Three Seas Initiative: Boosting Economic Growth in Central and Eastern Europe While Enhancing Region’s Energy Security

U.S. President Donald Trump and other leaders attend the Three Seas Initiative Summit of Eastern European countries at the Royal Castle in Warsaw, Poland, on July 6, 2017. (SAUL LOEB/AFP/Getty Images)

News Analysis

Infrastructure is the lifeblood of a healthy economy. For more than 40 years, the infrastructure in Central and Eastern European countries remained underdeveloped as the entire region was subjected to exploitation by their communist rulers.

But the collapse of communism marked by the fall of the Berlin Wall in 1989 gave these countries hope for prosperity. With the accession of the Central and Eastern European (CEE) countries to the European Union in 2004, much has been done to improve infrastructure and help the region achieve economic growth. The EU has spent over 150 billion euros on transport infrastructure projects in CEE countries, but the gap between them and Western Europe is still significant.

The light at the end of the tunnel appeared in 2015 when Croatian President Kolinda Grabar-Kitarović and Polish President Andrzej Duda launched the Three Seas Initiative. The kick-off meeting took place in New York on the margins of the U.N. General Assembly and was attended by the heads of state of the CEE countries.

The Three Seas Initiative is a flexible political platform at the presidential level to promote connectivity among nations in Central and Eastern Europe by supporting infrastructure, energy, and digital interconnectivity projects. It consists of 12 Central European states located between the Adriatic, Baltic, and Black Seas: Austria, Bulgaria, Czechia, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

With the exception of Austria, these countries used to be a part of the communist bloc. Their inadequate infrastructure became an impediment to their economic growth and the economic integration with Western Europe. The Three Seas region accounts for 28 percent of the EU’s territory and 22 percent of its population, but only 10 percent of its GDP. With the establishment of the Three Seas Initiative, however, the participating countries took charge of their future and embarked on the long journey to economic growth and prosperity.

Due to being part of the communist bloc and Soviet domination, the infrastructure of the CEE countries focused only on interconnections along the East-West axis. For example, pipeline infrastructure that was built to deliver Soviet oil and gas to the countries also served as a tool of submission and control.

With the accession of these countries to the EU between 2004 and 2013, it became critical to create a North-South infrastructure corridor in the Central and Eastern European region.  In 2014, the Atlantic Council and Central Europe Energy Partners (CEEP) released a report that outlined the need for and the concept of  “the accelerated construction of a North-South Corridor of energy, transportation, and communications links stretching from the Baltic Sea to the Adriatic and Black Seas.”

“To this day, most gas pipelines and even highways flow primarily east to west, as countries remain reliant on Russian energy imports and have prioritized connections with their Western neighbors. The Three Seas Initiative aims to right this imbalance by supporting the development of energy, transportation, and digital infrastructure within Central and Eastern Europe broadly, and along a North-South axis specifically.” wrote David Wemer, an assistant director at the Atlantic Council.

The need for improving the transport network in the region was best illustrated by Polish President Andrzej Duda in his speech during the presidential panel discussion held at the Three Seas Summit in Slovenia in June this year. He compared the travel time between two major cities in Western Europe and two major cities in Eastern Europe when going in the North-South  direction.

“Currently, the train journey from Tallinn to Constanta takes about 3.5 days. The same distance from Gothenburg to Barcelona is covered in one day by train, whereas the same journey by road is about eight hours shorter than it would be the case in our part of Europe. These facts have an impact not only on the comfort of travel and tourism, but also, above all, on economic and social relations,” Duda said.

Gothenburg  is the largest port in Scandinavia and the gateway to the world for Swedish industry. Barcelona, a strategically located Mediterranean port city in Spain, is a gateway for traffic coming to Europe from North Africa and the Americas as well as an important hub for manufacturing and industry. Tallinn is Estonia’s intermodal port of the Baltic Sea, well placed to handle transshipments between East and West as well as North and South. Constanta is a Romanian port city located on the Black Sea coast at the crossroads of the trade routes linking Europe, Central Asia, and the Far East.

