe's energy security must be seen 
against the geopolitical backdrop. The Ukraine crisis has demonstrated 
that security has multiple dimensions. Vulnerabilities can come in many 
forms: the threat of military intervention; the danger of 
overdependence on energy from an unreliable and, at times, hostile 
neighbor; or the cancer of corruption that weakens institutions and 
undermines security and sovereignty.
    My testimony today will examine each of these challenges and how 
United States policy is moving to bolster our allies in their efforts 
to tackle them. First, I will address how we are providing allied 
reassurance to frontline states from the Baltic to the Black Sea at 
this critical time. Second, I will briefly touch on the current 
European energy security landscape--particularly in Central and Eastern 
Europe--as awareness of the region's reliance on Russian gas has 
increased precipitously. DAS Hochstein has addressed this area in 
greater detail in his remarks. Finally, I will focus on how corruption 
is infusing so many elements of political and economic life in the 
region--including the energy sector--and how the United States is 
mounting new efforts to help countries in the region root it out.
    First, the situation in Ukraine has been a wake-up call for the 
transatlantic community and NATO. Russia's provocative actions in 
Ukraine and across the region have reaffirmed the continued importance 
of our solemn commitments to collective territorial defense enshrined 
in article 5. In response, all NATO members have reaffirmed our 
collective commitment to preserve security and territorial integrity in 
the NATO space.
    The United States has led in this effort, deploying a persistent, 
rotational military presence on land, sea, and air in Central and 
Eastern Europe. We have deployed approximately 600 troops to Estonia, 
Latvia, Lithuania, and Poland; stepped up our fighter jet deployment to 
Poland and the Baltic region; and increased our naval presence in the 
Black Sea. And as the President announced in Poland last month, we are 
ready to do more. The administration requested congressional approval 
for a $1 billion European Reassurance Initiative to build on our 
current efforts. This initiative will allow us to increase exercises, 
training, and our rotational presence on the territory of our Central 
and Eastern European allies; enhance prepositioned equipment and 
improve infrastructure; and elevate our participation in NATO naval 
force deployments in the Baltic and Black seas. We also intend to build 
up the capacity of friends like Georgia, Moldova, and Ukraine so that 
they can work effectively alongside the NATO allies and the United 
States as well as provide for their own defense.
    Just as the United States strengthens its presence in the region, 
each of the other 27 NATO allies has committed personnel and resources 
to NATO's reassurance effort. In May, Poland, with augmentation from 
France, the U.K., and Denmark, took over responsibility for the Baltic 
Air Policing (BAP) mission from the United States. The BAP mission has 
tripled the number of planes patrolling the Baltic States and NATO is 
now flying the mission from two additional locations. In addition, NATO 
has been flying two of its own AWACS surveillance planes over alliance 
territory since the beginning of the crisis. At sea, one of NATO's 
Standing Naval Forces, with ships from Germany, Poland, Lithuania, 
Estonia, and Denmark are patrolling the Baltic Sea.
    In the runup to the NATO summit in Wales, we are encouraging all 
members to sustain this demonstration of alliance solidarity and 
reverse the worrying slide in defense budgets. All NATO members must 
set themselves on the path to meet the 2 percent national defense-
spending goal that we, as an alliance, collectively established. Eleven 
allies have committed to meet this target and four have already done 
so. We urge other NATO members to join in this effort. As President 
Obama stated in Warsaw in June, ``Just as the United States is 
increasing our commitment, so must others. Every NATO member is 
protected by our alliance, and every NATO member must carry its share 
in our alliance.''
    Second, the United States is working hard with Central and Eastern 
European countries and the EU to shore up energy security by increasing 
energy efficiency, improving regulation, promoting nuclear safety and 
strengthening regional coordination. The U.S.- EU Energy Council 
meeting in April, chaired by Secretary Kerry, High Representative 
Ashton and Commissioner Oettinger, reiterated our joint commitment to 
these objectives.
    Since the onset of the Ukraine/Russia crisis, the U.S. has provided 
Ukraine with a congressionally authorized $1 billion loan guarantee as 
well as $133 million in assistance to address the country's most urgent 
needs. The loan guarantee was targeted at financial support to soften 
the impact of Ukraine's painful but necessary economic reforms--
including gas price liberalization and increased energy efficiency--on 
the country's most vulnerable. Reducing Ukraine's energy dependence on 
Russia is one of five top priority areas for U.S. assistance to 
Ukraine. The United States is working to help Ukraine reform its gas 
sector, increase energy efficiency, develop domestic sources including 
shale gas production, and integrate more fully into European energy 
markets. We are also working with our European allies to increase 
Ukraine's access to gas through reverse flows from countries like 
Slovakia.
    At the same time, the Ukraine crisis has given new impetus for 
countries across Europe to step up efforts to diversify their energy 
sources and supplies, boost storage, develop robust networks of 
interconnectors and reverse flow capacity. The EU is intensifying its 
work to create an integrated energy market that increases energy 
security and competition and lowers prices for its citizens. Countries 
are committed to building a nuclear power industry, like Poland, or 
developing greater nuclear capacity, like Bulgaria and Romania. Poland, 
the Baltic countries and Croatia have Liquefied Natural Gas (LNG) 
import terminals in development. DAS Hochstein just visited Croatia and 
Hungary to advance our interests in these areas; he has spoken to our 
efforts in Ukraine and Europe in greater detail.
    Third, as we work with our European allies to shore up a secure, 
reliable, and competitive supply of energy, the United States is 
devoting greater resources to fight corruption in the region. As Vice 
President Biden said in Romania, corruption eats away at society, 
prosperity, and security of many young democracies across Europe and 
Eurasia. Across the region, corrupt officials abuse their power to line 
their pockets, rig procurement contracts, give political favors for 
cronies, apply justice selectively, and siphon off their countries' 
economic potential to secret off-shore bank accounts and pet projects. 
The energy sector is one of the most highly vulnerable to the corrosive 
effects of this corruption.
    From Bosnia and Herzegovina to Romania to the Caucasus, many 
ordinary people feel cheated by a crooked elite and are expressing 
their frustration from the ballot box to the public square. In the 
Czech Republic, a new political party focused on anticorruption 
surprised observers by coming in second in parliamentary elections, and 
is now part of the governing coalition. In 2013, corruption drove tens 
of thousands of Bulgarians to the streets to demand transparency and 
accountability; similar grievances led to wide protests in major 
Bosnian cities in February. In Slovenia, corruption contributed to the 
downfall of the government. And anger at Yanukovych regime's corruption 
helped drive a million Ukrainians of all stripes into the streets in 
the dead of winter.
    In the wake of the situation in Ukraine and Russia, it is time that 
we treat corruption as more than a threat to economic prosperity or 
democratic legitimacy. Corruption doesn't just rot countries from the 
inside; it is also a threat to national security and sovereignty. 
Corruption-riddled political systems can play right into the hands of 
destructive outside influences. Corrupt elites and oligarchic interests 
are reaching across national boundaries to support each other and 
manipulate decisionmaking in strategic sectors. They hollow out border 
security and military services, leaving countries vulnerable and 
exposed to outside interference.
    That is why we are empowering our embassies to work with 
governments, civil society, and the business community across Central 
and Eastern Europe and the Balkans to develop tailored action plans 
best suited to local conditions. We are convening stakeholders, raising 
public awareness, building networks, and providing training. We are 
providing legal advice, technical assistance, and peer-review 
mechanisms that enable like-minded governments to share anticorruption 
solutions with each other, support for greater use of e-governance 
tools, and backing for civil society organizations that place the fight 
of corruption at the heart of their work. Through coalition building 
and technology, we can more effectively expose corruption where it 
festers and make better use of data in pursuing accountability for 
corruption. And our embassies will work to empower multistakeholder 
processes to improve transparency and accountability, supporting 
initiatives like the Open Government Partnership and the Extractive 
Industries Transparency Initiative.
    Multilaterally, we have worked to address these issues in the G8, 
the G20, and the OECD. We are using reviews by the OECD Working Group 
on Bribery, its Anti-Corruption Network for Eastern Europe and Central 
Asia, and the Council of Europe's Group of States Against Corruption 
(GRECO) to raise awareness of egregious practices; supporting regional 
law enforcement and anticorruption training centers in Prague and 
Budapest; and encouraging all of our European partners to ratify and 
implement the U.N.'s Convention against Corruption.
    The United States and the EU are intensifying our joint efforts to 
tackle this challenge across the region. Both sides of the Atlantic 
have passed legislation to compel companies to publicly disclose the 
payments they make to governments in extractive industries such as oil, 
gas, and minerals--sectors that are particularly vulnerable to 
corruption. Our aid and technical assistance complements the European 
Union's work with Ukraine, Moldova, and Georgia as well as the Balkans, 
which help to chart a path toward stronger rule of law and greater 
public accountability, key elements in the fight against corruption.
    We are also looking at how to use the Transatlantic Trade and 
Investment Partnership (TTIP) and other trade agreements to confront 
this challenge. TTIP aims to set a new global gold standard for free 
trade. In the past, the United States has included specific commitments 
on anticorruption in other bilateral trade agreements. We should 
explore fully what might be possible in the context of a comprehensive 
and ambitious TTIP agreement.
    Europe is our largest trading partner and home to some of our 
longest standing and most important allies. Our national interest is 
vested in a Europe in which countries are confident that their borders 
are respected and secure; their access to energy is reliable and ready; 
and their government is transparent and accountable to the people. We 
remain committed to working with this subcommittee and Congress in a 
bipartisan manner toward achieving these objectives.

