Troubled Waters: Nord Stream 2 and Putin’s Test of Euro-Atlantic Solidarity

By Maddy Ghose, Transatlantic Analyst

Source: Nord Stream 2, “Map: The Nord Stream 2 Route,” accessed October 1, 2019, nord-stream2.com

Executive Summary


Although the poisoning of Russian opposition figure Alexei Navalny in August brought the natural gas pipeline Nord Stream 2 (NS2) to the forefront of European and transatlantic relations, the threat of European sanctions and urgency around opposition to the pipeline is receding as Navalny recovers. But for some countries, NS2 was never a backburner issue. This flashpoint undercuts EU and transatlantic solidarity, illuminating in particular the difficulty of achieving a truly unified European approach to energy security. Opposition to the pipeline within the EU and from the US, and steps toward energy diversification in Europe have, however, increased NS2’s cost and diminished Russia’s capacity to leverage energy as a source of political influence in Europe.


Background


Following the successful completion of Nord Stream 1 (NS1) – the German-Russian pipeline that moves gas from Russia to Germany via the Baltic Sea – in 2012, planning began for companion pipeline NS2. Germany welcomed the project, which would double the amount of Russian gas it could purchase and distribute either internally or within the EU.[1] Each country’s political class had invested heavily in the idea. Russia’s state-owned gas company Gazprom is the majority shareholder of NS1, and Gerhard Schröder – Angela Merkel’s predecessor as Chancellor of Germany – headed the project’s shareholder committee. His friendship with Putin ensured that he remained active in Nord Stream projects, and he became chairman of NS2’s board of directors in 2016. Gazprom is the sole shareholder of the Nord Stream 2 AG consortium, and the pipeline’s financial investors comprise Dutch/British company Shell; German companies Uniper and Wintershall; Austrian company OMV; and French company Engie.


Within the EU, NS1 and its NS2 expansion were pitched as enhancements to European energy security as they would increase access to Russia’s vast natural gas reserves. However, Poland, Latvia, Lithuania, and Estonia opposed NS1 from the start. This group was united by difficult pasts with Russia as their majority gas supplier. Across the Baltic, Denmark did not have a prime minister who viewed NS2 as anything other than commercial until 2019 – when the project was already well underway. For these actors, energy security hinges on reliability, intent, and the past behavior of the supplier, in addition to a supply guarantee.


As a result, they view Russia’s history as a gas supplier with concern. In January 2006, Russia shut off gas to Ukraine during a price dispute. At the time, this was the latest of dozens of politically-motivated energy shutoffs by Russia to customers.[2] Russia is expected to use NS2 to cut out onshore transit countries – including Ukraine, Belarus, and Poland – and thereby divest them of vital transit revenue. These countries would also face increased vulnerability to Russian political pressure, which is already a dire threat to Ukraine and Belarus.


Elsewhere in the EU, France has split from Germany on the issue. Usually a close partner of Berlin, in February 2019 Paris announced its support for a proposed amendment to the EU Gas Directive that would prohibit any pipeline originating from a third country from being owned and operated by the same country. The amendment, which entered force in May 2019, applies to NS2’s first interconnection point in Germany.[3] Nord Stream 2 AG challenged the amendment in an EU court on the grounds that it is discriminatory, and requested a waiver from Germany’s energy regulator. It was rejected on both fronts in May 2020.[4] French President Emmanuel Macron reportedly told Merkel that the pipeline must not increase Europe’s reliance on gas supplies from Russia.[5]


Italy also opposes NS2, but for different reasons. Russia previously made plans with Italy to build the South Stream pipeline, which would have terminated in southern Italy and made the country a key hub in distributing Russian gas throughout Southern Europe. This plan was scrapped in 2014 after the EU found South Stream did not comply with its Third Energy Package of regulations. NS2, however, was allowed to proceed. Italy complained that Germany was given privileged treatment, and that the pipelines were not treated equally.[6] If or when completed, Nord Stream 2 could raise gas prices for Italy,[7] which currently receives the majority of its gas imports from Russia via Ukraine and Southeastern Europe.[8] Italy is also concerned that the completion of NS2 would increase Germany’s relative political influence within the EU at its expense.[9]


The United States has, with bipartisan support, consistently opposed NS2 on the grounds that it would maintain Europe’s dependence on Russian gas and increase Ukraine’s vulnerability to Russian aggression.[10] Further, American advocates for exporting liquefied natural gas (LNG) fear that business prospects would be damaged if Europe purchases more Russian gas. US sanctions on Russia have been comprehensive following Russia’s aggression in Ukraine in 2014. The sanctions regime that passed in 2017 – the Countering America’s Adversaries Through Sanctions Act (CAATSA) – targeted pipelines. The National Defense Authorization Act passed in December 2019 linked NS2 specifically to defense policy, rejecting its designation by many as a purely commercial project.