The Three Seas Initiative is based on pragmatic multilateral, bilateral, or national projects that aim to bridge any technological gaps and connect the countries of Central and Eastern Europe.  The participating countries identified 48 priority interconnection  projects that will be supported and monitored by the Initiative. Among them are 27 multilateral projects which include:

• New gas interconnector and the Baltic Pipe project with an expansion to Slovakia that will integrate of the isolated gas markets of Baltic States (and Finland) with the Polish and EU gas markets. This will contribute to the creation of a regional gas market and will enhance the competition as well as the security of the gas supply.
• Eastring, a bidirectional gas interconnection between Romania, Bulgaria, Hungary, and Slovakia that will utilize the existing infrastructure in a maximal manner. Together with the development of the gas transmission corridor and enhancement to the existing gas transmission system in these countries and Austria, it will provide access to inaccessible liquid European gas hubs and new gas suppliers, thus achieving the main idea of North-South and Southern gas corridors within the EU.
• A new liquefied natural gas (LNG) terminal on Krk island in Croatia and an LNG evacuation pipeline connecting the LNG facility on Krk with other countries in the region. It will also be connected to the Trans Adriatic Pipeline.
• Two road transportation projects: Via Carpatia, a new highway connection between Northern (Lithuania) and Southern Europe (Greece), and a road corridor connecting North and South Europe from Sweden to Greece. Both will integrate the transport systems of the participating countries.
• Baltic-Adriatic Corridor that will link major nodes (urban nodes, ports, airports, and other transport terminals) through key rail, road, maritime and air connections from North to South traversing heavily industrialized areas.
• Two transportation projects: Rail Baltica, a new railroad and an upgrade and modernization of the existing rail network with a goal to integrate the Baltic States with the European rail network; and Via Baltica, road infrastructure improvement to increase throughput and safety.
• Construction of a civil-military dual-use railway line between the Baltic port of Gdansk (Poland) and the Black Sea port of Constanta (Romania).
• Building missing links of the Danube-Oder-Elbe water corridor in Poland, Czechia, and Slovakia as part of the European inland waterways network.
• Digital projects which are open to all Three Seas countries and include creation of intelligent digital platforms for transport optimization, monitoring of water from hydrographic basins, a digital highway, and an environment for drones.

Benefits of the Three Seas Initiative

The initiative will benefit Central and Eastern Europe as well as the entire European Union. Among the benefits are:

•  stimulation of economic growth
• increase in the region’s competitiveness by making investments in the region more attractive
• increase of the economic resilience in the region
• increase of the energy security due to diversifying the energy sources and moving away from the overdependence on Russian gas
• ability of the Central European countries to help each other in the event of a supply crisis
• gaining access to spot markets in Western Europe
• bidirectional pipeline system so the direction of gas transmission can be reveres if needed
• elimination of disparities between Western Europe and Eastern Europe and making Europe on the whole more resilient globally

The Three Seas projects will also eliminate “energy islands” within the European Union that are currently not connected to mainstream European pipelines and grids, and thus are vulnerable to potential single-source supply disruptions. This applies in particular to the Baltic states—given their reliance on energy imported from Russia—and to Bulgaria, which is wholly dependent on gas supplies from Russia.

Bulgarian President Rumen Radev said in his remarks during the Three Seas Summit that Bulgaria has been transforming from a gas transitioning  country into a gas distribution center. He said the country has been building interconnectors with its neighbors and has already completed its interconnector with Greece.

Developing a North-South energy corridor will also potentially help create an effective single energy market for the EU—one that can receive oil, gas, and electricity from a variety of current and prospective suppliers and distribute them throughout the EU on a competitive market basis.

The emergence of cheap shale gas in the United States that could be shipped as liquefied natural gas provided a new alternative source of gas for European countries. LNG is shipped in tankers but at destination it should be unloaded in special terminals, returned to its gaseous state, and then transported by natural gas pipelines. The Three Seas projects include building new LNG terminals along North-South Corridor.