    Senator Murphy. Thank you to both of you for your 
testimony.
    Mr. Hochstein, you talked about the things that Ukraine 
needs to do in order to reform its energy markets. This is the 
most energy-inefficient country in the entire region. I will 
direct the question to you, but happy to have Mr. Yee respond 
as well. The reforms they need to undertake are dramatic and 
the effect of those reforms done too precipitously is perhaps 
destabilizing in a country right now that does not need much 
more instability. The vector between what gas prices are today 
and what they would be without the subsidy is enormous. The 
amount of money they have to spend on reengineering this wildly 
inefficient Soviet energy architecture is essentially almost a 
rip-down and build-back-up proposition.
    So how do we ask Ukraine to do this without requiring them 
to spend money they do not have and impose price increases on 
citizens who are right now looking for reasons to be confident 
rather than angry at their new government?
    Mr. Hochstein. Mr. Chairman, those are great questions, and 
it is a very difficult task to do, but it must be done, because 
if we do not, as I said in my testimony, if we do not reform 
it, if we just pour money into this and make sure that there 
are some reverse flows and gas comes in, as I said before, we 
are going to be back at this problem again very shortly.
    This is an opportunity. It is a moment in time for Ukraine 
to walk away from its past. Part of its past was a highly 
corrupt, inefficient system that kept using--instead of using 
energy as a resource for stability and security, it was the 
opposite. So we can take this moment in time and, as you said, 
not dramatically tear it all down and build it back up in a 
moment during a crisis, but put in place some fences around the 
energy sector so that it is free of corruption--that you could 
always do--to start talking about the subsidy reform not as an 
overnight bring it to market-based pricing, but to see how we 
can do this efficiently and effectively to begin that process.
    How do you look at the entire apparatus of their energy 
sector so that it reflects good management? If we can do that 
and make it open and transparent and effective and efficient, 
we will do a number of things. One, we will be able to actually 
reduce their costs over time because efficiency rates will go 
up. Second, they will not get further into the hole by having 
the subsidies drag them down. Third, they will encourage new 
investment of international oil companies and other parts of 
the energy sector worldwide to actually be interested in 
investing in the sector. Fourth, they will be able to see 
growth in their production levels. Their natural gas production 
levels today can be much higher if they use new technologies 
and a modern way of doing it--and work on the unconventional 
side. If we could put together a regulatory framework that 
understands how to do the shale gas exploration in a safe, 
secure manner, we could bring in the foreign direct investment 
into that, grow it, and at the end of the day have additional 
gas sources of their own to contribute to the new reverse flows 
and new energy diversification that we are going to do 
elsewhere, in addition to bringing other forms of energy so 
that the system is more resilient.
    So for that, I agree that it is hard to do it all at once. 
You have to be careful about it. I think that is what we are 
trying to do.
    Senator Murphy. Mr. Yee, talk to me about how Europe thinks 
and talks about this issue? We are encouraged by developments 
like the Third Energy Package, which recognizes the immense 
problem of allowing Gazprom to both control the source of the 
energy and the transmission of it. But for every step forward 
there are steps backward: members of the EU, like Bulgaria, 
that are openly opposing the Third Energy Package in the way 
that they are conducting their business; a country like 
Germany, who just this week announced that they are moving 
forward or passed-- 
I cannot remember--new legislation that will effectively end 
for the foreseeable future any potential of developing their 
own shale gas.
    There often seems to be a lack of urgency in Europe about 
this question, a lot of talk in Brussels, but then not always 
corresponding action at the individual member state level.
    Mr. Yee. Thank you for that question, Mr. Chairman. I would 
agree that there are different voices that we are hearing in 
Europe about the specific remedies and measures that need to be 
taken to address the problems of energy security and also 
Ukraine's particular case of energy security.
    One thing, though, that I think all the members of the 
European Union, all the countries that I deal with in Europe, 
share is a desire for energy diversification, a desire for less 
dependence on single sources, less dependence on Russia. So 
while they might disagree on the means and some of the measures 
and the timeframes, there is a general consensus on the need to 
do something to increase energy security through 
diversification.
    So one thing that we do here is an interest in developing 
alternative pipelines, alternative routes. We may not always 
agree on which are the best ones, but we do have a discussion 
with the Europeans, we have an open dialogue with the 
Europeans, on the need to develop these alternative routes, in 
addition to alternative sources.
    So the countries which are the most directly dependent on 
Russia, most dependent on Russian gas, for example, might be 
slightly less eager to talk about discontinuing South Stream or 
routes that we feel may not be commercially as viable or long-
term best solutions for Europe. But we are having success in 
discussing with the Europeans the need to diversify, the need 
to devise alternative routes and sources.
    Senator Murphy. Let me ask you specifically about the 
Germans, then. The Germans have openly been the most skeptical 
about sanctions on Russia with respect to action in the 
Ukraine. They are in the process of dismantling their nuclear 
fleet, which is a big part of energy independence and 
diversification. They are making a new commitment against 
developing their own internal energy resources under their 
ground, the potential for rather large shale deposits that they 
are going to leave in place.
    It is very hard for the EU to move without an active 
Germany on these questions. What is your feeling about 
specifically the German Government's commitment to leading when 
it comes to some of these questions of EU energy security?
    Mr. Yee. Thank you for that question. Our sense is that 
certainly Germany understands its responsibility as a leading 
economy and a leader in Europe and the European Union and the 
need for them to show leadership on the issue of energy 
security. I think their role reflects in part and the 
difficulty in reaching a consensus reflects the different 
situations of the European Union members, each of which has its 
own set of challenges.
    We are seeing from Germany an interest in discussing with 
us, discussing with the Commission, on ways to find solutions 
to these problems, certainly in its approach to Russia. 
Recently, Chancellor Merkel in her meetings with Foreign 
Minister Lavrov and with the French Foreign Minister has made 
clear expectation that there has to be some progress in 
Ukraine, in Russia's approach to Ukraine, to the situation in 
Ukraine.
    We also have discussions with the European Commission, 
together with the Germans and other European members, on how we 
can factor in all the different challenges, all the 
difficulties that European Union members face, whether it is 
limited--whether it is an overdependence on gas or geographical 
limitations on what can be done in terms of alternative routes.
    Senator Murphy. Senator Johnson.
    Senator Johnson. Secretary Yee, in your testimony you 
mentioned corruption. When Senator Murphy and I went through 
Poland, the Ukraine, and then to Romania and Bulgaria, that 
certainly was echoed as a reality of the situation. A legacy of 
really the Soviet era is just corruption throughout those 
Eastern European nations. When we visited Poland, I think our 
sense of the countries we visited was they have probably made 
the most progress in terms of limiting corruption, and I think 
they are probably doing better economically as a result of 
that.
    I want to talk a little bit about Romania because I think 
we were both impressed with the Charge there, Charlie Butcher. 
He arranged a meeting initially with us. Our first meeting in 
Romania was with the Chief Prosecutor General for Corruption, 
Laura Kovesi, an incredibly impressive, incredibly courageous 
young woman who is really battling corruption in Romania.
    I think we were both concerned that we do not have an 
ambassador for Romania. The Charge's term was basically coming 
up. Is the administration at all addressing that situation? 
Because I think the only way Romania proceeds in terms of 
reducing corruption is to have a strong U.S. presence to 
continue to put pressure on the Romanian Government to 
certainly protect Ms. Kovesi, who is under death threat.
    But can you just speak at all of the administration's plan 
in terms of American representation to Romania?
    Mr. Yee. Thank you, Mr. Ranking Member. Yes, the 
administration is working to identify an ambassador for 
Romania, working as quickly as possible to identify the right 
candidate. We also agree with you, Senator Johnson, that Duane 
Butcher, our Charge d'Affaires there, is doing an excellent 
job. We do agree that there needs to be an ambassador and we 
are working to get that in place as soon as possible.
    Regarding the prosecutor you mentioned, Ms. Kovesi, and the 
overall effort to fight corruption in Romania, American 
leadership has been critical. I think our good relations, 
working relations with the government, even when we disagree 
with the government of Mr. Ponta, is such that we are able to 
express our concerns, our objections, when there are steps 
taken by officials, business people, that are clearly in 
violation of Romanian law in addition to international rules 
and principles.
    So we have that frank dialogue. We are able to do that with 
a very strong Embassy team there. I think we need to continue 
to do that. It certainly helps when Members of Congress also 
visit these capitals to reinforce the message that we take the 
corruption very seriously, not only as a matter of economics or 
of moral principle, but as a matter of national security.
    Senator Johnson. Until an ambassador is appointed, has the 
administration considered reappointing or asking Mr. Butcher to 
stay on?
    Mr. Yee. Mr. Butcher will complete his tenure this summer. 
There is another Charge d'Affaires who has already arrived at 
post and is overlapping now with Mr. Butcher and will take over 
by the end of the summer.
    Senator Johnson. I am sure Senator Murphy agrees with me, 
we do not want to see a void there in Romania. It is important 
that we do not do that.
    Mr. Hochstein, you were talking a little bit about 
developing shale gas in Europe. Does the United States have any 
estimates or does Europe have any estimates in terms of what 
their oil and gas potential really is if they were willing to 
exploit it?
    Mr. Hochstein. Yes, Senator. We work with countries that 
are interested and, as Chairman Murphy talked about when he 
used the example of Germany, it is country by country. Every 
member state in the EU has a very different perspective on 
different resources, including shale. We had worked very 
closely with Poland, with Ukraine, with Romania, and we are 
working with other countries that are interested in pursuing 
that. We help identify what the shale resource is, using their 
own resources and the U.S. Geological Survey to be able to 
conduct a survey to identify what the levels and what the 
commerciality is of those resources.
    Senator Johnson. Can you share with me or with the 
committee what those resources are? What are the estimates? Can 
Europe be more independent if it were only to, for example, do 
fracking, actually exploit their shale gas reserves?
    Mr. Hochstein. Again, there is always a difference between 
what the estimates are and what it becomes in reality. If you 
look at Poland as an example, there were a lot of published 
estimates that were quite high. Several companies, 
international oil companies, including large American 
companies, went in. The results were more disappointing. Some 
have already left as a result. Some have remained. So we have 
to see as the drilling begins and we will see what is 
happening.
    In Ukraine, we are working with them on putting some of 
those frameworks in place to allow further exploration. They 
are interested. There are already companies in place. Romania 
is the same, where you visited. I was there just before the 
Senate delegation was there with Vice President Biden, talking 
to them about pursuing their unconventional resources as well 
as their offshore resources.
    So in short, I do not have the figures in front of me. It 
is something that I can definitely send to your office for you 
to see what our estimates are. In some places we do not deliver 
those publicly. But we are working with any country that is 
interested in doing it, and we have a program at the State 
Department, the Unconventional Gas Technical Expertise Program, 
that specifically puts together that framework for countries 
interested.
    Senator Johnson. To the best of your knowledge, the 
companies that went in but have subsequently left, did they 
leave because the oil and gas reserves were not there, too 
expensive to develop, or did they leave because of corruption, 
or some combination of the two?
    Mr. Hochstein. In that case it was not the issue of 
corruption. It was more about the resource.
    Senator Johnson. Can you speak to me a little bit about 
spot pricing versus oil index pricing and the effect that has 
on the situation in Europe in terms of gas?
    Mr. Hochstein. Europe buys its gas by pipeline from some of 
their suppliers, and they can buy LNG; they can bring it in as 
liquefied natural gas through other ports. They have long-term 
contracts and then there are spot prices. The long-term 
contracts they have with Russia, for instance, have been 
renegotiated a couple years ago. Some of them are coming up for 
renewal.
    The price in Europe has traditionally been relatively high. 
It has come down over the last couple of years. Part of that is 
because of the shale gas revolution in the United States, other 
market dynamics around the world. Prices have settled now on 
somewhere in the $10 to $12. But it is also because there has 
been fuel-switching in Europe as well. There has been a lot of 
switchover from gas to coal. And with a mild winter in a region 
that uses gas primarily for heating, that reduces the need for 
gas as well.
    So a variety of factors come into the pricing. I would not 
want to suggest that there is one specific cause for pricing. 
But clearly, if they can improve their infrastructure 
interconnections--so it is not just about the infrastructure to 
bring the gas into the continent, but rather for it to flow 
across from country to country. If you can upgrade the 
infrastructure in Romania so there could be a flow cross-
border, if you could bring interconnnections from Croatia into 
Hungary, from Slovakia into Hungary, if all those 
interconnections can happen you can have an integrated market 
where gas can flow. That will help with price and it will help 
with stability and security.
    Senator Johnson. I know I am out of time, but just let me 
follow up on this. Would moving toward spot pricing be a net 
positive or a net negative for Europe?
    Mr. Hochstein. That is probably a good question to ask some 
of my colleagues and friends who are going to testify on the 
second panel. I would not want to speculate on that. I think 
that I have learned in this job that speculating on price on 
oil and gas----
    Senator Johnson. Are you seeing a trend one way or the 
other in Europe, a movement toward spot away from oil-indexed?
    Mr. Hochstein. I think it depends on when you ask the 
question. If you asked me that last year, I probably would have 
had a different answer about what the trajectory is versus now. 
I think that the events and how we see events happening in the 
next few months shaping up--you probably will see a change. But 
again, I would reserve that for those who are going to 
speculate.
    Senator Johnson. Thank you, Mr. Chairman.
    Senator Murphy. Senator Shaheen.
    Senator Shaheen. Thank you.
    Thank you both for being here. The EU has coordinated a 
number of policies to address particular issues that have come 
up for the EU as a whole. But it is my understanding that 
energy decisions are still made on a state-by-state basis; is 
that correct? And can you talk about how these bilateral energy 
agreements have complicated the ability to get a collective 
energy strategy for the region?
    Mr. Hochstein. Senator, you are right, there is a 
Commissioner for Energy, Commissioner Oettinger. But many 
parts, many aspects of energy policy, are still set at the 
member-state level.
    The second issue that you raise is the bilateral 
agreements. It is true that people talk often about Europe's 
dependency on Russian gas. It is a two-way street. There is a 
Russian dependency on Europe as a gas market. It is a $50 
billion a year gas market, and they have very little 
infrastructure to support exports outside of Europe.
    With those facts, one would normally think that this would 
equalize the leverage and that there would be a negotiation 
position based on the consumers in Europe, on that purchasing 
power. But because there has been a bilateral agreement for 
each country, that has weakened that position. That is because 
countries are reluctant to allow a single central EU to 
negotiate price.
    That issue has come up in a proposal by the Prime Minister 
of Poland, who has suggested to have some kind of energy union, 
where they can negotiate collectively with Russia. That is a 
very controversial issue in Europe. There are a lot of 
different views on that.
    I would just note that if you did make decisions centrally 
in Europe it would have impacts beyond the negotiations of 
agreements. It would also impact some of the things that 
Chairman Murphy talked about a moment ago, and that is what do 
you do about nuclear, what do you do about shale gas? There are 
very different views. If a decision was made centrally in 
Europe on fuel sources and what should be allowed, approved, 
and what should be banned, that could lead in a different 
direction as well.
    So there are pluses and minuses to that idea. But on the 
negotiation side of agreement, there is no doubt that there 
would be a benefit.
    Senator Shaheen. Given the recent events in Ukraine and 
Russia's response, does that not provide some added impetus to 
try and encourage more unified action in the EU?
    Mr. Hochstein. I think that, you know, you look at what is 
happening in Ukraine and its impacts on Europe and the impacts 
themselves are very different in different countries. If you 
are receiving your gas through Ukraine, you are going to have 
one perspective, very different than those who receive their 
gas from Russia through other means, through other pipelines, 
and the level of dependency will change your attitude.
    It certainly caught our attention after the 2009 crisis, 
when on January 1 Ukraine's gas supplies from Russia were cut 
off and then on January 9 the rest of Europe, or the rest of 
Europe through Ukraine, was cut off. We have been trying to get 
and working with our EU colleagues to act as though there is 
still a sense of urgency to be able to diversify.
    The Third Energy Package that has been mentioned was a 
result of that 2009 crisis. We think that it would be a mistake 
not to take advantage and to seize the day and seize the moment 
of this crisis to move forward on implementation of a number of 
issues, specifically on the infrastructure side, but also on 
coming together as a region and cooperating better.
    Senator Shaheen. Well, that is the way we see it, but I 
guess what I am asking is, Do we think the Europeans see it 
that way and what has been their response?
    Mr. Hochstein. I think it is hard to say the Europeans in 
this case, because again there are different regions. I think 
there is by and large, as DAS Yee said, there is a European 
conventional wisdom that we need to--they need to work on 
energy security through diversification. What exactly 
diversification means changes, though. This goes back to, 
Senator Johnson, when you talked about reality-based. Some 
countries view diversification in a different way, not just 
diversifying their sources away from Russia, but also 
diversifying their routes of getting their gas from Russia. 
Hence the discussion on South Stream. Some countries see, if I 
can get my gas from Russia through a different mechanism that 
is not dependent on the relationship of Russia and Ukraine, 
maybe that is my solution. It ultimately does not solve the 
problem, but there is a difference of view there.
    Senator Shaheen. Well, one area where we know everybody 
could benefit is through energy efficiency. It is my 
understanding the EU will be meeting in October to unveil new 
energy efficiency goals and a framework to attain them. I 
wonder if you could talk about what we think will be coming out 
of these talks and whether the member states will be able to 
accomplish the goals from those talks?
    Mr. Hochstein. Thank you, Senator. Yes, they are going to 
be--I do not want to presuppose what they are going to say and 
announce there. They did have an aggressive efficiency rate 
target for 2020, 20 percent by 2020, which the projections are 
that they are not going to quite hit, but come pretty close. I 
think they would like to look at extending that and look at 
specific measures that would address efficiency. As you said, 
it is the easiest way to save a dollar, is through efficiency.
    Ukraine has one of the worst records in the world on 
efficiency and we are very much focused on that. But the EU 
needs to focus more internally. They have already done quite a 
bit, even though they may miss the target. But we are working 
with them to understand better how they think they can achieve 
that and to see if we can be supportive in that.
    Senator Shaheen. Can you talk a little bit about what the 
obstacles are? Because I think we are in agreement that 
efficiency is the first fuel, right, something that is the 
cheapest, fastest way to deal with our energy needs? So why is 
this not something that they would embrace, that all member 
states would embrace?
    Mr. Hochstein. I think in the idea level they all do 
embrace. It is in the implementation of putting the rules and 
regulations in place that will allow for it to happen in an 
effective manner and enforcing the rules and regulations that 
are there that seems to be more of the challenge. I think part 
of this is looking, how can you bring all of this into 
compliance, put in place a regulatory framework and rules that 
will actually deliver the results that they want.
    It is spotty and in some countries they have achieved more 
than others, and therefore when you look at the EU-wide 
position it is important to get those rules in place so that 
everybody can implement it efficiently.
    Senator Shaheen. So what could we do to help with that on 
the efficiency front?
    Mr. Hochstein. We have a number of programs that we work 
with individual countries--again, we do not do it through the 
EU as a central mechanism, but through individual countries--to 
look where we can. We have committees with the EU, through the 
U.S.-EU Energy Council, to look specifically at efficiency 
standards. There are some great lessons learned here from the 
United States that we are able to export. They have some ideas 
of their own and looking at how we can cooperate, bringing our 
experience to benefit what they are trying to achieve. But 
there is a lot of work being done and I am happy to send some 
things over to your office, a list of the programs that we are 
working on.
    Senator Shaheen. I would appreciate that. I am sure if 
Congress would pass energy efficiency legislation that would 
serve as a good model to share with them; would you not agree?
    Mr. Hochstein. I will follow what Congress does with great 
interest.
    Senator Shaheen. Thank you. Very well said.
    Senator Murphy. I just have one additional question for the 
panel and let me direct it to you, Mr. Hochstein. Senator 
Markey is not here to give us his sermon on what the export of 
natural gas will do to prices here in the United States. But 
let me ask you about what the market barriers are to U.S. 
natural gas reaching Europe?
    The administration is quick to remind us that they are 
approving licenses here as quickly as they can and others are 
quick to remind us that there is only 25 percent of capacity 
being used currently at European terminals and there is another 
35-plus terminals that are scheduled to be built.
    So with respect to the market, what is the barrier that 
would stop potentially licensed U.S. natural gas exports from 
ending up in Europe?
    Mr. Hochstein. Senator, to be honest, I think that you 
answered your question very well in your own question. At the 
end of the day, we have provided licenses, granted licenses for 
over 90 BCM of gas already. These are companies that actually 
have to now build the infrastructure here in the United States 
so that they can export it.
    Price plays a big role in this, and if you look at what the 
Henry hub price is today, where European prices are, add what 
you need to add for transportation, regasification, 
liquefaction, to Henry hub, to the price, and that will often 
dictate where this gas will end up for profitability purposes 
or reasons.
    I do not believe that it matters, though, where the 
individual molecule from the United States will end up. Even if 
the gas goes to Asia markets, the idea is that American gas 
will come onto the international market, which will adjust 
itself and free up gas that was destined for the markets where 
American gas came and will make those supplies available now to 
Europe. So even if it is not a contract that is directly signed 
between an LNG facility in Klaipeda, Lithuania, or elsewhere in 
Europe, it does not mean that there is no impact of U.S. shale 
gas exports, gas exports, on the European market.
    We have already seen that effect simply by no longer 
importing the great volumes that we used to or the great 
volumes that we were projected to import, and those already, by 
being freed up from the U.S. market to Europe and to Asia, had 
an impact on price in Europe and even led to the ability of 
countries and companies in Europe to renegotiate contracts in 
the last 2 years with Gazprom for the first time.
    So I think it is not really a matter of whether there is a 
direct contract between those, between two end points, but 
rather how does this affect the market as a whole. I will say 
that, as I say to my European friends and colleagues when I 
travel there and they complain about natural gas exports, that 
the best way to do that is to have companies in Europe 
negotiate contracts with American companies or operators or 
distributors here in the United States for already gas that is 
contracted for India, for Japan, and for others, and that is 
probably a better way to do it than to think about just the 
governmental control of it.
    Senator Murphy. I do think, and I hope that you will point 
out, the curious position that Europe continues to be in, which 
is to ask vociferously and aggressively for U.S. shale gas and 
then be totally unwilling to develop their own resources. They 
seem very happy to receive the resource from the United States, 
while very unhappy to develop their own resources.
    I get it that they have the ability to make sovereign 
decisions about what domestic resources they will and will not 
exploit. It is not necessarily a hypocritical position, but it 
is curious, to say the least.
    Mr. Hochstein. Mr. Chairman, I rarely miss the opportunity 
to raise that irony in my discussions.
    Senator Murphy. Senator Johnson, any further questions for 
this panel?
    Senator Johnson. It might be hypocritical.
    I just want to go to nuclear. My understanding is France 
generates about 75 percent of its power needs through nuclear 
power. Is that largely correct?
    Mr. Hochstein. Yes.
    Senator Johnson. What is the activity throughout the rest 
of Europe in terms of developing nuclear as a clean European 
alternative?
    Mr. Hochstein. Again, it changes from country to country. 
There are a number of countries that are working on nuclear 
energy. Hungary is looking to expand its current nuclear. The 
Czech Republic has been in a very lengthy process to identify--
through the tender process--to identify a company to build and 
expand nuclear power. That has hit some stumbling blocks in the 
Czech Republic. Bulgaria is working on it as well.
    So there are countries that are working on expanding and 
promoting nuclear energy. There are others, as Chairman Murphy 
mentioned, like Germany, that have decided in the wake of the 
Fukushima disaster to go the other direction.
    When we are asked for our opinion in Europe, we clearly say 
that this is something for each state and each country to make 
their own decisions. We believe that nuclear energy should be 
part of the mix, but that is something for a sovereign state to 
make their own decision. If they so choose to go in the nuclear 
direction and make that part of their mix, we will be there 
fully supportive and work with--we believe that we have 
companies here in the United States that are the best in the 
world and we believe that it is probably going to be a good 
decision for energy security for each country to have as many 
clean energy options as possible.
    Senator Johnson. What does Europe do with its nuclear 
waste?
    Mr. Hochstein. I do not have that information in front of 
me, but again I am happy to get that to you.
    Senator Johnson. You were mentioning the impact on price, 
just of the United States importing less oil and gas. Can you 
put some figures to that trend?
    Mr. Hochstein. We today are not yet a net--we are not a net 
exporter yet of natural gas. We will be, I believe it is by 
2016, we will be a net exporter of natural gas. We today still 
import some gas. On the oil side, we are far from being 
independent, as people like to say. We still import significant 
amounts of oil. However, we have reduced our imports quite 
significantly, down to the 30-percent range, and a lot of our 
gas we get still from our hemisphere and from our region, with 
some quantities coming from Saudi and elsewhere.
    So we are in a much better position. I cringe sometimes 
when people talk about energy independence in the United 
States. I think that self-sufficiency is something that we can 
strive for. Independence would suggest that we are immune to 
the market, and a disruption anywhere in the world and with 
everything that is going on geopolitically in the world today 
in energy-producing countries would have a great impact 
everywhere around the world, including here. If you look at the 
crisis in Iraq and what happened in the days after, when the 
prices spiked around the world, they spiked here in a 
commensurate way.
    So even though our production has increased, we are still 
susceptible to the market, which still calls for our direct, 
active leadership and engagement in the world, in the oil 
markets, and engaging diplomatically with countries that are 
producing hydrocarbons.
    Senator Johnson. I appreciate that answer, but what I was 
really looking for was what happened to the price in Europe 
when we ended up importing less oil and gas? I actually want 
some numbers. I am not an oil and gas expert. So I just want to 
understand what the movement was.
    Mr. Hochstein. Causality is always difficult to address 
directly, but when the extra volumes from the United States 
came on the market prices at around the same time came down, 
from in the $14, $15 range in Europe down to $10 to $12, 
recently even dipped a little bit lower than that in Europe, 
the range for natural gas. So that is where you can see the 
price differential.
    Senator Johnson. So the current price is about $10?
    Mr. Hochstein. In Europe, it is in that range.
    Senator Johnson. And in the United States it is . . . ?
    Mr. Hochstein. In the United States today it is, natural 
gas, $4.30.
    Senator Johnson. I have heard arguments on both sides, that 
if we actually export more that would lead toward greater 
exploration and we would actually build pipelines to capture 
some of the gas which is flaring, which is wasting. What is 
your or what is your administration's viewpoint in terms of if 
we actually did increase more exports; what would actually 
happen to the price of gas?
    Mr. Hochstein. Well, as far as the administration is 
concerned, the Department of Energy has approved a fairly large 
amount of natural gas for export. So I think that tells you 
what we think about that. There has been some studies----
    Senator Johnson. No, it really does not.
    Mr. Hochstein. No, I think that we looked at--the 
Department of Energy commissioned studies and did its own 
studies on the economic impacts of exports and determined that 
it would not have--the exports that it has already approved 
would not have an economic adverse effect on the U.S. price. It 
could go up some, but it would not have a terribly adverse 
effect.
    Senator Johnson. So you basically would be disagreeing with 
what Senator Markey talks about in terms of dramatically 
increasing the price of gas if we were to export more?
    Mr. Hochstein. I think if we believed that there would be a 
dramatic increase in price that we may be more cautious in what 
we have approved so far in the licenses. But that is why every 
license that comes, that is submitted for approval, is looked 
at through that lens of what would be, first of all, the impact 
on the United States. So far the quantities, which are large, 
that we have approved, we have not determined to be--would have 
a detrimental effect.
    Senator Johnson. In terms of the effect it might have on 
Vladimir Putin's calculation, even though it would not come on 
stream immediately, I come from the business world, where I 
really do believe the customer is king. Customers ought to be 
more in control of what the pricing levels are versus the 
supplier. But we have not developed the structure, we have not 
had the competitive environment, to cause that.
    Do you believe that just that signal alone would change or 
help to change Vladimir Putin's calculation in terms of his 
long-term control over that marketplace?
    Mr. Hochstein. I believe that Russia and others around the 
world already have internalized the effects of what the shale 
gas boom here in the United States has done and that we no 
longer import the levels that we have, we are going to be a net 
exporter. I think they have already understood that and that 
factors in. I think it has had a very important effect.
    Senator Johnson. Mr. Yee, let me just ask you. I am calling 
it Putin's pause. I actually appreciate the fact that he has 
not sent overtly more support and it looks like Ukraine is 
having some success at stabilizing the region. They are 
certainly stabilizing some of those cities. Do you have any 
explanation for that? Do you know what he is thinking?
    Mr. Yee. I think it would be very risky to try to get 
inside Vladimir Putin's brain and to explain what he is 
thinking.
    Senator Johnson. Let me just ask: Does that surprise the 
State Department?
    Mr. Yee. That he has paused?
    Senator Johnson. Yes.
    Mr. Yee. I think I would say that it is not a complete 
surprise in light of some resolve on the part of the 
international community in standing up to what Russia and 
Russian proxies are doing in Ukraine, in addition to some bold 
military action, security action, by the Ukrainian Government 
and security forces. It should not be a great surprise. We are 
talking about the recent days.
    Since March, I think there has been a cumulative effect 
with measures led by the United States and NATO in showing that 
we are absolutely committed first and foremost to our article 5 
commitments under the NATO Treaty and putting forces, 
additional forces, in the front line states near Ukraine, in 
applying limited sanctions against Russians and Ukrainians who 
are undermining Ukrainian sovereignty.
    I think it is reasonable and it is actually predictable 
that there would be some pause on----
    Senator Johnson. What has this administration specifically 
done to help Ukraine militarily as they are trying to grapple 
with their security situation?
    Mr. Yee. Well, we have, as you know, Senator, a large 
package of assistance that we have provided to Ukraine, both in 
terms of assistance to the government in immediate needs for 
shelter, vehicles, emergency equipment. We have provided 
nonlethal assistance to the military.
    Senator Johnson. What does that mean? Specifically what 
types of equipment have we provided?
    Mr. Yee. We are talking about cars, vehicles, basic 
equipment, nonlethal equipment the military needs in order to 
perform basic functions. It is nonlethal. It is the type of 
equipment we feel comfortable at this point providing, and it 
is what the Ukrainian forces have requested from us.
    I am not saying that it is all that is going to be 
necessary. We are not in any way predicting this is the end, 
that this pause is somehow the beginning of the end. I think we 
have to be prepared for a longer effort with continued resolve 
on the part of not only the United States, but its allies. But 
we have provided assistance, a large amount of assistance, both 
in terms of the humanitarian assistance to the people of 
Ukraine and also assistance in terms of efforts by NATO, the 
United States and its NATO allies, in putting troops on the 
ground, putting additional planes in the area, in the front 
line states, as well as a naval presence in the Black Sea and 
the Baltic Sea to show that we are determined.
    Senator Johnson. Thank you.
    Thanks, Mr. Chairman.
    Senator Murphy. Thank you both for your testimony. Just one 
last word on our representation there. Let me just join with 
Senator Johnson. We need an Ambassador to Romania. This is a 
country that has great reason to feel imperiled by Russian 
aggression, and I appreciate some of the work that is being 
done to make sure that there is a charge on the ground, but we 
need an ambassador.
    It is also incumbent upon the United States Congress to 
move on ambassadors that have been named. You mentioned the 
Czech Republic, for instance, is a country that has paused 
their plans to build new nuclear technology that is 
transformational for the Czech Republic, but also potentially 
for the United States should Westinghouse win that bid. It is 
really hard for us to represent our Nation's interests if we do 
not have an ambassador on the ground. We have a chance to 
confirm a really good one this week, next week, if the Senate 
acts on that.
    So when it comes to making sure that we are fully staffed 
in embassies, the responsibility is both the administration's 
to move, I would argue, faster than it has in bringing 
ambassadors to us and for us to move faster than we have once 
you bring them to us.
    Thank you both for your testimony, and we will sit the 
second panel now.