In August 2020, calls for European sanctions on NS2 suddenly escalated. Alexei Navalny, famous for his vocal political activism against Putin, was poisoned in Siberia. German doctors determined that he had been poisoned by Novichok, a nerve agent accessible only to the Russian government. European voices united against Putin, who is infamous for his extraterritorial assassination attempts against political opponents. There were calls from German politicians to sanction or pull out of NS2. Positions that opposing countries had been taking for years were suddenly brought into the mainstream. At the same time, Russian Deputy Energy Minister Anatoly Tikhonov was arrested in Moscow for corruption. Russian state news agency TASS reported claims by his lawyers that the arrest was intended to “discredit the ministry’s top officials.”[11]


Calls for sanctions were, however, quickly rebuffed. A European Parliament resolution calling for the reinforcement of existing sanctions against Russia did not pass unanimously. Vice President of the European Commission Josep Borrell said that EU institutions could not sanction NS2, and that decision-making power on this question resided in “Member States that have been pushing for this infrastructure to be built.”[12]


In the backdrop of these events are broader changes in the transatlantic relationship with Russia. Military networks are intensifying: in September, Georgia and Ukraine carried out interoperability exercises with NATO; the Nordic Defense Cooperation signed a new agreement as Russian military activity in the Arctic increases; and the Russian military conducted drills with Belarus and in the Caucasus, and in the Black Sea in October. In September, moreover, the US brokered a deal to normalize economic relations between Serbia and Kosovo. This heightens US influence in the region, which Russia may see as a threat to its planned expansion through Serbia for the TurkStream pipeline.


Prospects and Implications


The projected completion date for NS2 is unclear. The pipeline was originally expected to come online in mid-2020. This date, however, was pushed out by US sanctions in December 2019, which prompted Swiss company Allseas to halt pipe-laying for the project. In January, Russian officials estimated that NS2 could be operational by the end of the year or in early 2021.[13] Gazprom then transferred ownership of the pipe-laying ship Akademik Chersky to the murky Samara Thermal Energy Property Fund. The International Group of Protection and Indemnity Clubs, the largest insurance association for shipping, circulated a notice in late September that it would not insure members who take part in activities for either NS2 or TurkStream.[14] Russia is already encountering difficulty finding insurers for its Arctic projects due to sanctions. It must now find service providers who can issue certifications without being impacted by the sanctions, but are also legitimate enough to be accepted by the Danish Energy Agency.


The prospects for, and implications of, NS2 for the Euro-Atlantic community are, however, likely to be largely determined by policy developments outside of Russia’s reach and on the part of the following actors.


Ukraine


Although Ukraine is often treated as an object rather than a subject in discussions about its security, it has taken dramatic strides over the last four years in reducing Russian influence, upgrading its energy infrastructure, and forging pipeline connections throughout Eastern Europe. Ukraine also works with the EU and Germany on initiatives to modernize infrastructure, decrease energy use intensity, and improve energy efficiency. The Ukrainian government recently restructured the domestic gas market to decentralize and deregulate the existing model.[15] In 2014, Slovakia signed a reverse gas flow Memorandum of Understanding with Ukraine, increasing the scope of gas suppliers to which Ukraine can turn – and the EU supports the signing of more of these deals. These are all steps toward greater energy security and political independence vis-à-vis Russia, and it is likely Ukraine's government will build on them to further reduce the threat of NS2.

Poland and Denmark Poland and Denmark’s voices are often excluded from the mainstream discourse on this pipeline. However, both have an interest in shaping the European gas market and the discussion around it. For both countries, this means their joint Baltic Pipe project – last slated for completion in October 2022[16] – which will pipe gas from Norway through Denmark to Poland. As Germany weighed sanctions after the poisoning of Navalny, Poland and Denmark offered Germany access to Baltic Pipe if it halted construction on NS2. Relatively self-sufficient gas producer Denmark could remain an important voice on issues in the Baltic Sea region, particularly those regarding energy security. Permits from Denmark were one of NS2’s last hurdles, and it was only because of international law and Gazprom’s shrewd direction of the pipeline through Denmark’s exclusive economic zone that Denmark was forced to approve a construction permit in October 2019 and an operating permit in October 2020. Poland is upgrading its LNG storage capacity, which will increase its ability to provide itself and its neighbors with energy. A Polish government spokesman recently stated: “From the beginning, Poland has emphasized that European solidarity in this area must be maintained.”[17]

The European Union The EU was built on the principles of solidarity and a shared fate among its members. These promises, undercut by the Eurozone crisis, are now under threat again. But the reality of energy security in Europe is that there is no one-size-fits-all policy that can reconcile the extremely diverse energy needs and interests represented across the EU’s 27 members, let alone members of the “wider Europe” codified in EU policy. The pursuit of an energy-secure European Union through a single package presents a difficult test for solidarity as a foundational concept. Germany argues that NS2 does not threaten European energy security because of the small percentage of German gas consumption its deliveries would comprise. While this is true, it entirely overlooks the positions and needs expressed by Germany’s neighbors.