Piotr Soroczynski, the chief economist at Polish export credit agency Kuke, described the benefits of the transnational highway initiative Via Carpatia in an interview with the Global Trade Review: “The project will boost trade in the fast-moving consumer goods sector which currently, due to logistics, are limited to short distance trade—crossing only one or two borders,” he said.

“By providing new and easily accessible land connections, Via Carpatia should also noticeably boost the tourist industry in the region. This, in turn, may also help to foster business co-operation between smaller companies in the region.”

Soroczynski said the project will also open new supply chains.

“Until now, mainly due to logistical preconditions, supply chains were formed on the East-West axis. Via Carpatia will allow supply chains to be created along the North-South axis, thus benefitting countries located in the proximity of the emerging transport corridor. This will particularly benefit the automotive and aviation industry, producers of electrical machinery and equipment—including household appliances—manufacturers of furniture, construction materials, textile, clothing, and foodstuffs.”

Counteracting Russian Leverage

According to the Foreign Policy Research Institute, importing LNG from the United States can break up the monopoly of the Russian state-run gas company Gazprom, which has a prominent position in the European  market.

The gas transit crisis between Russia and Ukraine in 2009 resulting in the suspension of Russian gas supplies to European countries led Europe to look for ways to reduce dependency on Russian sources. In 2014, Gazprom again cut off Ukraine’s gas as a result of another gas dispute. Germany resorted to taking advantage of Gazprom’s Nord Stream project that bypasses transit countries (e.g. Ukraine and Poland) and runs directly from Russian gas sources to Germany along the bed of the Baltic Sea.

A crane moves Nord Stream 2 pipes at Mukran Port near Sassnitz, Germany, on June 5, 2019. (Axel Schmidt/Getty Images)

Poland opposes Nord Stream 2 as it can jeopardize Europe security, make the Central and Eastern European countries vulnerable to Russian political pressure, and divide Europe. Poland is preparing to end its dependence on Russian gas by not renewing its contract with Gazprom, set to expire in 2022.

To ensure uninterrupted gas supplies, Poland signed long-term agreements with three U.S. companies for LNG delivery. As well, Poland plans to develop additional gas sources on the Norwegian Continental Shelf. The Polish state-owned gas and oil company PGNiG holds shares in 25 exploration and production licenses on the Norwegian Shelf.

Thus, to benefit from American LNG or other non-Russian energy sources, the Central European countries need to collaborate on the development of cross-border infrastructure. This is especially important for the members of the Three Seas initiative, since many of them are landlocked.

Ultimately, if the ideal of a purely commercial market is reached, Russia can continue supplying its gas to anyone who wants it—and there will be many takers. But the political leverage Russia has gained will decline over the long term if the projects associated with this initiative are successfully implemented.

However, U.S. gas prices exceed Russian prices. Dr. Paula Stern, a member of  Atlantic Council’s Executive Committee, wrote: “Even though the United States now produces more natural gas than Russia, Russian gas travels to Europe through ... a series of relatively inexpensive pipelines. American gas must travel to coastal terminals in the United States through a yet-incomplete system of pipelines before undergoing a costly liquefaction process and being shipped to Europe.”

“This surge of LNG production in the U.S.—combined with technological advances in liquefaction, storage, and shipping vessels”—will lead to decreasing price disparity  when investments “begin to pay dividends,” Stern added.

When Poland’s PGNiG signed a contract to purchase LNG from U.S. companies in  2018, it was able to obtain a price 20-30 percent lower than the Gazprom price.

Importing U.S. gas will not displace Russian gas on the European market, but it will provide European countries with diversity and security of supplies and may help to negotiate better prices and contract terms with the Russian supplier. For example, after Lithuania opened its LNG regasification terminal in 2015, Gazprom slashed its gas price by 23 percent

Project Financing Challenges

Although the benefits of the Three Seas Initiative are unquestionable, financing the projects poses a challenge for the participating countries. The initiative is not a European Union initiative even though all its participants are the members of the EU, but it is supported by the EU and the June summit was attended by European Commission President Jean-Claude Juncker and German President Frank-Walter Steinmeier.