[Pause.]

    Senator Murphy. All right. Welcome to our second panel. 
Senator Johnson is going to return in a few minutes. Let me 
introduce you briefly, allow you to make brief statements, and 
then we will get to questions. That was a great first panel, 
dozens more questions we could have asked, and we will try to 
direct them to you.
    Ambassador Andras Simonyi is the managing director of the 
Center for Transatlantic Relations at the School of Advanced 
International Studies at Johns Hopkins. He previously was the 
Hungarian Ambassador to the United States and NATO and 
continues to be an advocate for strong transatlantic relations.
    Next to him is Mr. Edward Lucas, a senior fellow and 
contributing editor at the Center for European Policy Analysis. 
He is also a senior editor at the Economist, responsible for 
coverage of energy, commodities, and natural resources. He is 
one of the foremost experts on Russia and Central and Eastern 
Europe, having covered that region as a journalist for 25 
years, and also wrote a number of very good books on Vladimir 
Putin, Russia, as well as other topics.
    Next to him is Ms. Brenda Shaffer, who is on sabbatical 
right now from the University of Haifa in Israel, currently a 
visiting researcher at Georgetown University Center for 
Eurasian, Russian, and East European Studies. Professor Shaffer 
is the author of numerous books. She is an expert in the field 
of energy security policy, Europe, eastern Mediterranean energy 
issues.
    Last but not least, we are very pleased to have with us 
Edward Chow, a senior fellow in the Energy and National 
Security Program at the Center for Strategic and International 
Studies. He has decades of senior-level experience working in 
the energy industry and has advised the U.S. Government, 
multinational corporations, and international financial 
institutions on energy and investment matters. He is widely 
respected by both sides of the aisle. We are pleased to welcome 
him back to this committee.
    Thank you all for being here. Mr. Ambassador, why do we not 
start with you. Try to limit your summarized comments to under 
5 minutes and then we will just run down the line.

  STATEMENT OF AMBASSADOR ANDRAS SIMONYI, MANAGING DIRECTOR, 
    CENTER FOR TRANSATLANTIC RELATIONS, SCHOOL OF ADVANCED 
INTERNATIONAL STUDIES, JOHNS HOPKINS UNIVERSITY, WASHINGTON, DC

    Mr. Simonyi. Good afternoon. I want to thank you for 
inviting me here today to discuss this urgent and timely issue. 
I am honored to be a part of this impressive panel of experts.
    Senator Murphy, Senator Johnson, for much too long there 
has been a disconnect between Europe and the United States when 
it comes to energy. Most Europeans tend to think of the United 
States as a country out to destroy the planet and a commonly 
held view in America is the Europeans are all tree-huggers. 
Both are extreme and both are wrong and it is in our interests 
to overcome this divide, the sooner, the better.
    The U.S. shale revolution, which has changed the global 
energy landscape, is an unexpected turn of the last decade. It 
is a reality, and it is not going away. Europe should have 
embraced it a long time ago. Europe must put energy security 
first, as the integrity of its democratic way of life hinges on 
it.
    Lasting and viable solutions cannot be built on ideology. 
Europe has for too long taken its energy supplies for granted 
and banked on a breakthrough in renewables and storage 
technologies which has not happened.
    Captains of industry in Europe, like Solvay CEO Jean-Pierre 
Clamadieu, Exmar CEO Nicolas Saverys, as well as, Gerard 
Mestrallet, CEO of Gaz de France/Suez were among the first to 
signal to European leaders the challenges Europe faces with an 
unrealistic and ideological approach to shale technologies.
    European positions are changing. Europe is considerably 
weakened without a common energy policy. A good sign is the 
voices of pragmatists in the European Parliament and the 
European Commission are getting considerably stronger. I agree 
with Senator Murphy. This movement is way too slow, and Germany 
is key. I too have a lot of questions about Germany, 
particularly in which direction Germany is going.
    The recent crisis in Ukraine is a huge wake-up call. Russia 
is using Europe's dependence on supplies to influence European 
politics and coerce countries into taking positions against 
transatlantic interests. Since 2009 Europe has been reducing 
its overall energy dependence on Russia, but for the most 
vulnerable countries in Central and Eastern Europe, the energy 
dependence on Russia is a very high 80-90 percent. Energy has 
become a top security challenge for these countries.
    Europe is divided on how to deal with Russia. Russia is 
actively shaping the European energy debate by influencing 
organizations and leading public figures and by a sophisticated 
``divide and rule'' strategy. There is no consensus on the 
threats and challenges that Russian policies, in which energy 
is perhaps the most important tool, pose for the stability of 
European democracies.
    The majority of Europeans hope the United States will 
continue to see the issue of energy security of its allies as 
one of its top strategic priorities. The United States is 
expected to share its gas wealth with Europe. It needs to 
dispel worries that its energy independence will result in 
turning away from Europe and from regions on whose security 
European energy supplies depend.
    LNG exports from the United States to Europe would be a 
strategic message, would strengthen the transatlantic 
relationship, and besides making economic sense, would create 
jobs on both sides of the Atlantic. The transatlantic 
cooperation on energy should result in a more courageous energy 
mix for Europe that should include all sources, including shale 
and nuclear.
    Europe needs to support the building of interconnectors and 
port facilities to make U.S. LNG an important factor. In this 
the U.S. private sector should be actively engaged. We need to 
use all opportunities to shape a transatlantic energy agenda 
including through the TTIP--the Transatlantic Trade and 
Investment Partnership--process, at the forthcoming NATO summit 
in Cardiff and by reinventing United States-European dialogue 
and cooperation on energy. The United States and Europe must 
also lead the international effort on the Future of the Arctic, 
sometimes a neglected issue.
    Finally, the United States and Europe need to get serious 
on common research on alternatives.
    Substantive, practical projects that reinforce 
transatlantic cooperation could also help to ``de-ideologize'' 
U.S. and EU approaches to climate change.
    I hope Congress will find a way to allow the government to 
issue LNG export licenses in sufficient numbers for U.S. LNG to 
make a difference under an Allied Energy Security Act. And 
while this will not have an immediate impact on European energy 
security, the political message it would send to Vladimir Putin 
is incalculable.
    And by the way, I hope, Senator Johnson, in the course of 
the debate you will ask me what I think is in the head of 
Vladimir Putin when he stopped short of invading the whole of 
the Ukraine.
    What is at stake here, the cohesion and resilience of 
democratic and free societies, is enormous. And I do feel that 
the United States must lead. Thank you.
    [The prepared statement of Mr. Simonyi follows:]

                  Prepared Statement of Andras Simonyi

    Distinguished members of the subcommittee, Senators Murphy and 
Johnson, thank you for inviting me to this very timely and important 
discussion on an issue that cuts to the core of the transatlantic 
relationship, and which is so important to the security of both the 
United States and its European allies.
    The United States and Europe have been on a different energy 
trajectory for the past decades. It is an imperative for the United 
States and its European friends and allies to put their ``ideological'' 
differences on the back burner, and engage in an effort to align or at 
least synchronize their energy policies. The recent developments in 
Ukraine and the ever-increasing efforts by Russia to wield its energy 
weapon is a wake-up call.
    Europe, roughly speaking, has embraced a radical ``ideological'' 
view on climate change and fossil fuels, banking on a breakthrough in 
renewables technologies. The breakthrough has not happened. Europe's 
dependence on Russian gas has increased. There is no common European 
energy policy, which is a prerequisite of the alignment of, or at least 
synchronization of energy policies of the EU and the United States. 
European captains of industry, like Solvay Chairman Jean Pierre 
Clamadieu, and some member state governments of the EU, were sounding 
the alarm well before the Ukraine crisis, calling for a better energy 
mix, which should include traditional sources of fossil fuels and coal, 
but also nuclear and shale gas. In the past few months, there are signs 
of a more pragmatic approach within the European Commission, the 
administrative body of the European Union.
    Over the last 5 years the United States has gone through an energy 
revolution, with energy independence becoming a reality in the very 
near future. This has been an unexpected change of fortune for America. 
For decades the United States and EU have been dependent on fossil fuel 
resources from OPEC and Russia. Now this formula has been turned on its 
head by transformational U.S. energy developments generated in 
particular by a surge in production of cheap natural gas and shale oil.
    Yet as U.S. prospects brighten and foreign dependence falls, 
Europe's energy picture has become muddled and its dependence is 
rising. These developments are likely to have profound yet still 
uncertain implications for U.S.-European relations; they require 
greater transatlantic attention.
    It is an imperative for the United States and Europe (meaning the 
European Union and the European Free Trade Association) to put their 
``ideological'' differences on the back burner, and engage in an effort 
to align or at least synchronize their energy policies.
    The United States is and remains Europe's most important strategic 
and economic partner. It is clearly in the interests of the United 
States work as closely as possible with Europe on the future of 
transatlantic energy and to do what it can to make Europe less energy 
dependent on Russia, while understanding that Russia will remain a key 
source of Europe's energy. Steps by the United States to allow for 
generous issuing of export licenses to Europe would be important, 
strategic decisions that would have a long-term economic impact, 
improve supply diversity, and--perhaps equally important--have an 
immediate political impact.
    At the same time Europe must be courageous and embrace a common 
energy strategy that allows for diverse solutions. The European 
Commission, in its latest recommendation, encourages a radical embrace 
of the energy mix, not excluding shale or nuclear. The EU must also 
take further steps to de-ideologize its internal debate, not forcing a 
choice between a sound energy policy and a sound climate policy, but 
finding a balance to accommodate both, but with a lot more realism. 
There are signs that the debate is changing, as recently as last week 
Germany decided to allow the ``exploration of the possibilities of 
shale gas.'' However, time is of the essence, and Europe needs to move 
fast.
                           framing the issues
    A number of issues deserve attention. First are basic issues of 
relative competitiveness. How is growing U.S. energy production likely 
to interact with declining EU production and growing EU reliance on 
outside sources in terms of price differentials, relative dependencies, 
energy mix, and basic economic fundamentals? How might such 
differentials translate into changes in trade and investment patterns? 
What sectors are most likely to be affected?
    Second, Americans and Europeans still tend to talk past each other 
when it comes to issues of energy and climate. At times it seems to be 
a ``clash of religions'': Americans tend to believe that European 
preoccupation with their image as the ``champion'' of climate issues 
has blinded them to key dependencies and the need for a clear and 
common energy policy. Europeans tend to believe that American 
preoccupation with the notion of energy independence has blinded them 
to the dangers posed by a changing climate and caused them to pull back 
from vigorous efforts to develop breakthrough energy solutions. Neither 
view is entirely true, but these differing perceptions have contributed 
to a dialogue of the deaf that often finds the United States and the EU 
in opposing camps globally. That is in the interest of neither partner. 
How may changing energy dynamics alter such approaches? Is there room 
for greater transatlantic alignment?
    Third, there is a growing transatlantic foreign policy disconnect 
when it comes to the implications of diverging U.S. and European energy 
trajectories. Are America's changing energy dependencies resulting in 
reduced U.S. interest in engaging with allies or retrenchment from 
traditional regions of U.S. foreign policy concern? Could there be a 
new transatlantic strategic bargain involving energy and security 
elements? Can energy become a common denominator for common interests 
and values in a new world, or are evolving energy dynamics more likely 
to pull Europeans and Americans further apart?
                            key developments
    Changing energy dynamics have generated a host of geostrategically 
relevant trends.
    The geopolitics of energy itself has been transformed. For more 
than 30 years America and Europe lived in a world in which 80 percent 
of fossil fuel resources were in the hands of OPEC and Russia and only 
10 percent in the hands of OECD countries and China. With shale being 
dispersed worldwide the 80:10 ratio has imploded.
    The impact, however, is uneven. Major petro-states such as the 
Russian Federation and Saudi Arabia need high oil prices to fund 
budgets to keep their restive populations passive. The shale revolution 
challenges their approaches. For Europe there is potential for long-
term gain, but it is being overshadowed by short-term pain. And despite 
the energy revolution, global energy demand is still likely to double 
by 2050. Uneven access to energy could exacerbate disparities between 
energy haves and have-nots, with implications for Western security and 
prosperity.
    By mid-century the strategic centrality of the Middle East in the 
global supply of hydrocarbons in their present form may well have been 
lost in the new context of global shale gas and tight oil production. 
Conventional hydrocarbon production in the Middle East, however, will 
still play an important role in determining global supply, and to the 
extent that this continues, the U.S. and other powers will continue to 
project power in the region. Some U.S. allies and the global economy 
more broadly will continue to be dependent on energy reserves 
controlled by problematic regimes, even if the U.S. is not. But the 
relative attention and roles of various actors are likely to change 
over time.
    The full implications for the United States are also unclear. While 
fashionable notions of U.S. decline seem impossible to sustain in the 
face of surging U.S. energy production, the 1973 oil crisis occurred 
when the United States was dependent upon foreign sources of oil and 
gas for only about 15 percent of its energy demands, and the United 
States is likely to be more dependent on hydrocarbon imports than this 
for at least the next decade.
    Moreover, many U.S. partners wonder whether the new energy dynamics 
could interact with other trends to weaken their relationship with 
Washington. Some Arab leaders already think that the oil-for-security 
deal in the Middle East is fading because they perceive that America's 
energy revolution has made Washington less interested in that bargain. 
These perceptions have already had an impact on U.S. engagement in the 
region.
    Europeans are also increasingly concerned about U.S. retrenchment 
due to energy dynamics, as well as other trends. There is widespread 
uncertainty in Europe about the U.S. commitment to the transatlantic 
relationship in general and U.S. interest in European energy security 
in particular. The ``pivot toward Asia,'' and the widely used 
expression ``U.S. energy independence,'' have been interpreted as signs 
that the United States continues to flirt with unilateralism at the 
expense of engagement with allies. There is growing concern that 
previous U.S. efforts to facilitate the development of new pipelines in 
Turkey, the Caucasus and Central Asia, and to lower European energy 
reliance on Russia and the Middle East, are no longer important as the 
United States grows more self-reliant. These developments render it 
even harder to find transatlantic common ground on energy security.
    Taken together, these developments underscore the need for policies 
that are proactive rather than reactive. Today's world of haves and 
have-nots, asymmetric challenges and diffusion of power offers 
policymakers less time and less order to make decisions, and large 
institutions are often ill-equipped to adjust to the speed of change. 
Prevention of conflict has become as important as reaction to conflict. 
The ability to shape the environment in which countries develop, and to 
help frame decisions that leaders and populations make, remains as 
relevant as the ability to command or compel change.
    In short, energy is front and center on the strategic agenda. It is 
a transformational issue and must be addressed as such.
                          europe's challenges
    The crisis in Ukraine has highlighted the seriousness of the role 
of Russia in Europe's energy supplies. The divisions and the reactions 
to the Russian annexation of Ukraine have been highly influenced by the 
levels of importance of Russia's relative significance as a given 
country's gas supplier. This link is also apparent in the attitudes of 
certain EU members toward sanctions.
    The challenge posed by Russia to Europe, has been in the making for 
a long time. Some of the newest members of the alliance (Hungary, 
Slovakia, Czech Republic, the Baltics, Bulgaria and Croatia) are among 
the most vulnerable. Perhaps it is not an exaggeration to suggest that 
Europe has been naive about the relationship being one of 
interdependence. Russia provides approximately one-third of Europe's 
overall gas supplies, but for some countries of Central and Eastern 
Europe, the economically and politically most vulnerable part of 
Europe, it is up to 80-90 percent in some cases. The building of the 
North and South Stream pipelines and the abandoning of the Nabucco 
project have made the Russian hold on Europe stronger. The European 
Commission has made laudable efforts to reign in Gazprom's monopolistic 
practices, but Europe needs a clearer strategy to find alternative 
sources, to be able to resist Russian pressures.
              key problems of the european energy economy
    EU energy vulnerability is growing. The EU faces a future of 
limited domestic fossil fuel production from conventional resources as 
the North Sea begins to deplete. In fact, as the shale revolution takes 
hold worldwide Europe becomes on current policies the only major 
economic bloc without access to domestic fossil fuel resources at 
scale. Varying EU approaches to nuclear energy have contributed to this 
vulnerability. Europe also remains dependent on three principal 
external suppliers of conventional energy: Algeria, Russia, and Norway. 
Various Central and Eastern Europe countries--members of both the EU 
and NATO--are particularly concerned about their energy dependency on 
Russia. The failure of Nabucco and the delivery of a small amount of 
gas by the end of the decade (probably at most 10bcm) via the Trans-
Adriatic Pipeline does not bode well for new alternative gas sources 
into Europe. There is the prospect of gas from the Eastern 
Mediterranean toward the end of the decade. However, the capital has be 
found, local geopolitics addressed and the resources extracted and 
transported. None of these factors are yet secure. Moreover, the 
stresses caused by the shale revolution on Saudi Arabia and the Russian 
Federation could render Europe's immediate eastern and southeastern 
neighborhood more unstable.
    There appears to be little chance of significant shale production 
in Europe, even if efforts go forward. There is no indigenous industry 
of this type or a finance market that can securitize loans for drilling 
rigs; deposits are far deeper and thus harder to develop than deposits 
identified in many other world regions; and property laws limit 
incentives and opportunities, as do widespread environmental concerns 
and Europe's population density. The more immediate impact of shale on 
Europe is less likely to come from fracking directly in Europe than 
from fracking elsewhere--particularly the United States. But if 
countries such as China or Australia also engage in large-scale 
fracking it could free up gas from Qatar and other suppliers.
    Europe has also been hit with a triple-whammy of higher energy 
costs due to climate change policies, natural gas prices linked to oil, 
and low U.S. natural gas prices stemming from its shale revolution. 
Between 2005 and 2012 gas prices for industry fell by 66 percent in 
America but rose 35 percent in Europe, according to the European 
Commission. One result is that a significant number of energy-intensive 
European companies are considering relocation to the United States, 
where industrial gas prices are about one-quarter those in Europe.
    EU climate change policies have largely failed to reduce CO2 
emissions, despite extensive EU and member state regulatory structures 
and renewables subsidies. The focus has been on cutting carbon emission 
production rather than consumption (with the exception of a few 
countries, notably the Nordics), and carbon-based imports are simply 
replacing what is no longer produced in Europe.
    One effect has been to encourage greater use of cheap coal to 
offset the cost of renewables. America's shale-gas bonanza has 
displaced to Europe coal that had previously been burned in America, 
pushing European coal prices down relative to gas prices. At the same 
time carbon prices crashed because there were too many permits to emit 
carbon in Europe's emissions-trading system and the recession cut 
demand for them. This has reduced penalties for burning coal and kept 
profit margins for coal-fired power plants healthy while slashing 
profit margins for gas-fired plants. In Germany, for instance, carbon 
emissions have gone up, not down; production of brown coal electricity 
is at its highest levels since 1990; and the country has become 
America's largest global customer of coal.
    Many European opinion leaders are still in a state of shock, and 
many in denial, about the nature of their dependence, their policy 
misfortunes, and the implications of the global shale revolution. 
European leaders once thought that they were leading the way toward the 
era of low-carbon power. The original EU climate strategy was motivated 
as much by competitive thinking as it was by concern for the 
environment. The prevailing notion at the time was that the EU's 
ability to break through to a hyper-energy-efficient model in a high 
fossil-fuel-price world would generate competitive advantage for the EU 
vis-a-vis its energy-guzzling competitors. Yet in austerity conditions 
the 20/20/20 program imposed significant costs on EU member states, and 
the new energy environment has rendered questionable the price 
calculations that underpinned Europe's renewables revolution.
    The Ukraine crisis has prompted a quick regional response from 
central Europe, from the Baltic States and from the Nordic countries as 
well. There is a realization that diversifying sources of supply is 
only one element in the process of increasing energy independence. New 
interconnectors are being built, regional cooperation enhanced, further 
ways to increase energy efficiency are being explored.
    As a result, the EU has an integrated climate change policy yet no 
integrated energy policy. Liberalization of Europe's gas markets would 
force Gazprom and other giants to open their pipelines to competitors, 
and would bring down prices. The European Commission estimates that 
fully integrated gas and electricity markets could yield savings of up 
to 65 billion euros [86 billion dollars] annually.
    Some progress has been made. There are now much deeper liquid gas 
markets across the continent. Around half of gas is now traded on hubs. 
Interconnections are being put in place and the European Commission's 
antitrust arm is bearing down on Gazprom. Nonetheless, European energy 
policies remain fragmented, with many countries going their own way.
                        a new strategic bargain
    Senator Murphy, Senator Johnson, aligning U.S. and European energy 
policies is of renewed strategic importance, as key energy producing 
regions become more volatile and new energy producers and sources 
emerge, as the United States debates its shale boom and the potential 
for energy exports to Europe, and as the United States and the EU 
negotiate a potentially transformative Transatlantic Trade and 
Investment Partnership (TTIP). Stakeholders in government and 
parliaments, energy producers and consumers, energy-intensive sectors, 
experts and other opinion leaders need to establish a new path for 
dialogue across the Atlantic.
    Unfortunately, current transatlantic mechanisms are broken. A 
formal U.S.-EU Transatlantic Energy Council and other venues exist, but 
their effectiveness is questionable. Each transatlantic partner is 
setting its own priorities with inadequate regard for the other.
    Much of the transatlantic debate, of course, is likely to be 
influenced by how each side of the Atlantic addresses its own domestic 
issues--whether the United States changes current market distortions 
and bans on oil and gas exports; whether the EU can create a single 
energy market or change prevailing approaches premised on high energy 
prices; or whether either can escape the lingering effects of the Great 
Recession.
    There is potential, however, for a new strategic bargain based on a 
problem-solving approach using energy dynamics to help address various 
geostrategic challenges.
    Both the cold war and post-cold-war models of transatlantic 
security partnership seem less attuned to today's challenges. While 
Washington has signaled its continued commitment to the alliance, it 
argues that it is not unreasonable to expect European allies to step up 
their relative contributions and engagement. The U.S. has demonstrated 
that it is prepared to provide assets only it has--whether political 
credibility in Kosovo; cruise missiles in Libya; or advanced 
communications and logistics capacities in Mali--but it has made it 
clear that it does not need to command every operation and expects 
European allies and partners to bear the brunt of the burden for 
managing regional crises below the threshold of mutual self-defense.
    U.S. leaders look to progress in Europe's efforts to enhance its 
capabilities as the most visible measure of its commitment to a fuller 
partnership in maintaining transatlantic and global security. So far 
they have been disappointed. Yet if the United States would add energy 
to the mix, there is a reasonable chance that Europe may respond.
    A strategic initiative of this type would be more than a crude 
energy-for-security deal. But at its core the United States would 
signal willingness to work energetically on an energy partnership with 
Europe, including U.S. exports, and European partners would signal a 
willingness to step up their geopolitical engagement in regions 
abutting Europe and engage in more proactive efforts to address a range 
of geopolitical challenges, many far from European shores. This 
strategic package might usefully consist of various elements, including 
the following.
    An Allied Energy Security Act (AESA), under which the U.S. Congress 
would fast track waivers of Department of Energy export licensing for 
up to 100bcm of natural gas to NATO allies or member states of the 
European Union. Above 100bcm the normal export licensing process would 
apply. The AESA would also permit the White House to seek further 
waivers from DOE procedures from the Senate should a ``grave supply 
situation'' arise that could threaten the security of its allies. This 
would be similar to national security exemptions, currently in place, 
which allow the U.S. administration to take action that might otherwise 
be in violation of certain regulations. At my last count 6 export 
applications have been approved and 24 are awaiting action, although 
this may have changed recently. The approval of AESA would be important 
for commitments by U.S. companies to invest in European LNG 
capabilities.
    In parallel with the AESA, NATO allies and EU member states would 
commit to enhance their responsibility for Western energy security in 
the Mediterranean and the gulf. This would mean at a minimum that 
France and the United Kingdom would have to be willing to maintain 
substantial naval forces in the region, potentially taking over from 
the U.S. Fifth Fleet in Bahrain.
    These efforts would be buttressed by those of the NATO Alliance 
itself. Allies have already agreed that NATO has a legitimate role to 
play regarding energy security. As the alliance's major operational 
focus on Afghanistan winds down, there may be more policy space for 
greater NATO attention to energy issues. For instance, as part of an 
expanded and realistic plan for NATO partnership with North Africa, 
NATO countries could support and advise Libya and Algeria on pipeline 
security and oil fields and help them create a secure platform for 
continued production and investment in fossil fuel facilities, 
including Algeria's rich shale resources. NATO could even take a lead 
across the Mediterranean basin to reinforce supply security for all 
states in the region. This could include training, exercises, and 
education to help protect the states from terrorist attacks, threats of 
supply cut off and technical threats to supply. This would also include 
cooperation with the member states in maintaining energy security in 
the EU and the European neighborhood. It would include technical 
security of pipelines and energy facilities as well as a broader range 
of measures to support EU and regional action.
    Energy should become a key element of the negotiations on the 
Transatlantic Trade and Investment Partnership (TTIP). More effective 
energy cooperation was not an original impetus for the talks, but 
should now be incorporated to facilitate U.S. energy exports to Europe, 
align standards in areas such as e-mobility and energy efficiency, 
reduce tariff and nontariff barriers to clean energy goods and 
services, and create mechanisms for mutual recognition of regulatory 
processes regarding energy innovation. In essence, members of the TTIP 
and the Trans-Pacific Partnership alike should be eligible for waivers 
to DOE licensing requirements.
    The United States and its European partners must reengage 
strategically on Wider Europe. Twenty years after the European 
revolutions of 1989, much of Europe has integrated. But the unsettled 
spaces of Wider Europe are significantly less democratic, less secure, 
and less aligned with the West than some years ago. Russia's forceful 
annexation of the Crimean region of Ukraine, and its active support for 
armed separatists in other Ukrainian regions, are the most dramatic but 
by no means the only examples of this challenge. The U.S. and its 
European allies should reengage to help stop backsliding and to project 
stability. Successes in this region--secure energy production and 
transit, more effective democratic governance grounded in the rule of 
law, progress against corruption and trafficking, peaceful resolution 
of conflicts, more confident and prosperous market economies--could 
resonate significantly across the post-Soviet space and into the 
broader Middle East, and enhance the region's potential as a strategic 
bridge. Failure to deal with the region's problems risks dysfunctional 
energy markets, destabilizing competition and confrontation among both 
regional and external actors, festering separatist conflicts, and 
greater transnational challenges, the negative consequences of which 
could spill over into Europe, Eurasia, and the Middle East. While much 
progress depends primarily on the people of the region, much also 
depends on the nations of the West.
    The next 2-3 years are critical for setting out the long-term 
patterns of managing the future development of the Arctic region. As 
Arctic ice melts, Arctic states and other major economic powers, such 
as Japan and China, are increasing efforts to exploit energy resources 
and fisheries, open shipping routes, and variously reinforce a 
commercial, military and coastal security presence. All this is taking 
place across the backdrop of a fragile geophysical environment already 
degraded in many areas and disproportionately subject to the effects of 
global warming. The United States and its North American and European 
partners need to set forth a comprehensive approach to the Arctic, 
backed at high level, to address key interests and prevent potential 
future crises before the melting ice brings differing national agendas 
into conflict.
    Energy discoveries in the Eastern Mediterranean could offer the 
transatlantic partners a way to clear the many blockages in the region, 
including the Cyprus problem, to create a basis for significant 
offshore development.
    There is significant potential for more effective U.S.-EU efforts 
in energy research and development. Joint efforts to advance clean coal 
technologies and carbon capture, storage and sequestration could not 
only benefit the transatlantic partners; China and India will continue 
to use coal, so changes to coal production techniques could have 
significant global impact. Aligning standards on safe nuclear energy 
would also lift global standards. Consideration might be given to a 
U.S.-EU Clean Energy Bank and Transatlantic Energy Innovation Fund. The 
Clean Energy Bank, which would be open to others, would underwrite the 
risks of developing new, commercially viable technologies. It would 
help commercialize new technologies, some of which might be developed 
under the Innovation Fund. That fund would support joint research and 
development to accelerate the introduction of new technologies for 
electric mobility (car technology, batteries, infrastructure); super 
smart grid; renewable energy development and deployment; carbon capture 
and storage; and energy efficiency. Such agreements would allow the EU 
and United States to pool scarce research resources, encourage faster 
and broader roll out of new technologies, and rapidly develop common 
standards for new technologies for further dissemination.
    Substantive, practical projects that reinforce transatlantic 
cooperation could also help to ``de-ideologize'' U.S. and EU approaches 
to climate change. Multilateral climate discussions have essentially 
become donors' conferences. It is essential to transform them into a 
more robust platform for engagement on related issues of economic and 
technological development and trade. The chances of that happening are 
higher if the United States and the EU align their approaches.
    EU-U.S. energy cooperation would be further enhanced through 
greater attention to the Energy Renaissance that is occurring across 
the entire Atlantic Basin. Over the next 20 years the Atlantic is 
likely to become the energy reservoir of the world and a net exporter 
of many forms of energy to the Indian Ocean and Pacific Ocean Basins. 
The Atlantic is setting the global pace for energy innovation and 
redrawing global maps for oil, gas, and renewables as new players and 
technologies emerge, new conventional and unconventional sources come 
online, energy services boom, and opportunities appear all along the 
energy supply chain. Together these developments are shifting the 
center of gravity for global energy supply from the Middle East to the 
Atlantic Hemisphere.
    Our Center at Johns Hopkins SAIS is coordinating an Atlantic Basin 
Initiative to advance this new agenda. Leading private and public 
sector leaders from all four Atlantic continents will meet this 
November in Mexico at the inaugural Atlantic Energy Forum under our 
auspices to consider ways to facilitate and develop Atlantic Basin 
energy trade and investment; remove barriers; eliminate illicit energy 
trade; enable best possible access to capital, further development and 
interconnection of energy transport infrastructure; improve energy 
access and reduce energy poverty; and promote energy mixes designed to 
minimize negative environmental consequences in cost-effective ways.
    Allow me as a final point to stress that in my view the United 
States should take the lead on a strategic debate on energy security in 
the transatlantic community. For this the forthcoming NATO summit must 
task the North Atlantic Council to regularly discuss the issue and make 
recommendations relevant to the alliance as a whole, or to individual 
member states. NATO needs to monitor national policies from a security 
standpoint.

    Senator Murphy. Thank you.
    Mr. Lucas.

   STATEMENT OF EDWARD LUCAS, SENIOR FELLOW AND CONTRIBUTING 
  EDITOR, CENTER FOR EUROPEAN POLICY ANALYSIS, WASHINGTON, DC

    Mr. Lucas. Good afternoon and thank you for inviting me. It 
is an honor and a privilege for a European to be invited here 
to talk. I have got some written testimony which I shall just 
summarize briefly. I would like to thank Chairman Murphy and 
Ranking Member Johnson for the opportunity.
    European security really matters to the United States. 
Europe is your largest trading partner and Europe is a force 
multiplier. It is your most important ally. And Europe is under 
attack. It is under attack from Vladimir Putin's Russia in ways 
that we have not completely understood, because we tend to 
compartmentalize things. We think this is an energy problem, 
this is a military problem, this is a diplomatic problem. In 
Putin's Russia all these things mix together. You have 
business, statecraft, intelligence, organized crime, energy, 
military force, all overlapping and interlocking.
    As you referred to in your opening remarks, Russia is a 
revisionist power and I think we have understood that Russia is 
trying to tear up the European security order. That is what it 
did with its invasion of Crimea. It is perhaps less understood 
that Russia is also trying to tear up the European energy 
order. It regards to EU's ability to be the rule-setter in 
European energy as an existential threat, because Vladimir 
Putin's power at home and abroad depends on the abuse of energy 
markets, particularly through the way he manipulates gas 
exports. And the European Union has been doing a pretty good 
job to stop that, as we have heard, with the Third Energy 
Package, with the growth of interconnectors and storage and 
things like that.
    And Putin does not like that. As you saw in your visit to 
Bulgaria, he is very keen to push ahead with South Stream, 
which is an absolute head-on challenge to the European energy 
order, and he has managed to get six EU countries now lined up 
in support of South Stream, and that is pretty bad.
    So this revisionism affects more than just the conventional 
military thing. Russia has got the means to be revisionist. I 
think we are still sometimes mentally in the 1990s, where 
Russia is a poor country. Even now, people say Russia is a 
declining country. Well, maybe it is a declining country, but 
it can still do us an awful lot of damage.
    It is not just the military buildup that we have seen, and 
the willingness to use force, which gives it an edge over 
European countries, who basically do not want to. It has been 
able to use the energy weapon over a period of years to 
constrain Europe's decisionmaking ability. European countries 
that worry about their supplies of Russian natural gas do not 
want to offend Russia. They feel vulnerable.
    It has also used the money that spins off from energy and 
from other things to foster very powerful lobbies--commercial, 
financial, economic lobbies--of people who have got a direct 
business interest in having good political relations with 
Russia. We see this in Germany, the Netherlands, particularly, 
I am sorry to say, in my own country, Britain, where the city 
of London is perhaps the biggest laundry machine for Russian 
money, and there is a very strong political pushback in Britain 
when we try and do things that might offend the Russian 
Government.
    I should also mention information warfare, which is 
something that we have neglected. I am happy to go into that in 
the Q and A. Russia practices information warfare against the 
West with a sophistication and intensity that we did not even 
see during the cold war. They are using techniques of social 
media, using YouTube, using all sorts of other things against 
us, and we do not really have an answer. And of course they are 
also willing to use force.
    I think we also have to acknowledge and agree that Russia 
is winning. Regardless of whether there is a pause in Ukraine 
or not, the fact is they got away with it. They got away with 
the Crimea and they are getting away with it in the pushback on 
energy. A particularly good example of that is that the EU has 
put on hold what would have been potentially a devastating 
response to Russia, which is the complaint against Gazprom.
    If anyone had told Mr. Putin in 2005, 2006, 2007, 2008 that 
EU officials with search warrants would be kicking down doors 
and going to Gazprom affiliates all over Europe, seizing 
documents, seizing computers, and building up a compelling 
picture of market abuse that could lead to hundreds of millions 
of dollars in fines on Gazprom, enormous legally mandated 
changes to their business model, and possibly class action law 
suits--we do not know what goes on inside Putin's head, but it 
would not have been pretty.
    That is what happened. The EU got to the stage where it had 
a loaded weapon pointed at the Kremlin and then it flinched in 
pulling the trigger.
    We need to do all sorts of things. We need to deal with the 
military dimension, particularly a standing defense plan for 
the Baltics, prepositioning, all that sort of stuff. We need to 
send a message that crime does not pay. We need to do the 
Magnitsky sanctions on a much wider scale.
    I think American LNG is a vital part of the picture and I 
am very glad that you touched on that. Even before a molecule 
of LNG arrived in Lithuania, thanks to Lithuania's LNG 
terminal, which has not actually been delivered yet, they were 
able to drive a much harder bargain with Gazprom and get a much 
lower gas price. So I think one has to see LNG and LNG 
infrastructure not just in business terms, but in national 
security terms, and from that point of view it is vital for 
Europe, and the American export licenses already granted play a 
very important psychological component in that, even before any 
molecules flow.
    Finally, I would just touch on energy market reform. Russia 
habitually abuses the energy market. It abuses the setting of 
benchmarks. Its trading companies abuse the market. A lot of 
this stuff is very difficult to write about publicly because of 
English libel laws, and I refer in my written testimony to my 
coordinating The Economist's libel defense when we were sued by 
someone who is now on the U.S. sanctions list.
    This really deserves the full attention of the American 
criminal justice system. You have all sorts of evidence about 
money-laundering, market abuse, insider trading, and all sorts 
of other stuff that goes on. You have the ability to clean this 
up, and the more open, the more transparent, the more liquid 
world energy markets are, the better everybody else is and the 
safer Europe will be.
    I will stop there.
    [The prepared statement of Mr. Lucas follows:]

                   Prepared Statement of Edward Lucas

    Good afternoon. Thank you for inviting me here today. It is an 
honor and a privilege to give testimony to this committee and I would 
like to thank Chairman Murphy and Ranking Member Johnson for this 
opportunity. I will give a short oral version of my written testimony 
and then look forward to taking questions.
    I have been dealing with European security for more than 30 years, 
as an activist for freedom and democracy during the cold war, as a 
foreign correspondent and editor for major international media outlets, 
and also as a senior nonresident fellow at the Centre for European 
Policy Analysis--CEPA--here in DC. I speak Russian, German, Polish, 
Czech, and some other languages.
    In 1989 I was the only foreign newspaperman living in Communist-era 
Czechoslovakia and witnessed the Velvet Revolution bring down that 
regime. I was the last Western journalist to be expelled from the 
Soviet Union, for having crossed the border with the first visa given 
by the new but unrecognised Lithuanian authorities. In 1992 I founded 
and ran the first English-language weekly in the Baltic States. In 2010 
I coordinated the defence for my employer, The Economist, in a high-
stakes libel action brought against us by Gennady Timchenko, a Russian 
energy tycoon who denied our claim that had benefited from his 
association with Vladimir Putin.
    I am the author of two books on the regime in Russia. The first of 
these, ``The New Cold War,'' was written in 2007, at a time when most 
Westerners were still reluctant to face up to the threat the regime 
poses both to its own people, and to Russia's neighbours. Many accused 
me of scaremongering. Few do that now.
    Yet conventional thinking about Russia has surprisingly deep roots. 
Many people in Washington, Brussels, London, and Berlin believe that 
Vladimir Putin's Russia can be accommodated diplomatically. Money 
doesn't smell. Energy is just a business. There is no need to take 
radical measures in response to the latest crisis in Ukraine. The 
danger is of a provocative over-reaction, not of appeasement.
    I disagree profoundly. My views are based on my experiences over 
many years in in Estonia, Latvia, Lithuania, Poland, the Czech 
Republic, Russia, and other countries in the region. People there have 
been warning us for years of the dangerous direction of events. We have 
not listened to them. Instead, we have systematically patronised, 
belittled, and ignored those who know the problem better than we do. 
Now they have been proved right. I hope that my voice may be heard, 
where theirs, still, is not.
    My first point is that Russia is a revisionist power. The Kremlin 
not only regards the existing European security order as unfair but 
actively seeks to change it. It wants to weaken the Atlantic alliance, 
to divide NATO, and to undermine the European Union's role as a rule-
setter, especially in energy policy. On issues such as the South Stream 
pipeline, access to gas storage, reverse flow and other issues the 
unsung bureaucrats of the EU Commission represent an existential threat 
to the Kremlin's business model.
    Russia begrudges the former captive nations of the Soviet empire 
their freedom, their prosperity, and particularly their independence. 
It maintains an old-fashioned idea of ``legitimate interests'' and 
``spheres of influence'' in which the future geopolitical orientation 
of countries such as Ukraine and Georgia is not a matter of sovereign 
choice for the peoples of those nations, but a question in which Russia 
has, by right, a veto.
    My second point is that Russia, a leading petrostate, now has the 
means to pursue its revisionist approach:

   It ruthlessly uses its energy weapon against European 
        countries, particularly in pipeline-delivered gas, where it has 
        a substantial monopoly in the eastern half of the continent.
   It uses money. It bolsters a self-interested commercial and 
        financial lobby which profits from doing business with Russia 
        and fears any cooling in political relations. Austrian banks, 
        German industrial exporters, French defence contractors, and a 
        slew of companies, banks, and law firms in my own country, the 
        United Kingdom, exemplify this. These energy and financial ties 
        constrain the Western response to Russian revisionism.
   It practises information warfare (propaganda) with a level 
        of sophistication and intensity not seen even during the cold 
        war. This confuses and corrodes Western decisionmaking 
        abilities.
   It is prepared to threaten and use force.