Juncker stated in his closing remarks that the EU has already invested 60 billion euros in the region from 2014-2022 that came from the EU structural fund, and 42 billion euros from the “Juncker Plan,” an EU fund that mobilizes private financing.

“I believe that we have done and will do everything to support the efforts aiming at better cohesion and better connectivity in the region,” he said.

From 2022-2027, the next financial period, 42.3 billion euros have been allocated to improve the interconnectivity in Europe and in particular in this region, Juncker noted.

In light of this, the Three Seas countries launched a Three Seas Initiative Investment Fund  that was established by Poland’s state development bank, Bank Gospodarstwa Krajowego (BGK), and Romania’s export-import EximBank.

The fund’s resources will come from various sources. The two banks that established the fund have made investment commitments, with the total presently exceeding 500 million euros. The fund is now open for other Three Seas countries to join once the necessary permits are obtained. Additional investors will be targeted among pension funds, private equity funds, private investors and others. The estimated objective of the fund is to raise 3-5 billion euros.

The plan for the fund is to engage in infrastructure projects with a total value up to 100 billion euros, while the needs in the Three Seas region have been estimated at more than 570 billion euros.

Three Seas Initiative participants also use their national budgets to finance the initiative’s projects. For example, Bulgarian President Rumen Radev said during the presidential panel discussion at the summit that Bulgaria uses money from its national budget to modernize its gas infrastructure, but the modernization will benefit other CEE countries.

Despite the challenges the Three Seas Initiative is making progress. The following diagram illustrates the status of all projects reported during the summit:

Source: Three Seas Initiative website.

US Support for The Three Seas Initiative

Since the initiative’s inception in 2015, the Three Seas participants hold an annual presidential summit hosted by a different participating country each year.

At the 2017 summit in Poland, President Donald Trump expressed his support for the initiative.

“I want everyone to know that the United States supports your bold efforts. These projects will improve countless lives across the region and throughout the world. America will be your strongest ally and steadfast partner in this truly historic initiative,” Trump said.

“The Three Seas Initiative will transform and rebuild the entire region and ensure that your infrastructure, like your commitment to freedom and rule of law, binds you to all of Europe and, indeed, to the West.”

U.S. Energy Secretary Rick Perry speaks during a joint press conference at the Cotroceni Palace, the Romanian Presidency headquarters in Bucharest, as part of a Three Seas Initiative Summit on Sept. 18, 2018. (DANIEL MIHAILESCU/AFP/Getty Images)

In addition to political support, the United States also aims to help spur private investment in some of the projects. During the 2018 Bucharest Summit, U.S. Secretary of Energy Rick Perry announced the Partnership for Transatlantic Energy Cooperation, a new initiative that will work together with the countries in the region and the European Commission to spur investment in critical infrastructure for a North-South energy corridor.

“Completing the trans-Adriatic pipeline, the Krk LNG terminal, interconnectors [between] Greece and Bulgaria, the Bulgaria-Romania-Hungary interconnector, and a spate of offshore oil and gas projects will be one of the indications of our success,” he said.

Perry said he hopes the Three Seas Initiative will attract substantial investment from U.S. and multinational businesses to work in partnership with governments to build new energy and transportation infrastructure. However, such large-scale capital investments require investor confidence, which is inspired by predictability, the rule of law, and a skilled workforce. Partnering with the technological know-how of the United States can contribute to the region’s development, job creation and wealth creation, Perry said.

There is still a long way to go and a lot of challenges facing the Three Seas countries, but every kilometer of a newly built or modernized road, railway, or pipeline brings benefits and shortens the gap between Central and Eastern Europe and the “old Europe.”

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.