    My third point is that Russia is winning. Too much attention is 
paid to the ebb and flow of events in Ukraine. The big picture is 
bleak: Russia has successfully challenged the European security order. 
It has seized another country's territory, fomented insurrection, and 
engaged in repeated acts of military saber-rattling, subversion and 
economic coercion. The response from the West has been weak and 
disunited. The United States is distracted by multiple urgent problems 
elsewhere. You rightly wonder why you should be bearing the cost of 
increasing European security. For their part many European countries 
have no appetite for confrontation with Russia.
    My fourth point is that greater dangers lie ahead. Russia has 
mounted a bold defence of its market-abusing South Stream pipeline, 
signing up Austria, Hungary, Croatia, Slovenia, Bulgaria, and Greece in 
support of a direct challenge to the EU's rules on pipeline 
construction and third-party access. The Ukrainian adventure has given 
a big boost to the Putin regime in Russia, which had previously shown 
some signs of declining popularity, amid economic failure and growing 
discontent about corruption and poor public services. The big danger is 
that as the effect of seizing Crimea wears off (and as the costs of 
doing so bear more heavily on Russia's sagging finances), the regime is 
tempted to try something else.
    Our weakness over Ukraine makes that more likely. We have set the 
stage for another, probably more serious challenge to European 
security, most likely in the Baltic States. Estonia, Latvia, and 
Lithuania are loyal American allies and NATO members. If any one of 
them is successfully attacked or humiliated, NATO will lose its 
credibility overnight, permanently and irreversibly. These are our 
frontline states: the safety and security that we have taken for 
granted since the end of the cold war now hangs on their fate.
    But geography is against them: the Baltic States form a thin, flat 
strip of land, lightly populated and with no natural frontier and 
little strategic depth. Russia knows that. NATO has only a token 
presence in the region. We have no hardened infrastructure, no 
prepositioned military forces, weapons or munitions. Russia knows that 
too. Their economies are liable to Russian pressure (especially in 
natural gas, where they are 100 percent dependent on Russian supplies). 
Estonia and Latvia are also vulnerable to Russian interference because 
of their ethnic makeup (between a quarter and a third of their 
populations self-identify as ``Russian'' in some sense).
    What can we do?
    The first task is to see clearly what has happened. European 
security will not be fixed with a few deft diplomatic touches. To cope 
with a revisionist Russia it needs a fundamental overhaul. American and 
European policymakers need to explain to the public that the war in 
Ukraine was a game-changer.
    We need to rebut the phoney Realpolitik arguments, which advise us 
to make the best of a bad job. We should accept the loss of Crimea, so 
the argument goes, do a deal with Russia over the future of Ukraine, 
and get used to the new realities, of a Russian droit de regard in 
neighbouring countries.
    Such an approach would be morally wrong and strategically stupid.
    Securing a Europe whole and free after 1991 has been a magnificent 
achievement in which the United States has played a huge part. True: we 
made mistakes. We declared ``job done'' in 2004, when 10 ex-Communist 
countries joined NATO. That was far too early. We overlooked Russian 
resentment at the way Europe was evolving, and our vulnerability to 
Russian pushback. We neglected Ukraine, Moldova, Belarus, and the 
countries of the Caucasus. But having made these mistakes is no reason 
to compound them now, by retreating into a grubby defeatism. To go back 
to business as usual would send a message that the kleptocratic regime 
in the Kremlin would understand all too well: crime pays.
    Legitimising Russia's land-grab in Ukraine, and its attempted 
power-grab in the wider neighbourhood, would also fly in the face of 
historical justice. The Crimean Tatars--whose suffering at Soviet hands 
is all but unmatched--are now under the rule of their former 
tormentors. Are we really proposing that whole countries, which the 
past masters of the Kremlin occupied and despoiled, should be subject 
to renewed interference and manipulation?
    Instead, we should make it clear that we will boost our allies and 
weaken our opponents. We do not want to be enemies with Russia. But if 
the Putin regime treats us as an enemy, we help nobody by pretending 
otherwise.
    The most immediate priority is military. A security crisis in the 
Baltic region is the single most dangerous threat facing the Atlantic 
alliance. Reckless behaviour by Russia could face us with a choice 
between a full-scale military confrontation (including the potential 
use of nuclear weapons) or surrender, with the collapse of our most 
fundamental security arrangements. We must make every effort to ensure 
that this does not happen.
    That means American and other allies prepositioning military 
equipment and supplies in the Baltic States. It means NATO creating a 
standing defence plan--one which assumes that there is a real and 
present danger of attack. We need to put a major NATO base in Poland, 
to reassure that country that it can safely deploy its forces to the 
Baltics as reinforcements in the event of a crisis. We need to boost 
the NATO presence in the Baltic States with rotating visits by naval 
vessels, extended air-policing, and ground forces--initially on 
persistent rotation, but as soon as possible on permanent deployment.
    Russia will complain vigorously about this. But the fact that the 
Kremlin is unhappy when its neighbours are secure is telling. We should 
explain to the Russian authorities that when NATO expanded in 2004, we 
did not even draw up contingency plans for the military defence of the 
new members, because we assumed that Russia was a friend, not a threat. 
It is Russia's behaviour which has changed that. Russia attacked 
Georgia in 2008. It rehearsed the invasion and occupation of the Baltic 
States a year later, in the Zapad-09 exercise (which concluded with a 
dummy nuclear strike on Warsaw). It has continued to menace the Baltic 
States ever since, with air-space violations, propaganda and economic 
warfare, and state-sponsored subversion. We take the step of securing 
our most vulnerable allies belatedly and reluctantly, and solely as a 
result of Russian policy directed toward them.
    A further vital military component of security in north-eastern 
Europe is the closest possible integration of Sweden and Finland into 
NATO planning and capabilities. These countries are not members of the 
alliance, so they cannot formally be part of its command structure. But 
we should make every effort to maximise cooperation in every respect. 
We cannot defend the Baltic States or Poland without their help. It is 
commendable that the United States is selling the JASMM missile to 
Finland. It should continue the further sale of advanced precision and 
stealth weaponry on a wide scale to both countries. NATO's summit in 
Wales this fall, which will have little to offer on expansion, should 
make a point of offering a ``gold card'' partnership to Sweden and 
Finland. The United States should take every opportunity to foster 
high-level political dialogue with both countries in and around NATO. 
Rich, well-run countries with serious military capabilities, excellent 
intelligence services and strong strategic cultures are in short supply 
in modern Europe. We should make the most of what we have.
    The United States should also continue to make good on its promises 
of missile defence installations in the region. The administration 
should also consider the interim deployment of armed Patriot missiles 
in Poland--a promise which the Polish Government believes was solemnly 
made by the George W. Bush administration, but never honoured.
    Having shored up our most vulnerable allies, the next task is 
stabilising Ukraine. It is hard to overstate how parlous the situation 
is. How much more Ukrainian territory ends up under direct or indirect 
Russian control is of secondary importance. Ukraine is going to be in 
the political and economic emergency room for years to come. That is 
Russia's doing. Ukraine is suffering a world-class economic and 
financial crisis, which even in a stable and secure country would be 
far worse than anything experienced elsewhere in Europe. The economy is 
fundamentally uncompetitive. The main export market, Russia, is at risk 
of closure at any moment. Public finances are in ruins. The government 
subsists on a hand-to-mouth basis, relying on ad-hoc donations from 
wealthy oligarchs for even core spending requirements such as national 
defence. Even if everything else goes well, simply fixing Ukraine's 
economy will take 5 years.
    The outside world must respond generously and imaginatively. A new 
Marshall Plan for Ukraine should involve not only direct financial 
support, but the widest possible relaxation of tariffs and quotas on 
Ukrainian products such as steel, grain, textiles, and agricultural 
products. The European Union has led the way with the newly signed deep 
and comprehensive free trade agreement, but much more remains to be 
done. In particular, European countries should accelerate efforts to 
supply Ukraine with natural gas by reversing the flow of existing 
pipelines. Russia has already threatened unspecified sanctions against 
countries which re-export Russian gas--a sign of how seriously the 
Kremlin treats the issue.
    Second, Ukraine faces a political and constitutional crisis of a 
kind unseen since the end of the wars in ex-Yugoslavia. Every political 
institution was degraded and discredited under the previous Yanukovych 
regime. Decades of bad government, corruption and abysmal public 
services have corroded public confidence in the state--one reason for 
the initial public support enjoyed by the insurgents in the poorest 
parts of eastern Ukraine. The United States should press for early 
parliamentary elections, and offer support for institution-building, 
and especially the vexed question of relations between the center and 
the regions.
    Third, Ukraine faces a geopolitical and security crisis which could 
lead to full-scale war. Here the need is twofold: First, to offer 
Ukraine military training, assistance, arms and equipment in order to 
defeat the separatist insurgents; Second, to deter the regime in 
Russia.
    Deterring Russia, not only in Ukraine but elsewhere, is the hardest 
part of the task ahead. Russia is an integrated part of the world 
economy and of world decisionmaking on everything from space to subsea 
minerals. It cannot be simply isolated and ignored. But that does not 
mean that we cannot raise the cost of doing business for the Putin 
regime.
    In particular, we should greatly extend the use of sanctions 
against individuals. The United States has commendably paved the way 
here with the Magnitsky Act--a move which other countries, sadly, have 
mostly so far failed to follow. The furious Russian reaction to the 
American imposition of even a handful of visa bans and asset freezes on 
those responsible for the death of the whistle-blowing auditor Sergei 
Magnitsky shows the effectiveness of this approach. The scope of such 
sanctions should be widened to include hundreds or even thousands of 
Russian decisionmakers and policymakers. It could include all members 
of the legislature (Duma and Federation Council), all members of the 
General Staff, military intelligence (GRU) domestic security (FSB), 
foreign intelligence (SVR), the interior ministry (MVD) and other 
``power agencies,'' the Presidential administration, and Presidential 
property administration (and companies which represent it abroad), 
companies run by personalities linked to the Putin regime, and any 
banks or other commercial institutions involved in doing business in 
occupied Crimea. Such visa bans and asset freezes could also be 
extended to the parents, children, and siblings of those involved.
    This would send a direct and powerful message to the Russian elite 
that their own personal business in the West--where they and their 
families shop, study, save, and socialise--will not continue as usual. 
The United States should make vigorous overtures to its allies to 
encourage them to follow suit. The more countries which adopt 
sanctions, and the longer the list of those affected, the more pressure 
we are putting on the Putin regime to back off and change course.
    We can also apply much tougher money-laundering laws to keep 
corrupt Russian officials out of the Western payments system and 
capital markets. We should intensify investigations of Russian energy 
companies which have mysterious origins, shareholders, or business 
models. We can tighten rules on trust and company formation agents to 
make it harder for corrupt Russian entities to exploit and abuse our 
system. It is often said that offshore financial centres are beloved by 
the Russian elite. But the shameful truth is that it is Britain and the 
United States which make life easiest for them.
    We also need to improve the West's resilience and solidarity in the 
face of Russian pressure. American exports of LNG will be a small but 
welcome addition to the global natural gas market. Lithuania has built 
its own floating LNG terminal, which will become operational in 
December of this year, with the arrival of the aptly named 
``Independence'' a vessel constructed in South Korea. Already, 
Gazprom's grip on Lithuania's natural gas market has slackened, and 
Lithuania has been able to negotiate a discount from the extortionate 
price--the highest in Europe--which the Russian gas giant had been 
charging. As energy editor of The Economist, I am sceptical of the idea 
that we will ever have a deep and liquid global LNG market: the 
technology and costs involved hinder the development of the needed 
supply chain. However at the margins, LNG does make a big difference, 
blunting the edge of any artificial emergency that Russia may try to 
create with selective supply interruptions.
    Europe can do much more. It can build more gas storage, and 
liberalise the rules governing it, so that all parties have access to 
the facilities. It can complete the north-south gas grid, making it 
impossible for Russia to use supply interruptions on its four east-west 
export pipelines as a political weapon. Most of all, the European 
Commission should proceed with its complaint against Gazprom for 
systematic market-abuse and law-breaking. This move--in effect a 
prosecution--is based on the seizure of huge numbers of documents 
following raids on Gazprom offices and affiliates. The Commission had 
expected to release this complaint--in effect a charge sheet--in March. 
Then it was postponed until June. Many now wonder if it has been 
permanently shelved. The United States should urge the European 
Commission to enforce its laws.
    I understand that the United States Justice Department is rightly 
suspicious of the way in which Russian companies operate in the world 
energy market. There are grave suspicions of price-fixing, insider 
trading, money-laundering and other abusive and illegal behaviour. My 
own researches suggest that these suspicions are amply justified, 
though writing about them is hampered by the costs and risks imposed by 
English libel law. In the course of researching the defence case in the 
libel case I mentioned earlier, I met several potential witnesses who 
were frightened for their physical safety if they cooperated with us. 
The more that the criminal justice system of the United States can do, 
through prosecution, witness protection and plea bargains, to drive the 
Russian gangster state out of international energy markets, the safer 
the world will be.
    Next, we need to revive our information-warfare capability. We won 
the cold war partly because Soviet media lied as a matter of course, 
and ours did not. They tried to close off their societies from the free 
flow of information. We did not. In the end, their tactics backfired.
    Just as we have underestimated the potential effect of Russian 
energy, money, and military firepower, so too have we neglected the 
information front. Russian propaganda channels such as the multilingual 
RT channel are well-financed and have made powerful inroads into our 
media space. They create a subtle and effective parallel narrative of 
world events, in which the West are the villains, mainstream thinking 
is inherently untrustworthy, and Russia is a victim of injustice and 
aggression, not its perpetrator.
    Combating this will require a major effort of time, money, and 
willpower, involving existing media outlets, government, nonprofit 
organisations and campaigning groups. We need to play both defense and 
offense. We need to begin to rebut Russian myths, lies, and slanders, 
highlighting the factual inconsistences and elisions of the Kremlin 
narrative, and its dependence on fringe commentators and conspiracy 
theorists. We also need to start rebuilding the trust and attention we 
once enjoyed inside Russia. The collapse of respect and affection for 
the West inside Russia over the past 25 years has been a catastrophic 
strategic reverse, all but unnoticed in Western capitals. After the 
fall of communism, Russians believed we stood for freedom, justice, 
honesty, and prosperity. Now they believe that we are hypocritical, 
greedy, aggressive custodians of a failing economic system.
    Finally, we need to reboot the Atlantic alliance. As memories fade 
of the Normandy beaches, of the Berlin Wall's rise and fall, and the 
sacrifice and loyalty of past generations, we are running on empty. 
Without a shared sense of economic, political, and cultural 
commonality, the Kremlin's games of divide and rule will succeed. This 
will require renewed and extraordinary efforts on both sides of the 
Atlantic. The revelations surrounding the secret material stolen by 
Edward Snowden have stoked fears in Europe that America is an 
unaccountable and intrusive global hegemon. This year I wrote a book--
``The Snowden Operation'' attacking the ``Snowdenistas'' as I termed 
the NSA renegade's unthinking defenders. I believe that our 
intelligence agencies as a rule function well, within the law, and to 
the great benefit of our nations. But much damage has been done. At a 
time when we need to be restoring transatlantic ties, they are 
withering before our eyes, especially in the vital strategic 
relationship with Germany. The Transatlantic Trade and Investment 
Partnership (TTIP) offers a rare chance of a big-picture, positive 
project which could help revive what sometimes looks like a failing 
marriage.
    A final footnote: Whereas Russia once regarded the collapse of the 
Soviet Union as a liberation from communism, the regime there now 
pushes the line, with increasing success, that it was a humiliating 
geopolitical defeat. That is not only factually false; it is also a 
tragedy for the Russian people. They overthrew the Soviet Union, under 
which they had suffered more than anyone else. But they have had the 
fruits of victory snatched away by the kleptocratic ex-KGB regime. The 
bread and circuses it offers are little consolation for the prize that 
Russians have lost: a country governed by law, freed from the shadows 
of empire and totalitarianism, and at peace with itself and its 
neighbours.

    Senator Murphy. Ms. Shaffer.

   STATEMENT OF BRENDA SHAFFER, PH.D., PROFESSOR, CENTER FOR 
    RUSSIAN, EURASIAN AND EAST EUROPEAN STUDIES, GEORGETOWN 
                   UNIVERSITY, WASHINGTON, DC

    Dr. Shaffer. Chairman Murphy, Ranking Member Johnson, thank 
you for having this hearing this afternoon on this very 
important topic. The 21st century is the era of natural gas. In 
the 19th century coal was the dominant fuel, in the 20th 
century it was oil. But now enormous new natural gas resources 
have been discovered in vast new locations. Natural gas has 
many benefits, such as low environmental impact and lower 
carbon emissions than almost any other energy sources. Natural 
gas is the fuel that is most compatible with the use of 
renewable energy as a baseload in power generation.
    However, security of supply in natural gas is more 
challenging than any other fuel source, as natural gas's 
physical qualities make it complicated and expensive to ship. 
Consequently, there is a greater need in the coming decades for 
meticulous policies and government involvement to ensure 
security of supply of natural gas.
    A number of measures can improve European natural gas 
energy security. First, policy should focus on improving the 
security of supply in Europe's most vulnerable markets. 
Observers may speak of a single European energy market, but 
this is an illusion. States on Europe's periphery have much 
higher energy prices and bigger security challenges than those 
in the west and the center of Europe. The European Council's 
recently endorsed energy security strategy recognizes the 
uneven nature of this situation in Europe.
    Natural gas sectors must be properly organized to guarantee 
security of supply regardless of the origin of the gas supplies 
or even the political situation. Supply disruptions most 
frequently result from technical glitches, natural disasters, 
or extreme weather. In fact, one of the biggest security 
challenges to natural gas supplies in recent years in Europe 
has been winter 2012 due to extreme weather.
    Next, the United States and Europe should make sure that 
Kiev gets its natural gas sector in order. The Ukraine's unpaid 
gas bills to Gazprom are a legitimate Russian concern. Ukraine 
is the major transit point of Russian gas into Europe. In the 
last decade Ukrainian political elites across the political 
spectrum have engaged in reckless siphoning of gas, disregard 
for payments, and provided massive subsidies that encouraged 
runaway gas consumption. This behavior endangered security of 
supply to Europe.
    Additional natural gas supplies can also improve the 
security of supply in Europe. The most promising new source of 
gas into Europe is the Southern Gas Corridor. Beginning in 
2019, this project will bring natural gas from Azerbaijan into 
southern Europe. This project is the first in decades to bring 
new volumes into Europe and not just rerouting existing 
volumes.
    This project also reaches the specific gas markets of 
southern Europe that have previously relied on a single source 
and are the most vulnerable. The Southern Gas Corridor can 
facilitate transport of increased volumes of gas from different 
sources, such as Iraq, such as the eastern Mediterranean, and 
any new sources that will be discovered in the region. Spurs 
can be built to additional markets in Europe, such as the 
Balkans. The project will bring thousands of new jobs in the 
construction phase to southern Europe, such as Albania, Greece, 
and Italy.
    Azerbaijan made a strategic choice to sell its gas to 
Europe instead of to local markets that probably would have 
been more profitable, and Russia and Iran have noticed this 
strategic choice. This project needs continued EU and American 
support to make sure that Russia does not undermine it along 
the route. Russia may attempt to re-ignite the Nagorno-Karabakh 
conflict between Azerbaijan and Armenia or destabilize Georgia 
in order to thwart the development of the Southern Gas 
Corridor. Continued United States interest in resolving this 
conflict is important to removing the potential means for 
Russia to destabilize the region.
    Another potential new source of natural gas into Europe is 
from Israel and Cyprus. The eastern Mediterranean at this point 
is too modest to serve as a source for mainland Europe unless 
additional discoveries are found. But this can be very useful 
for the region itself. The ability of these resources to serve 
as peace pipelines I believe are overstated. Energy trade 
reflects existing peaceful relations; it does not create them. 
In fact, dispute over energy resources or commercial conditions 
can exacerbate existing political conflicts and not resolve 
them, as we have seen so recently in Europe.
    Although the gas volumes can eradicate conflicts in the 
Middle East over water as a source for desalination, 
essentially to remove any water shortages in the region. It has 
already increased water supplies to Israel, Jordan, and the 
Palestinian territories, at least removing this part of this 
quite regretful conflict. The new resources can also improve 
reliable and affordable electricity in this part of the Middle 
East, which is very important as a basis for future prosperity 
and hopefully for peace.
    In recent months there has been some speculation that if a 
deal on Iran's nuclear program was reached with the West 
Teheran could also serve as a source of supply of gas to 
Europe. This idea is farfetched. While Iran indeed holds the 
second largest reserves of natural gas in the world, today Iran 
is, rather surprisingly, a net importer of natural gas, also 
fed by its huge domestic subsidies and inefficiency at home.
    If Iran tried to launch a gas export project to Europe, 
Russia would surely block it. Over many issues, despite their 
semblance as allies, there is strategic competition between 
Iran and Russia, and especially in the sphere of natural gas 
exports.
    Throughout Europe, Moscow employs sophisticated policies to 
continue its role as the dominant energy supplier in Europe and 
blocks indigenous production efforts in Europe and rival supply 
projects. For instance, Moscow sponsors and funds bogus 
environmental movements to oppose shale gas production and to 
oppose new gas projects. Professional government analysis 
should identify and disrupt these sophisticated organizations 
and companies that Moscow utilizes to protect its dominance in 
Europe and to remove the tax status, nonprofit status, for 
these organizations that receive this funding from Moscow. In 
addition, the EU should investigate Moscow's use of surrogate 
European and Russian companies that make nontransparent 
alliances with Russian companies and bar this behavior.
    Another mechanism that Moscow can exploit is the 
manipulation of gas hub trade in Europe and this should be 
countered.
    Last, Washington and Brussels should clarify to NATO and EU 
members that belong to these organizations that it entails also 
obligations to protect its energy security. Bulgaria's 
reluctance to implement policies intended to improve its own 
security of supply are particularly worrying.
    Up until this year, Brussels has increasingly pulled out of 
the business of ensuring energy security and delegated the job 
to the invisible hand of the market. But the marketplace alone 
will not be enough to encounter a relentless Russia. National 
and EU institutions must take a more active and strategic role 
and the United States should support this.
    Thank you.
    [The prepared statement of Dr. Shaffer follows:]

                Prepared Statement of Dr. Brenda Shaffer

    The 21st century is the era of natural gas. In the 19th century, 
coal was the dominant fuel source and in the 20th century, it was oil. 
In the 21st century, enormous new natural gas sources have been 
discovered and produced. These new discoveries are vast in quantity and 
varied in location, with new parts of the globe becoming natural gas 
producers and new volumes far exceeding the rise in global demand for 
natural gas. Natural gas has many benefits as a fuel source, such as 
its low environmental impact and lower carbon emissions than most other 
energy sources. In many markets, it is also the cheapest source of 
energy for power generation and other functions. With these economic 
and environmental advantages, natural gas consumption has become 
widespread and in many places is supplanting coal as the main source of 
power generation. Natural gas is also the fuel that is most compatible 
with the use of renewable energy as a base load in power generation, 
and thus consumption of natural gas goes hand in hand with consuming of 
renewables under current technologies.
    However security of supply is more challenging with natural gas 
than most other fuel sources, as natural gas' physical qualities make 
it complicated and expensive to ship. Consequently, there is a greater 
need in the coming decades for meticulous policies and government 
involvement to ensure security of supply of natural gas. The market 
alone will not create the infrastructure, multiple supply sources, 
storage, and contingency plans that can ensure security of supply.
    In recent years, Europe has had a number of challenges in the 
sphere of energy security: carbon emissions are rising, high power 
generation costs are challenging the competitiveness of Europe's 
industry, and the security of the continent's natural gas supplies is 
tenuous. The recent Ukraine crisis serves as a new wake-up call 
regarding the importance of ensuring Europe's continued energy 
security.
    The United States treats Europe's continued energy security as an 
integral part of U.S. national security policy. In recent years, the 
United States has significantly improved its capacity to integrate 
international energy policy into its foreign policy through the 
successful establishment of the State Department's Bureau of Energy 
Resources. In this recent crisis in Ukraine and in a number of arenas 
around the world, it is clear that this Bureau plays an important role 
in promoting U.S. national security and energy interests, including 
developing a comprehensive policy to improve European energy security 
in light of the recent crisis.
    A number of measures can improve European natural gas energy 
security: focusing policies on specific markets in Europe that are at 
high risk for disruption of security of supply; respecting legitimate 
Russian commercial demands, such as payment for the gas it has shipped 
to Ukraine; developing new natural gas sources for Europe, especially 
the Southern Gas Corridor; identification organizations that are funded 
by Russia to undermine European energy security under the guise of 
promoting environmental protection; preventing European companies from 
acting as surrogates for Gazprom; halting potential price manipulation 
at gas sale hubs; requiring that NATO and EU members such as Bulgaria 
adopt EU energy security policies; and separating out EU climate change 
and renewable energy policies. In my testimony, I will elaborate on 
these policy suggestions and propose a policy approach for natural gas 
energy security policy in Europe.
    A number of measures can improve European energy security:

   Focusing policies on specific markets in Europe that are at 
        high risk for disruption of security of supply;
   Making payment to Russia for the gas it has shipped to 
        Ukraine;
   Developing new natural gas sources for Europe, especially 
        the Southern Gas Corridor;
   Identification of environmental movements that are funded by 
        Russia to undermine European energy security;
   Preventing European companies from acting as surrogates for 
        Gazprom;
   Halting potential price manipulation at gas sale hubs;
   Requiring that NATO and EU members such as Bulgaria adopt EU 
        energy security policies;
   Separating EU climate change and renewable energy policies.

    The natural gas supply situation in Europe is quite complex, and 
U.S. policies should focus on improving the security of supply in 
Europe's most vulnerable markets. Observers may speak of a single 
European energy market, but that is an illusion. States on Europe's 
periphery have much higher energy prices and bigger security challenges 
than those in the West and Center of Europe. The European Council's 
recently drafted Energy Security Strategy recognizes the uneven nature 
of the supply situation in Europe, and the EU is beginning to take 
positive steps to address this asymmetry.
    Assessing a market's vulnerability to supply disruption depends on 
a number of factors, including the diversification of a state's fuel 
mix, its supply connections with neighbors, its capacity to switch to 
different fuels in power generation, the extent of its fuel storage 
(and especially natural gas storage) capacity, and the extent to which 
natural gas forms a part of a country's fuel mix.\1\ Some markets, such 
as Germany, have multiple suppliers, and have energy infrastructure 
that connects it with neighbors. Other states, such as Poland, 
currently have access only to Russian natural gas, but natural gas is a 
small part of its power generation and total fuel consumption. Hungary 
also has only a single gas supplier, but it maintains extensive natural 
gas storage capacity and thus can easily endure supply disruptions.
    Southern Europe and southeastern Europe contain some of the markets 
that are most vulnerable to potential natural gas supply disruptions. 
Not only do a number of the markets in the region rely on Russia as 
their single gas supplier, most of the markets in southern Europe are 
not interconnected by gas pipelines.
    Natural gas sectors must be properly organized to guarantee 
security of supply, regardless of the origin of the supplies and the 
political situation. Supply disruptions most frequently result from 
technical glitches, natural disasters, or extreme weather. One of the 
biggest challenges in recent decades to the security of the natural gas 
supply in Europe took place in winter 2012 when severe cold weather 
created an extreme demand for gas, leaving some nations, such as Italy, 
Bulgaria, and Slovakia, without adequate supplies.
    Price disruptions also hit European states in an uneven manner. 
States with multiple supply options, mostly in Western Europe, are able 
to contract gas for much lower prices than states located in Europe's 
periphery, such as in the continent's south and east, which rely mostly 
on supplies from Russia. Thus, natural gas energy security policies 
should target Europe's most vulnerable markets.
    Next, the United States and Europe should make sure that Kiev gets 
its natural gas sector in order. In order to improve the security of 
energy supply, consumers should honor their contractual agreements with 
their Russian supplier. Ukraine's unpaid gas bills to Russian-led 
Gazprom, therefore, are a legitimate Russian concern. Ukraine is the 
major transit point for Russian gas into Europe. In the last decade, 
Ukrainian political elites across the political spectrum engaged in 
reckless siphoning of gas, disregarded payments, and provided massive 
subsidies that encouraged runaway gas consumption. In addition, Ukraine 
houses Gazprom's most important gas storage facilities. By acting as a 
reliable transit and storage partner, Kiev can create additional supply 
options for itself, from both neighbors in Europe and even Russia. 
However, companies will not utilize these immense storage facilities if 
they do not trust Ukraine to release these supplies or pay its bills.
    Additional natural gas suppliers can also improve the security of 
supply in Europe. The most promising new source of gas into Europe is 
the Southern Gas Corridor. Beginning in 2019, this project will bring 
natural gas from Azerbaijan to southern Europe. This project is the 
first in decades to bring new volumes of natural gas into Europe (as 
opposed to only transiting existing supplies). This project also 
reaches specific gas markets of southern Europe that have previously 
relied primarily on a single source, leading to supply vulnerability 
and high import prices.
    The Southern Corridor is a massive project, involving 7 countries, 
6 regulatory systems, 12 investing companies, and costing $45 billion. 
It will bring significant investment and create tens of thousands of 
jobs in southern Europe. The Southern Gas Corridor is an energy 
superhighway that can facilitate transport of increased volumes of gas 
from different sources, such as additional fields in Azerbaijan, 
Central Asia, Iraq, and potential production in the eastern 
Mediterranean. Spurs can be built from the Southern Corridor to reach 
additional markets in Europe, such as the Balkans. The project is being 
built with double the capacity that is needed for its current supply 
contracts and can be scaled up to a capacity of 60 BCM (2.2 tcf) 
annually in order to serve as a conduit for additional supplies into 
Europe. The Southern Gas Corridor will also serve as a catalyst for new 
interconnectors in Southern Europe and thus should help improve the 
supply situation in this region.

    The State Department's Bureau of Energy Resources (and specifically 
Ambassador Carlos Pascual and Deputy Assistant Secretary Amos 
Hochstein) and Directorate-General for Energy of the European 
Commission, led by Commissioner Gunther Oettinger, have played a vital 
role in cultivating this project and arriving at the final investment 
decision in December 2013. This project, however, needs continued 
support to ensure that Russia does not succeed in undermining it along 
the route. Final Investment Decision is only one stage in the process 
of establishing the Southern Gas Corridor.
    Azerbaijan could have sold its natural gas at a higher profit to 
neighboring Iran and Russia, but embarked on the ambitious Southern Gas 
Corridor project in order to link itself with Europe and lower its 
dependence on these neighboring states. This strategic choice entails 
closer cooperation with Europe, Turkey, and the United States, but also 
elicits potentially negative responses from Russia and Iran, and thus 
needs U.S. and European political attention. Moscow may try to disrupt 
this project by supporting bogus environmental movements or using 
surrogate companies to buy infrastructure along the route. Russia may 
also attempt to reignite the Nagorno-Karabagh conflict between 
Azerbaijan and Armenia or destabilize Georgia in order to thwart the 
Southern Corridor. In May 2014, the U.S. representative to the OSCE 
Minsk Group, Ambassador James Warlick, made an important statement 
reaffirming the long-standing U.S. policy on the Nagorno-Karabakh 
conflict, and the State Department is attempting to invigorate the 
peace process between Azerbaijan and Armenia.\2\ Continued U.S. 
interest in resolving the conflict is important for removing a 
potential means for Russia to destabilize the region.
    Another potential new source of natural gas into Europe is from 
Israel and Cyprus. Eastern Mediterranean gas will only be able to serve 
as a source for mainland Europe if additional discoveries are found. At 
this point, there is most likely only 200 to 300 BCM (7-10.6 tcf) 
available for export, and these volumes would not justify a major new 
export project. Exploration is continuing and additional volumes may be 
discovered. Existing natural gas volumes, however, are still very 
useful in improving the energy security and prosperity for Cyprus, 
Israel, and their neighbors.
    The discovery of significant reserves of offshore natural gas in 
Israel in 2009 and 2010 and rather smaller volumes of offshore natural 
gas in Cyprus in 2011 has sparked interest in their potential to 
contribute to regional cooperation and peace. These newfound resources, 
it is often said, can serve as peace catalysts and promote 
reconciliation between Israel and its neighbors, facilitate the 
reunification of Cyprus, and foster cooperation between Cyprus and 
Turkey. However, the probability that these new natural gas resources 
may serve as a lever for conflict resolution or produce far-reaching 
geopolitical effects is rather low. There is no evidence from elsewhere 
in the world that trading in energy is an incentive for peace. Case 
studies show no instances in which the incentive of energy trade led 
countries to make concessions on issues critical to peace agreements 
such as borders and the status of refugees.\3\ Energy trade reflects 
existing peaceful relations; it does not create them. In many cases, 
the causal arrow points the other way; disputes over energy resources 
or commercial conditions of trade can exacerbate existing political 
conflicts.
    While the new natural gas volumes may not serve as ``peace 
pipelines,'' cooperation in the development of these resources can 
reinforce any political breakthroughs in the Middle East peace process 
or in efforts to find a comprehensive solution to the problem of the 
division of Cyprus. Moreover, the development of these resources has 
the potential to benefit the greater region by lowering the costs of 
desalination and increasing the supply of fresh water, and therefore 
these new natural gas reserves can contribute to the elimination of 
water conflicts in the region. The increased water supply enabled by 
the new natural gas volumes has already had a positive impact in the 
region. The new natural gas resources can also help the region by 
providing reliable and affordable electricity to the Palestinian 
territories, Jordan, and potentially to Lebanon and Syria. This is 
especially significant to a region where most countries' electricity 
supply is limited to certain hours of the day and where electricity 
production is unstable and cost-prohibitive.
    In recent months, there has been some speculation that if a deal on 
Iran's nuclear program was reached with the West, Tehran could serve as 
a new supplier of natural gas to Europe and thus reduce dependency on 
Russia. This idea is quite far-fetched. While Iran indeed holds the 
second-largest natural gas volumes in the world, today Iran is, rather 
surprisingly, a net importer of natural gas. Due to low production 
volumes, huge domestic consumption, and low energy efficiency--all of 
which are exacerbated by gas price subsidies--Tehran imports today more 
gas than it exports (to Turkey and Armenia). In addition, if Iran tried 
to launch a gas export project to Europe, Russia would surely block it. 
In the past, Moscow has taken steps to block the entrance of Iran into 
European gas markets: in 2006, Gazprom bought a pipeline from Iran to 
Armenia and limited its size to ensure that it could be not be used to 
carry Iranian gas into Europe. While Russia and Iran may seem like 
allies, their cooperation is tacit. Over many issues there is strategic 
competition between Iran and Russia, and especially in the sphere of 
potential natural gas export.
    As part of improving the security of supply, Europe must foil 
Moscow's effort to prevent new supplies from reaching Europe. Moscow 
employs sophisticated policies to continue its role as the dominant 
energy supplier in Europe and blocks indigenous production efforts in 
Europe and rival supply projects. For instance, Moscow sponsors and 
funds bogus environmental movements to oppose shale gas production in 
Europe and new gas pipeline projects. Astute, professional government 
analysis should identify and disrupt the sophisticated organizations 
and companies that Moscow utilizes to protect its dominance in Europe. 
Policies should be enacted that would remove the nonprofit status of 
these groups that collaborate with Russia and legislation similar to 
that that combats terror financing should bar European organizations 
from receiving funds from Moscow that are intended to promote Russia's 
foreign and security policy aims.
    In addition, the EU should investigate Moscow's use of surrogate 
European and Russian companies and enact legislation that bars this 
behavior. Moscow attempts to gain influence over rival projects 
directly, via Russian companies, or indirectly, through closely allied 
companies in Europe, to hold on to its influence over the supply of gas 
to Europe. Gazprom and a number of European companies also use informal 
alliances to circumvent EU legislation meant to unbundle energy 
production, transmission, and distribution.
    Another mechanism that Moscow can exploit to influence gas trade is 
manipulation of gas hub trade in Europe. The EU has encouraged the gas 
trade to transfer from long-term contracts with set prices or prices 
pegged to oil or other commodities to gas trade hubs with spot prices. 
Many new gas supply contracts signed in recent years have hub-based 
prices for part or all of their supplies. In Europe's case, the 
adoption of hub pricing may actually allow outside players to increase 
their hold on Europe. Gazprom, the largest source of gas traded 
currently on the continent's hubs, could manipulate hub prices by 
flooding or withholding gas from particular hubs to its own advantage. 
Policy mechanisms must be devised to prevent Russia or other actors 
from price manipulation at Europe's gas trade hubs.
    The new EU energy security strategy calls for coordination among 
its members and solidarity after recognizing that the energy supply 
situation in eastern and southern Europe differs fundamentally from 
that of Western Europe. Eastern European states must embrace policies 
designed to boost their own long-term security and independence, and 
Washington and Brussels should clarify to NATO and EU members that 
belonging to these organizations entails obligations related to their 
energy infrastructure and security. Bulgaria's reluctance to implement 
policies intended to improve its security of supply is particularly 
worrying, as it appears to reflect Russia's strong influence and 
frequent intervention in domestic political developments there.
    Despite the EU's strong public support for policies to avert 
climate change, Europe's carbon emissions have risen in recent years. 
This is due primarily to the rise in coal consumption in Europe. It 
seems that Europe's failure to reduce its emissions emanates from the 
fact that it has linked its climate change policy to its renewable 
energy policies. Mandatory use of renewables has inadvertently 
encouraged utilities to use coal as a way to lower electricity 
production costs, thus contributing to the unintended consequence of 
rising emissions. In order to address this challenge, the EU needs to 
separate its climate change policy and renewable energy policy. Wind 
and solar power in their current technological states, regardless of 
how many subsidies are thrown at them, cannot deliver sufficient energy 
to current consumption demands. Europe needs climate change policies 
that address current consumption levels, with funds also invested in 
Europe's laboratories to discover the answers for the renewable future.
    Ensuring Europe's natural gas security of supply entails a paradigm 
shift in energy policy. Up until this year, Europe's approach to the 
issue has focused on strengthening market mechanisms 
(``liberalization'') and reducing both EU and national government 
involvement in Europe's gas trade. Over the years, as the challenges 
have grown, Brussels has increasingly pulled European Union 
institutions and member states out of the business of ensuring energy 
security and delegated the job to the invisible hand of the market. But 
the marketplace alone will not be enough to counter a relentless 
Russia. National and EU institutions must take a more active, strategic 
role.

----------------
End Notes

    \1\ For more on natural gas supply disruptions and foreign policy, 
see Brenda Shaffer. ``Natural gas supply stability and foreign 
policy.'' Energy Policy 56 (2013): 114-125.
    \2\ http://www.state.gov/p/eur/rls/rm/2014/may/225707.htm.
    \3\ For more on ``peace pipelines,'' see Brenda Shaffer, ``Natural 
gas supply stability and foreign policy,'' Energy Policy 56 (2013), p. 
6; Brenda Shaffer, Energy Politics (Philadelphia: University of 
Pennsylvania Press, 2009), pp. 70-74.

    Senator Murphy. Thank you.
    Mr. Chow.

STATEMENT OF EDWARD C. CHOW, SENIOR FELLOW, ENERGY AND NATIONAL 
   SECURITY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL 
                    STUDIES, WASHINGTON, DC

    Mr. Chow. Chairman Murphy, Ranking Member Johnson, I am 
honored to return to testify on European energy security and 
the impact of the ongoing crisis in Ukraine. When it comes to 
energy security for Europe, we focus primarily on natural gas 
supply. It is interesting to ponder why, when Europe is more 
dependent on oil imports than it is on gas imports. There has 
been major global oil supply interruptions in the past year, 
but not in gas. Yet the level of anxiety is much higher with 
gas than with oil. Why?
    The root causes are in part related to incomplete market 
integration in Europe when it comes to gas and electricity. Its 
gas markets have been dominated until recently by long-term 
contracts at fixed volumes, with prices indexed to oil. 
Suppliers have restricted competition and the free flow of gas 
with destination clauses and control over pipelines.
    These business practices were supported not only by major 
foreign suppliers, such as Gazprom, but also by incumbent 
European gas companies that control distribution networks in 
their home countries and pass on the higher cost of gas to 
consumers. Consequently, European markets in gas and 
electricity distribution infrastructure are not well connected 
for a supposed common market.
    So what can the United States do to help our European 
allies and trading partners? The first point to be made is that 
we have already done a lot indirectly through the shale gas 
boom. Since the United States no longer imports liquefied 
natural gas in increasing volumes as expected, these supplies 
became available for Western Europe. Despite the initial denial 
of the lasting nature of the shale gas phenomenon, Gazprom was 
forced to meet the market by adjusting downward all its major 
supply contracts under more flexible pricing terms. As a 
result, European imports of Russian gas increased by 13 percent 
last year, half of which transits through Ukraine.
    Western European LNG import facilities are currently 
operating at very low utilization rates. Even if U.S. LNG 
exports were available today, they would not be imported by 
Europe, but by East Asia, where spot gas prices are about 
double European prices.
    When the United States begins to export major volumes of 
LNG in a few years, its benefits to Europe lies not in the 
quantities it might receive, but in future price formulation in 
global gas markets. International gas prices may no longer rise 
and fall with oil prices, with prices in different regions 
converging as a result of U.S. exports.
    The competitive advantage the shale gas revolution provided 
the U.S. economy, with lower gas and electricity prices coupled 
with reduced greenhouse gas emissions, has also caused 
Europeans to reexamine their energy policies, with renewed 
efforts for further market liberalization, enforcement of 
competition rules, and rethink on the use of domestic energy 
resources.
    In the mean time, the crisis in the Ukraine caused by 
Russian action presents a clear and present danger for European 
energy security. The risks are borne disproportionately by 
Central and Eastern European countries since they rely on 
Russia for almost all their gas imports, much of which transits 
through Ukraine. Ukraine's weak and corrupt energy sector 
creates severe vulnerabilities for itself and its neighbors.
    The previous Ukrainian Government left the current 
government with mounting gas debt to Russia. This debt and the 
failure to agree to new gas prices led to the cutoff of Russian 
supplies to Ukraine on June 16. Ukraine depends on Russia 
normally for 60 percent of its gas demand and is the major 
transit corridor for Russian gas exports through Europe. In 
neither case are there ready substitutes.
    If the already-delayed injection of gas into strategically 
located western Ukrainian storage facilities does not begin 
soon, Ukraine will run out of gas before the start of winter. 
If nothing changes, the Ukrainian Government would be left this 
winter with a choice of either letting its own population 
freeze or taking gas from Russia destined for European markets 
for its own use.
    If Russia's intent is to further destabilize Ukraine and to 
prove to Europe that Ukraine is an unreliable transit partner, 
then it is in Russia's interest to prolong negotiations. To 
date, European mediation has not led to any real results. The 
European gas market is surprisingly complacent about the 
situation. Spot gas prices have dropped significantly. Although 
gas storage capacity has risen, actual storage is not as high 
as it could be. The risk of miscalculation is high.
    Meanwhile, Russia is pushing its South Stream gas pipeline, 
which would bypass Ukraine altogether, as an alternative supply 
route to Europe.
    As someone more comfortable with commercial negotiations, I 
instinctively question economic negotiations brokered by 
political leaders. I will know the EU-mediated Russian-
Ukrainian gas negotiations have become serious when negotiators 
stop talking to the press.
    Long-term sustainable economic transactions cannot be based 
mainly on political conditions, which tend to change, as we 
discovered with the Russian-Ukrainian gas deals of January 
2006, January 2009, April 2010, and last November. Raising 
matters to the highest political level, as Europe has done, 
only invites Russia to make political demands, such as 
accommodation of its occupation of Crimea, restrictions on 
Kiev's actions in southeastern Ukraine, and stopping further 
Western economic sanctions resulting from Russian aggression 
against Ukraine.
    The only real solution to the crisis in Ukraine is to 
strengthen Ukraine. President Poroshenko, Prime Minister 
Yatsenyuk, Energy Minister Prodan all observed firsthand and up 
close the blunders made by previous Ukrainian Governments on 
energy policy. Business as usual is no longer an option. 
Concrete policy action is required and we have seen precious 
little so far.
    What needs to be done for energy sector reform in Ukraine 
is well known, especially in natural gas. What have been 
missing are the political will and the professional and 
financial capacity to execute reforms in an orderly and 
systematic way.
    Reform depends foremost on Ukrainian leaders. True 
reformers deserve and require concerted Western assistance if 
they are to be successful. As long as Ukraine is weak, it is an 
open invitation for Russian opportunism and aggression and a 
constant source of instability in the heart of Europe.
    Neither Ukraine nor the West will have another chance 
better than the opportunity created by the current crisis for 
energy reform. The situation cries out for American leadership, 
working closely with Europe and the donor community, by 
injecting needed resources with strict conditionality on the 
provision of assistance. Our policy must be informed by sound 
analysis, not wishful thinking, followed by hard work.
    Thank you.
    [The prepared statement of Mr. Chow follows:]

                   Prepared Statement Edward C. Chow

    Chairman Murphy, Ranking Members Johnson, members of the committee, 
it is an honor for me to return to the subcommittee to testify on 
European energy security and the impact of the ongoing crisis in 
Ukraine.
    When it comes to the question of energy security for Europe, we 
are, of course, talking primarily about natural gas supply. It is 
interesting to ponder why, when Europe is more dependent on oil imports 
than it is on gas imports. In the past year, there were major oil 
supply interruptions from unrest in Libya, sanctions against Iran, and 
minor disruptions from Syria and South Sudan. On the other hand, there 
has been no gas supply cutoff to Europe even with the Ukraine crisis 
caused by Russia's actions. Russia's share of the European oil market 
is about the same as it is with gas. Yet the level of anxiety in Europe 
is much higher with gas than with oil. Why?
    The answers go beyond the different nature of oil and gas markets 
and the ease that crude oil and petroleum products can be traded and 
transported as compared to natural gas. The root causes are related to 
incomplete market integration in Europe when it comes to gas and 
electricity, which fails to take full advantage of economies of scale 
provided by a 500-million consumer market.
    Europe has not adapted to changes in the global gas market or 
adapted to new technologies. Its gas markets have been dominated until 
recently by long-term contracts at fixed volumes with prices indexed to 
oil. Suppliers have restricted competition and the free flow of gas 
with destination clauses and control of pipelines. Consequently, Europe 
does not enjoy gas-on-gas competition the way we do in the United 
States after the Federal Government deregulated natural gas in 1978, 
which incidentally was a major factor enabling our shale gas 
revolution.
    Many of these anticompetitive business practices were supported not 
only by major foreign suppliers such as Gazprom of Russia, but also by 
incumbent European gas companies that control distribution 
infrastructure in their home countries and were all too happy to pass 
on the higher cost and economic pain of an inflexible system to gas 
consumers. Consequently, European gas and electricity distribution 
infrastructure and markets are not as well connected as one might 
suppose in a common market.
    So what can the United States do to help our European allies and 
trading partners? Here I have to debunk some commonly held notions in 
Washington.
    The first point that has to be made is we have already done a lot 
indirectly through the shale gas boom. Since the United States no 
longer imports liquefied natural gas (LNG) in increasing volumes as we 
were expected to do, these supplies from liquefaction projects previous 
targeted for the U.S. market became available for Western Europe. 
Despite initial denial of the lasting nature of the shale gas 
phenomenon, Gazprom was forced to meet the market by adjusting downward 
all its major supply contracts under more flexible pricing. As a 
result, European imports of Russian gas increased by 13 percent last 
year, half of which transits through Ukraine. Western European LNG 
import facilities are currently operating at very low utilization rates 
(around 25 percent). Even if U.S. LNG exports were available today, 
they would not be imported by Western Europe, but by East Asia where 
spot gas prices are about double European prices.
    When the United States begins to export major volumes of LNG in a 
few years, its benefit to Europe lies not in the quantities it might 
receive, but in future price formulation in global gas markets. We may 
finally see gas-on-gas competition outside of North America, with gas 
prices no longer rising and falling with oil prices, when global market 
prices converge after adjusting for LNG transportation cost 
differential.
    The tremendous competitive advantage the shale gas revolution has 
provided the U.S. economy, with lower gas and electricity prices 
coupled with reduced greenhouse gas emissions, has also caused European 
capitals and the European Union (EU) to reexamine their energy 
policies, with renewed efforts for further market liberalization, 
enforcement of competition rules, and rethink on the use of domestic 
energy sources. (It is not without irony that some advocate strongly 
for exporting U.S. LNG to our European allies when some of these 
countries, such as France and Germany, effectively ban hydraulic 
fracturing.) However, it will take years before significant results can 
be achieved.
    In the meantime, the crisis in Ukraine, caused by Russia, presents 
a clear and present danger for European energy security. The risks are 
borne disproportionately by Central and Eastern European countries, as 
I testified before this subcommittee in April, since they rely on 
Russia for almost all of their gas imports, much of which transits 
through Ukraine. I also testified before this subcommittee 2 years ago 
on the vulnerability Ukraine's weak and corrupt energy sector creates 
for itself and its neighbors. I wish I could be more optimistic today 
than I was in those two other occasions.
    The previous Ukrainian Government left the current government with 
mounting gas debt to Russia, which predates President Yanukovych's 
public change of heart on the signing of the Association Agreement with 
Europe last November. The debt issue and the failure to agree to new 
gas prices led to the cutoff of Russian gas supply to Ukraine on June 
16. Ukraine depends on Russia normally for 60 percent of its gas supply 
and is the major transit corridor for Russian gas exports to Europe. In 
neither case are there ready substitutes.
    If the already delayed injection of gas into strategically located 
western Ukrainian storage facilities does not begin soon, Ukraine will 
run out of gas before the start of winter. If nothing changes, the 
Ukrainian Government would be left with a choice of either letting its 
own population freeze or taking gas from Russia destined for European 
markets for its own use.
    If one assumes that Russia's intent, unless met with stiff 
resistance, is to further destabilize Ukraine and to prove to Europe 
that Ukraine is an unreliable transit partner, then it is in Russia's 
interest to prolong current negotiations. To date, European mediation 
has led to no results other than agreement on the date and place for 
the next round of negotiations. The European gas market is surprisingly 
complacent about the situation. Spot gas prices have dropped 
significantly and, although gas storage capacity has risen, actual 
storage is not as high as it could be. The risk of miscalculation is 
high.
    Meanwhile Russia is pushing its South Stream gas pipeline project, 
which would bypass Ukraine altogether, as an alternative supply route 
to Europe. Only yesterday Russian Foreign Minister Lavrov was in Sofia 
urging Bulgaria to start construction of its segment of South Stream 
against EU objection. (Incidentally Bulgaria also bans shale gas 
exploration.) Long ago Russia has signed up the west Balkan countries 
along the route to support South Stream; more recently Austria came 
onboard formally. Gazprom's partners in South Stream include major 
Italian, German and French energy companies. Partners such as the 
Western-supported Southern Gas Corridor projects of Trans-Anatolian 
pipeline (TANAP) and Trans-Adriatic pipeline (TAP) have not progressed 
as fast as was hoped after contract signings at the end of last year. 
For example, the landing spot in Italy has not yet been agreed.
    As someone more comfortable with commercial negotiations, I 
instinctively question economic negotiations brokered by political 
leaders eager to head to the press conference after a couple of hours 
of unproductive discussions. I will know the negotiation has become 
serious when negotiators stop talking to the press. Some of the 
proposals on gas from European politicians, such as an energy union 
with a single gas purchaser (Polish Prime Minister Tusk) and a uniform 
gas price for Europe (EU Energy Commissioner Oettinger) make no 
economic or commercial sense and are, I hope, merely political 
posturing and not serious policy proposals.
    Long-term sustainable economic transactions cannot be based mainly 
on political conditions, which tend to change as we discovered with the 
Russia-Ukraine gas deals of January 2006, January 2009, April 2010, and 
last November. Raising matters to the highest political level as Europe 
has done only invites Russia to make political demands, such as 
accommodation of its occupation of Crimea, restrictions on Kiev's 
actions in southeastern Ukraine, and a stop to further Western economic 
sanctions in response to Russian aggression against Ukraine. These 
negotiations need to be handled in a professional manner yet to be 
displayed by any side.
    The only real solution to the crisis in Ukraine is to strengthen 
Ukraine itself. It has been more than 4 months since the acting 
Ukrainian Government came into power after the collapse of the previous 
government. President Poroshenko was inaugurated almost exactly a month 
ago. He, Prime Minister Yatsenyuk, Energy Minister Prodan all observed 
firsthand and up close the blunders made by previous Ukrainian 
governments on energy policy by perpetuating and expanding the corrupt 
system. Business-as-usual is no longer an option and cannot be 
accepted, especially by the Ukrainian people after the sacrifices of 
EuroMaidan which they continue to make. Policy rhetoric alone is 
insufficient. Concrete action is required and we have seen precious 
little so far. Some initial steps, such as the emergency energy 
legislation proposed by the government and passed by the Ukrainian 
Parliament (Rada) in its first reading last Friday, appear to be 
against market principles and require more professional scrutiny.
    What needs to be done for energy sector reform in Ukraine is well 
known, especially in natural gas. Many studies have been commissioned 
in the past decade by Ukrainian governments and international bodies, 
and have gathered dust. What have been missing are the political will 
and the professional and financial capacity to execute reforms in an 
orderly and systematic way. This is particularly important in pricing 
reform not only at the consumer level as demanded by the International 
Monetary Fund (IMF), but also at the producer level in order to 
encourage investments in domestic production. Also crucial are a truly 
independent energy regulatory commission and transparent, modern 
licensing procedures to eliminate graft.
    Reform depends foremost on Ukrainian leaders. True reformers 
deserve and require concerted Western assistance if they are to 
succeed. More than 20 years of neglect has left Ukraine with meager 
financial and human resources to fundamentally reform its energy 
sector, which is so critical to its survival and to stability in the 
region. As long as Ukraine is weak, it is an open invitation for 
Russian opportunism and aggression, and a constant source of 
instability in the heart of Europe.
    The West took its eye off the ball after the Orange Revolution in 
2004 and never gave President Yushchenko and his various cabinets the 
tough love they needed. After 2010, we appeared to avert our eyes 
capriciously with President Yanukovych and his barely disguised 
industrial-strength corruption. Neither Ukraine nor the West will have 
another chance better than the opportunity created by the current 
crisis. The situation cries out for American leadership, working 
closely with Europe and the donor-community, by injecting needed 
resources with strict conditionality on the provision of assistance. 
Similar to Ukraine, our own rhetoric must also be informed by sound 
analysis and followed by concrete actions, not wishful thinking as we 
have done too many times with Ukraine and its energy sector in the 
past.

    Senator Murphy. Thank you very much. Thank you, all of you, 
for your testimony.
    Mr. Chow, I wanted just to ask you a question about the 
effect of a prolonged crisis in Ukraine. You posit that it 
would accrue to Russia's benefit because it would undermine 
faith in Ukraine on behalf of the EU. I think there are sort of 
three, in my mind, three possible outcomes, and I am sure you 
can add to them.
    One is the one that you suggest, that it will undermine 
European faith in Ukraine and compromise, enthusiasm for 
marrying together Ukraine and the EU or ultimately with NATO. 
Second, it could increase enthusiasm for alternate routes of 
gas to Europe. South Stream is the primary example. But it 
could also be a tremendous wake-up call, the straw that breaks 
the camel's back, in terms of prompting Europe to do the things 
truly necessary to become much more energy-independent of 
Russia.
    Why is the third--why is my third alternative not just as 
plausible as the first two?
    Mr. Chow. Thank you, Senator, for that important question. 
I hope you are right, but I think if you were sitting in 
Russia's shoes: Europe got a wake-up call in January 2006 when 
gas was cut off to Ukraine. It got another wake-up call in 
January 2009, when, instead of a three-day gas cutoff, Europe 
suffered a 3-week gas cutoff. It has done precious little so 
far except for the steps that I have already mentioned. Its 
response to the invasion of Crimea, as well as Russia's 
adventurism, may I say, in southeastern Ukraine has been 
relatively weak and disunited.
    So I think from--I guess it is a parlor game now to try to 
get into Vladimir Putin's head. But from his standpoint, the 
way he sees it--and he may be miscalculating--the time is on 
his side, not on Europe or Ukraine's side.
    Senator Murphy. Let me ask that question of the other three 
panelists. A simple question--it is not simple: Does a 
prolonged crisis harm Ukraine more, or Russia more, with 
respect to future dynamics over EU membership or future 
continued reliance on European energy? Mr. Lucas, you have your 
hand up, so I will go to you and then Ms. Shaffer and then Mr. 
Simonyi.
    Mr. Lucas. I think Europe frequently gets wake-up calls and 
it then goes back to sleep again. I think that the question 
here is the timeframe. I slightly disagree with Mr. Chow, that 
I think that the previous crises have stimulated quite a lot of 
activity in Europe. We do now have a pretty much complete 
north-south gas grid. We have quite better storage. We have the 
Third Energy Package, which has reduced Russia's monopoly 
power.
    This means that if they cut the gas off right now we would 
have about 3 months before it would start to bite, and that is 
quite nice. But in terms of the sort of stuff you were talking 
about to make a real difference, we are talking years. If we 
start right now, in 5 years time we would have a really 
resilient energy system. If not a fully independent one, but at 
least a Europe that had lots of LNG capacity, lots of storage, 
new interconnectors to Norway, all this sort of stuff. But the 
gap between 3 months and 5 years is the vulnerability.
    What Russia knows is that they can threaten stuff, which 
scares politicians. Just like here, we have a fragile recovery 
and the politicians are desperate not to have stuff that is 
going to harm growth and jobs and so on. An energy 
interruption, or worries about energy and what that does to 
business confidence, is a powerful weapon for the Russians. 
They just have to threaten this stuff and we already start 
thinking of ways of trying to make this conflict go away, 
rather than try to win it.
    Senator Murphy. Ms. Shaffer.
    Dr. Shaffer. I think with the last move of Russia they set 
up a really perfect strategy. They actually set up Ukraine 
against Europe, because basically the gas is still flowing to 
Europe and the only way for Ukraine to get the gas is actually 
to disrupt the supplies to Europe and not put gas into storage 
to meet future commitments. So actually in the long run, as 
winter approaches it is pinning Kiev against Europe.
    I would say that if you look at previous European response 
to these crises, it was actually to build North Stream, meaning 
building a pipeline directly from Russia to Germany that 
circumvents transit states. Again, as you said, you might see 
the response being South Stream, or the more responsible 
response would be the Southern Corridor.
    While the Third Energy Package is great in terms of 
principles and in a very perfect world where lawyers run all 
the gas trade, it is very nice. But I think in the reality of 
Russian behavior, as we pointed out, whether it is manipulation 
of gas hubs, of price--Gazprom is the biggest trader in 
Europe's gas hubs, so of course they can flood the market, deny 
the market, and really affect these prices.
    I think what we need in Europe is a paradigm change. They 
based the Third Energy Package on the American model, which 
is--what you have, the market has done a great job here in 
increasing U.S. energy security. But the United States has been 
able to succeed due to the unique structure of its market. The 
United States has thousands of gas buyers, hundreds of gas 
producers. The largest gas producer in the United States only 
has 3 percent of the market. Europe has three gas producers. 
Three of them, all three, are external to Europe and each has 
about a third of the market. It is a completely different game.
    What Europe needs is a paradigm shift. Gas is not a 
commodity. Gas is a utility. When we grew up we called gas a 
utility, not something that you just trade. When you think of 
it as a utility, it is a public good, which needs much more 
public involvement.
    Senator Murphy. Ambassador.
    Mr. Simonyi. I think what really is at stake is a 
competition of two systems, our liberal societies and Putin's 
ideas; he is going to use the time before we get our acts 
together to export his illiberal ways of running a society.
    The signs that you encountered in Bulgaria are exactly 
this. He is targeting the weakest links within Europe and 
within the NATO alliance. Also one of the really big problems 
is not directly related to energy, but that the perception of 
the Russian threat is very, very different in Western Europe, 
northern Europe, southern Europe, and Eastern Europe. In 
Eastern Europe I am really worried, that Russia with multiple 
tools in its toolbox, expecially Putin using energy, and other 
kinds of tools, can easily influence particularly the Eastern 
and Central European countries. Putin feels this was once part 
of his sphere of influence and it is just unfair that they are 
now on the other side.
    Senator Murphy. I will save my other questions for the 
second round.
    Senator Johnson.
    Senator Johnson. Mr. Ambassador, you asked for a softball, 
so I will throw it to you. What is Putin thinking?
    Mr. Simonyi. I think what Putin is thinking right now is, 
first of all: My goal was to destabilize Ukraine enough so that 
it is definite that the Ukraine will not be part of the Western 
institutions, the European Union or NATO. This was his first 
goal. I think he has achieved that, and he is going to resort 
to all kinds of means to stoke trouble when the moment comes 
and it looks like things are too smooth.
    I think for now he is totally satisfied with running or 
``owning,'' the Crimea, and I have no doubt that, at any moment 
he can turn the switch on and we will be back to a lot of 
trouble. The fact that we do not see him visibly present in the 
eastern Ukrainian conflict at this moment does not mean that he 
is not fully in control of the insurgencies.
    Senator Johnson. Mr. Lucas.
    Mr. Lucas. I think Mr. Putin thinks that we are weak and he 
is winning.
    Senator Johnson. I agree.
    I was always in support of strong sanctions, hopefully 
targeted ones that were really painful to Putin, not to us. 
When we were talking of all these sanctions, that they were a 
double-edged sword, I really wanted to stop talking about them 
because I thought it was just a delaying action, they were not 
going to be implemented, and they had no effect.
    When we were in Poland--I do not want to identify the 
individual telling us this, but I think we have had this since 
confirmed--apparently 100 to 110 Russians control 35 percent of 
the wealth. Certainly being from the outside, hearing how 
effective the sanctions were against North Koreans, just the 
top leaders, denying them their access to their banking 
accounts and traveling to Macau and that type of thing, was the 
most effective sanction, why do we not target in a far more 
robust fashion those 100 to 110 individuals in Russia that 
really do rely on the West for their banking, for their wealth 
dispersion, that type of thing? Mr. Lucas, I will go to you.
    Mr. Lucas. Well, I could not agree with you more, Senator. 
I think that we are looking for kind of magic sanctions that do 
not hurt us and do hurt Putin. Unfortunately, there are no such 
things. Every country has got something to lose, because Russia 
has done a very good job of building up vulnerabilities and 
dependencies.
    But I do think these visa sanctions and asset freezes are a 
really powerful weapon. We have not begun to exploit them. We 
have laws against money-laundering in my country and in your 
country. Banks are supposed to know their customer before they 
start taking deposits. So how is it possible these people on 
their modest official salaries and their sons and daughters and 
wives and parents and all the rest of it are coming and putting 
tens and hundreds of millions of dollars through our payments 
system and through our financial system?
    How is it possible that Rosneft was allowed to list on the 
London Stock Exchange, when Rosneft feasted on the corpse of 
Yukos? You remember, Russia's biggest oil company was 
dismembered because of a political fight with the Kremlin. 
Rosneft buys its assets for nothing, $8 billion of Western 
shareholders' money goes down the tube, and then this company, 
which is effectively taking stolen property, is allowed to list 
on one of the oldest, most reputable stock exchanges. How is 
that possible?
    The old Russian dissidents had a great slogan, which was: 
``Powers that be, enforce your laws.'' ``Vlast soblyudaite 
zakoniy!'' I think we should just start enforcing our own laws, 
and we would be amazed at the scope.
    On visas, we do not have to just start with these people. 
The most terrifying thing in Russia is not the secret police; 
it is an angry Russian woman. If these people are going home at 
night and finding that their wives and grandmothers and 
daughters are all saying, we cannot study in the West any more, 
we cannot shop in the West any more, we cannot go on vacation 
in the West any more, because of these visa sanctions applying 
to us, that would really hurt.
    Senator Johnson. Does it not also threaten the oligarchs 
when they cannot spread their money around the world? I would 
not want to be an oligarch in Russia, fall out of favor with 
Putin, and have all my wealth in Russia.
    Mr. Lucas. The first thing they do is they get foreign 
passports. They get Finnish citizenship and Swiss citizenship. 
They move their assets offshore. They diversify, because they 
realize what a mess Russia is in. We have a wonderful 
opportunity there to hurt them.
    Senator Johnson. Mr. Ambassador, do you want to chime in?
    Mr. Simonyi. Yes. We know there is much more grumbling in 
the inner circles of Putin about the sanctions than meets the 
eye.
    Senator Johnson. So let me ask: Why do we not do it?
    Mr. Simonyi. That I do not know. I think Putin thinks that 
he can count on the divide between America and Europe----
    Senator Johnson. Again, we are showing more weakness, 
playing right into his hands.
    Mr. Simonyi. I think so.
    Senator Johnson. Mr. Lucas, what is the EU thinking by not 
dropping those charges on Gazprom, not revealing to the public 
what they found in their investigations? What is the EU 
thinking? Because what would be a more perfect, totally 
directed sanctions to a certain extent, when Putin is invading 
Crimea and threatening peace in the Ukraine? What could be more 
effective than that? What are they thinking?
    Mr. Lucas. I think in a way it was too perfect, that it was 
seen as an enormous escalation of a response, when the 
conventional wisdom, which I believe is wrong in both this 
country and in Europe, was we need to find an exit ramp for 
Putin, we do not want to escalate this, we are not going to 
send massive naval task forces to the Black Sea, we are trying 
to apply very judicious, moderate sanctions, raise the cost for 
Putin, and give him a chance to back down, and launching this 
equivalent of a kind of cruise missile straight at the Kremlin 
was not seen as part of that.
    I think that was wrong. I think that postponing it makes 
him think the Russians will always hope that there will be a 
political solution to this. They have said again and again to 
the European Union: Do not go down this quasi-prosecutorial, 
quasi-judicial route; let us have a political deal; we will 
agree to stop doing some stuff and maybe pay a little bit of 
fines here and there, but we do not want a big public fight.
    I fear that that argument has begun to bite, and I think it 
is a great pity. It would have been a wonderful thing to see 
this prosecution of Gazprom, and I am beginning to wonder if we 
are ever going to see it. Certainly it was hoped that it was 
going to be under this Commission, but it looks to me at the 
moment as though it is going to be passed to the next 
Commission. And we do not, of course, know what the political 
complexion and makeup of that Commission will be.
    Senator Johnson. Thank you all. I will complete mine in the 
next round.
    Senator Murphy. Mr. Lucas, you said twice that you think 
Russia is winning, so I want to pursue that rather simplistic 
rendering of geopolitics. I guess if the measurement is levels 
of testosterone and bravado, he is winning. If the measurement 
is the respective approval ratings of Putin versus Obama, he is 
winning. But when I look at other metrics, it is hard for me to 
understand how he is winning. He has less friends now than he 
had before. Former republics are climbing over themselves to 
sign association agreements with the European Union and are 
only stopped by illegal tactics and invasions.
    His economy is in recession, two straight quarters likely 
of negative growth, massive capital flight, U.S. banks that 
will not do any business with them. He is no longer a member of 
the G8. He is not an international pariah, but he certainly has 
less influence than he used to.
    We are having a debate here about how fast Europe is going 
to move away from Russian energy, but I do not think there is 
any debate as to whether the next 10 years will see more or 
less reliance. It is just at what pace.
    So how is he winning if he has less friends, his economy is 
in worse shape, he has been kicked out of international 
institutions, and his reason for existence, being an energy 
supplier to Europe, is in peril?
    Mr. Lucas. I think that is a bit like saying to--first of 
all, I completely agree with you. But it is a bit like saying 
to Tony Soprano: Doesn't it bother you that you don't have any 
friends? And he says: I have lots of money and the people who 
need to be scared of me are scared of me.
    So in his terms--and the question was what is going on 
inside his head--he thinks this is great. A few years ago, a 
couple of years ago, Putin was in trouble in Russia because 
basically the Putin modernization program has not worked, 
Russia has not diversified, the infrastructure is still 
rubbish, public services are still rubbish. And he was becoming 
a bit of a figure of ridicule and the opposition was doing 
quite well. That has all changed now. The opposition is 
nowhere, ratings are high, and he has kind of distracted 
Russian public opinion through these foreign adventures.
    Yes, you are absolutely right that countries like 
Kazakhstan are very nervous, Moldova, Georgia, and so on. Even 
Belarus is kind of wobbling. But he does not care about that. 
When he needs them to do something, he can make them do it. And 
he sees that he has got more influence now in Western Europe or 
in Europe than he had ever dreamed of. The Atlantic alliance is 
weak.
    The success of this divide and rule strategy has been 
pretty impressive. You only have to look at the way countries 
are signing up for South Stream, the enormous wave of anti-
Americanism we are seeing in Germany right now with the Snowden 
stuff. There is a whole range of things that must make him 
think the sun is shining.
    Senator Murphy. Ambassador.
    Mr. Simonyi. I wanted to add to this that he does not 
necessarily want to be seen winning; he wants to win, meaning 
that while we are debating Ukraine, while we are debating 
energy, at the same time he is doing a lot of other things in 
Europe. He is buying up banks, he is buying up companies. What 
he wants is a long-term influence within the European Union and 
within NATO. So in that sense, I think in a way he is winning. 
He is not winning in the sense that we consider winning, but he 
is winning in the sense, in his own world, he is going to gain 
a foothold that will be very difficult to counter if we are not 
very careful.
    Senator Murphy. I just think that is an enormously 
important distinction, because I do not really care if he 
thinks that he is winning according to his terms. We have to 
conduct our business according to our understanding of winning, 
losing, what benefits us, what is to the detriment of U.S. 
security interests.
    Let me turn the topic to another, more specific issue. That 
is this intersection of production and transmission. When we 
were in Romania there was some very positive discussion about 
the ability to move Romanian resources into Moldova, save for 
the fact that the Russians owned a controlling stake in the 
transmission lines inside Moldova. So all the work that was 
going to go into moving the product to the border of Moldova 
was potentially for naught, because once you got it into the 
country it was still up to Russia.
    The Third Energy Package speaks to this in trying to 
separate the two. But how important is this control of 
transmission to Russian energy hegemony and what are the 
prospects to dislodge their control of transmission? Is there 
anything that the United States can do about that? I am asking 
that to the panel. So, Ms. Shaffer, you seem most eager to 
answer.
    Dr. Shaffer. This is a crucial--Senator Murphy, thank you 
for this question because it is crucial. In a sense, the Third 
Energy Package has created opportunity for Russia to actually 
get its hands on transmission systems, because the producers or 
other shippers or distributors cannot own it. So these things 
have gone for sale. Also, with the financial crisis in a number 
of countries in the region, there has been privatization of 
transmission systems. So this has given them incredible 
leverage within Europe.
    So for instance, as the Southern Corridor made a decision 
to go through Southern Europe and go on the route of Greece, 
Albania, and Italy, suddenly we see a small Russian unknown 
company pop up and suddenly try to buy the transmission system, 
DESFA, in Greece. They are quite aware that this is a way that, 
if you cannot beat them with a South Stream at least try to buy 
a chunk from within.
    So something has to be done, because the Third Energy 
Package actually will enable this kind of behavior and not the 
opposite. We see, for instance, exactly as you pointed out in 
the case of Moldova, that Russia is constantly taking payment 
for gas in national infrastructure. In January, Armenia lost 
its last stake in its gas transmission infrastructure. It 
became Gazprom Armenia. In the end, this might even be more 
hurting of a state's independence than actually its gas 
supplies, because this becomes an actor in the local economy 
and gives it a lot of leverage as one of the major financial 
forces domestically in the country.
    Senator Murphy. Mr. Chow, your thoughts on this question?
    Mr. Chow. I would support what Dr. Shaffer said. The idea 
of piling up debt in order to have a debt-equity swap later is 
a long-standing Russian business model since the collapse of 
the Soviet Union. It happened inside Russia and it applies in 
Moldova's case as well. The reason Gazprom is controlling 
equity is for all the gas debt that Moldova owes Gazprom, 
including, by the way, gas that was actually utilized by 
Transnistria and not paid for. So this is quite a common 
practice by Russia.
    The EU leverage that on paper could be applied is the fact 
that these countries, including Moldova and Ukraine, by the 
way, are signatories to the European Energy Community Treaty 
and are supposed to comply over time with the acquis 
communautaire energy of the European Union. That has been 
observed mainly in the breach in the case of both Ukraine and 
Moldova up until now. But this is certainly something within 
the EU's power to police over time. It has chosen not to do so 
for reasons that my European colleagues may know more than I 
do.
    Senator Murphy. Senator Johnson.
    Senator Johnson. I want to go back to the issue of winning, 
because I think it is just a crucial point. If we do not 
understand what the objective of our adversaries is, we will 
misjudge. So I do not believe Putin is acting rationally from 
the standpoint of improving his economy. I agree with you, Mr. 
Chairman. This is not long-term in Russia's best interest, but 
it is in the best interest of Vladimir Putin. I think this is 
all about Vladimir Putin, about his ego, about his power, about 
his control.
    Mr. Lucas, in your testimony you were talking about when we 
expanded NATO, we did not even draw up contingency plans for 
the military defense of the new members because we assumed 
Russia was a friend. Now, we all hoped that. I wish at this 
point Russia was a friendly rival. But they are not a friendly 
rival. They are an adversary. I am hoping they do not become a 
full-fledged enemy.
    Mr. Lucas, I want to ask you again: What do you think is 
Vladimir Putin's goal personally? What is he in this for?
    Mr. Lucas. I think, first of all, lots of money, to be 
honest. Secondly, I think he wants to weaken the West to the 
point that he does not think we are a threat to him. So he 
wants to corrupt, corrode, and coerce Europe, and he is doing a 
pretty good job of it.
    I think he worries that successful countries on his borders 
might give his people ideas. We, I think quite wrongly, in the 
European Union thought that Russia would be happy if we could 
make Ukraine into a success story. We thought it would be nice 
for Russia to have a large, successful, prosperous, well-
governed, law-abiding neighbor with a free press and contested 
elections and so on, and this would be a great thing for 
Russia.
    I tried again and again to explain to European Union 
officials that if we try to make a success of Ukraine that is 
an existential threat to Putin and he will react very strongly. 
And they said: We do not believe in geopolitics. And I said: 
You may not believe in geopolitics, but geopolitics believes in 
you.
    Senator Johnson. But explain a little bit further why that 
is an existential threat to Putin. If Putin has got successful 
democracies that are Western-leaning, lacking corruption, or 
have reduced corruption, and his citizens are seeing that in 
Ukraine, is that the reason it is an existential threat?
    Mr. Lucas. Yes. For example, Ukraine would be the second-
largest Russian media space in the world, and if you have tens 
of millions of people consuming Russian media and fostering a 
lively culture of debate and inquiry, some of those debates and 
inquiries will start touching on Russia, and Russians will 
start watching that. He needs to be able to tell Russians that: 
My way is the only way and nothing else works.
    Senator Johnson. So successful bordering countries threaten 
his power, threaten his control. This is true. When I first 
made my trip to the region in 2011 we went up to the border in 
Georgia, where they had invaded. They were all talking about 
how Vladimir Putin at that point in time was doing everything 
he possibly could to undermine their success, undermine their 
democracies.
    Mr. Lucas. I think you have put your finger on a very 
important point, which is that these front-line states have 
been warning us in the West about this even before Putin.
    Senator Johnson. And we just refuse to acknowledge it 
because it does not make sense to us. Why would anybody do 
that? We all wanted integrated economies, we want to lift up 
everybody's lifestyle. That is not what Putin is trying to do.
    Mr. Lucas. Absolutely, we patronized them, we belittled 
them, we ignored them, we told them they had their hair on 
fire. And they have been proved right. I think the first thing 
we should do is that we should ask them for advice. We should 
say: What do you think we should be doing? You actually know 
this problem better than we do. What is your suggestion?
    Senator Johnson. What a concept, go to the real experts.
    Mr. Ambassador.
    Mr. Simonyi. I agree, we did warn our friends and allies 
about the impending dangers of Putin. This has been in the 
making for the last 12 or more years. So as far as I am 
concerned, I keep telling people, just because I am a 
Hungarian, I might still be right about Vladimir Putin.
    But I would like to echo what Edward said, that first of 
all he is not interested in the long, long, long, long-term 
success of Russia because what you are talking about is a very 
long, difficult, painful, bloody process, which at the end of 
the day will be the best for the Russian people. What he is 
interested in is the next 20 years. He wants to stay in power 
for the next 20 years, and we are the biggest threat to his 
continuous remaining in power, because transparency, 
accountability, and the rule of law means that he will end up 
where almost all authoritarian leaders or dictators end up, and 
that is something he wants to prevent.
    Senator Johnson. So understanding his goal--and I totally 
agree with that. This is all about one man, one man's power for 
the rest of his life. What is the best way to blunt that? What 
is the best way to confront that? What is the first thing we 
should do, the most effective thing, the thing that we can do 
and implement quickly?
    Mr. Simonyi. Let me just say that it is counterintuitive: 
The harder we react, the stronger our reaction. The more 
determined we are, the more likely he is to back off.
    Senator Johnson. By the way, when we were in Poland, and 
again I do not want to name the official, this individual said 
that the main reason Vladimir Putin did not go further into 
Eastern Ukraine is because he was genuinely surprised at the 
West's reaction. We had bipartisan senatorial delegations. The 
West actually covered what he was doing. Basically, this Polish 
official credited the West's reaction that surprised Putin for 
having him hold off. So that basically bolsters your point.
    Mr. Simonyi. Yes, but it could have been a little harder.
    Senator Johnson. Absolutely.
    Mr. Simonyi. And Senator, that would have given us a lot 
more time to fix the problem.
    Senator Johnson. I think our reaction has been totally 
weak, totally lacked resolve, totally inadequate.
    Go ahead, Mr. Chow.
    Mr. Chow. First of all, I want to agree with my fellow 
panelists that Mr. Putin clearly has different metrics for 
success than we hold. But I also want to say that he is not 
insensitive to the down sides of what his action has caused. I 
see the deal that he signed with the Chinese in Shanghai on May 
21, for example, as a reaction. It is not going to help him in 
the short run, but it is a reaction to the need to show that 
Russia cannot be isolated and his need for a political win in 
the foreign policy and trade sphere.
    So the fact that he may think that he is winning does not 
mean that we should give up. I think the steadfastness of 
Western policy is the most important thing. Here I would repeat 
again what I said in my oral testimony earlier, that 
strengthening Ukraine, helping Ukraine become a democratic and 
prosperous free market country, is the best thing that we could 
be doing in the short to medium term.
    Senator Johnson. I totally agree. By the way, I think what 
we should be doing is everything we can to bolster energy and 
Poroshenko's hand--help provide advisers, provide military 
equipment if so requested. I mean real military equipment, 
things that actually might change the balance, change the 
calculus.
    Ms. Shaffer.
    Dr. Shaffer. I think we should not equate Russia's recent 
actions just with Putin's personality and his specific goals. I 
think actually any Russian leadership would try to invade 
Crimea. After the invasion of Crimea there was an interesting 
debate in the United States: Is this the return of geopolitics? 
In my years as an international relations specialist, the idea 
of the return of geopolitics is like saying, oh, the return of 
the Pacific Ocean, or the return of the Caucasus Mountains. Of 
course geopolitics is always there, and the only thing that 
changes, we try, as Mr. Lucas pointed out, we try to ignore 
them.
    E.H. Carr, who I think was the most important strategist of 
the 20th century, said that the most dangerous way of analyzing 
politics is the world as you would like it to be, versus as it 
is. The Soviet breakup left Crimea, left the Black Sea fleet, 
outside the jurisdiction of Russia. I am not saying on an 
ethical level this was nice, to invade another country. But 
this was almost like leaving the Pacific fleet outside, if 
California broke off from the United States and leaving the 
Pacific fleet outside the jurisdiction of the United States. It 
was a ticking bomb.
    The only problem, as some of our panelists have pointed 
out, we did not learn any lessons about how countries react. 
Actually, there is something connecting these panels in terms 
of natural gas, because states are like natural gas. They 
expand as much as they can until they hit some kind of 
container.
    Basically, Russia saw this as the opportunity, this was the 
timing. But invading Crimea was something that was always going 
to happen. We have seen it. This is the Russian playbook. I 
think that why they seem to be pulling back from Ukraine is 
that it gets us focusing on eastern Ukraine, forgetting about 
Crimea. This is the same thing they did when they invaded 
Georgia. It seems like they are going to invade Tbilisi when 
they have no intent to invade it. Then you are very happy when 
they stay just in Abkhazia and South Ossetia. It seems like 
they are going to invade Azerbaijan and then you are very happy 
when they just want to stay in the region as peacekeepers.
    So I think this is their playbook, is to get us focusing on 
getting them out of eastern Ukraine so we will not really 
remember that they actually are staying in Crimea.
    Senator Johnson. Vladimir Putin is playing the West like a 
violin because we refuse to acknowledge reality. We continue to 
deny reality, trying to rely on hope as being a strategy, and 
hope is not. We have to be very brutal in our assessment of 
what the reality of the situation is. That is why I keep going 
back to having to recognize that Vladimir Putin's goal really 
is his power, his control. That is right, I do personalize it 
more, because it makes no sense for his country, for the 
citizens of Russia. It makes total sense when he wants to 
maintain his own personal power for as long as he lives.
    Dr. Shaffer. To respond to Senator Murphy's question about 
who is winning: Every day thousands of people are trying to 
enter the United States and they hope not only to enter here, 
but to stay here as legal citizens. I do not see thousands of 
people trying to break through the border and make it into 
Russia. So I think at the end of the day we can feel very 
comfortable. I agree we have to stop this defeatism in our 
policies.
    Senator Murphy. I thank the witnesses. Thank you, Ms. 
Shaffer, for that comment as well. Senator Johnson and I agree 
on much more than people may think when it comes to a lot of 
these topics. We obviously do disagree on right now the 
scorecard between the East and the West.
    I will just close with this comment. There is some irony to 
Putin's actions. We both agree that there is short-term 
calculus being made here. Of course, Russia made its name over 
the last 200 years by being better than anybody else at playing 
the long game. It was Kutuzov who emptied out Moscow down to 
10,000 residents in order to allow Napoleon to stretch his 
troops so far into the Russian territory that eventually his 
forces collapsed.
    I think it is important for us to remember that the long 
game is creating a real contrast between what it means to align 
yourself with the West with free market economics and liberal 
democracy and what it ultimately means to be beholden to 
Russia. This is asymmetrical warfare right now. They are 
willing to use tactics that we simply are not willing to use. 
That may mean that we lose a couple skirmishes and battles 
along the way. But in the end the advertisement, by being the 
ones that are unwilling to engage in that kind of intimidation, 
bribery, and corruption, ultimately probably means that we now 
are the ones that hopefully will be able to win the long game.
    Thank you very much for being here. With that, our hearing 
is adjourned. The record will remain open until Friday at 5 
o'clock. We have other questions from committee members. We 
hope that you will turn around answers as quickly as possible.
    [Whereupon, at 4:36 p.m., the hearing was adjourned.]

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