Just as important to recognize is the success of the EU’s Third Energy Package in changing the legal framework within which NS2 was launched. This package laid out the EU’s pivot away from Gazprom and toward American LNG, and Russian aggression against Georgia in 2008 and Ukraine in 2014 further changed the legal and normative landscapes. The challenges NS2 has faced are likely far beyond what Putin envisioned at the outset. Although the EU is unable to sanction NS2, it can – through its continued support for projects such as Baltic Pipe, Ukrainian infrastructure upgrades, and additional reverse gas flow deals with Ukraine – continue to shape its internal gas market and hinder the use of energy as a political weapon.

Germany

In the aftermath of Navalny’s poisoning, Germany faced intense debate at home about its internal politics and relationship with Russia. Though positions on NS2 had consolidated across party lines by the invasiveness of US sanctions – with extraterritoriality remaining as an overarching theme – cracks showed again as German politicians grew more outspoken about their support for, or opposition to, blocking the pipeline. This raised questions about whether, and how, Germany would reevaluate relations with Russia.


Further questions surrounded Merkel’s stance. Would she be held responsible for not sanctioning Gerhard Schröder for his role in NS2? Additionally, Merkel stated in 2018 that NS2 could not move forward without clarifying Ukraine’s future as a transit country. Almost three years later, her statement remains unanswered.[18] In August, when Merkel’s foreign minister questioned the pipeline’s future, she told reporters: “I think that we should see [the Navalny case] decoupled from that. Our opinion is that Nord Stream 2 should be completed.”[19] It appears, therefore, that the Navalny poisoning was ultimately not a red line, and that Germany’s support for NS2 remains substantial. The United States

American sanctions have proven to be the most significant roadblock to NS2’s progress. The next step in this regard is the Protecting Europe’s Energy Security Clarification Act currently waiting in Congress. The original act, enacted in December 2019, tightened existing sanctions against Russia. The new act expands the sanctions’ scope from simply “pipe-laying” to broader “pipe-laying activities.”[20] This includes services for testing, inspection, insurance, and certification that are necessary for pipeline construction and operations.

[1] NS1 can transport 55 billion cubic meters (BCM) of gas per year. NS2 would add 55 BCM of capacity. See Gazprom, “Nord Stream 2,” accessed October 7, 2020, https://www.gazprom.com/projects/nord-stream2/ [2] Robert L. Larsson, “Nord Stream, Sweden, and Baltic Sea Security” (Stockholm: FOI et al., 2007), p. 78-81. [3] Oxford Institute for Energy Studies, “Gas Directive amendment: implications for Nord Stream 2,” March 2019, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/03/Gas-Directive-Amendment-Insight-49.pdf. [4] Reuters, “EU court throws out challenge from Russian-backed Nord Stream 2,” May 20, 2020, https://www.reuters.com/article/us-gazprom-nordstream-court-eu/eu-court-throws-out-challenge-from-russian-backed-nord-stream-2-idUSKBN22W25N [5] Emmanuel Macron, quoted in “France's Macron says Nord Stream 2 must not increase Europe gas reliance on Russia,” Reuters, August 28, 2020, https://www.reuters.com/article/france-macron-nordstream/frances-macron-says-nord-stream-2-must-not-increase-europe-gas-reliance-on-russia-idUSP6N2F203Z [6] Giovanna De Maio, “A Tale of Two Countries: Italy, Germany, and Russian Gas,” Center on the United States and Europe, Brookings Institution, August 24, 2016, https://www.brookings.edu/research/a-tale-of-two-countries-italy-germany-and-russian-gas/ [7] Balázs R. Sziklai et al., “The impact of Nord Stream 2 on the European gas market bargaining positions,” Energy Policy vol.144 (September 2020), https://www.sciencedirect.com/science/article/pii/S0301421520304201?dgcid=rss_sd_all; Reuters, “ENI CEO says Nord Stream 2 would raise gas prices in Italy,” May 23, 2016, https://www.reuters.com/article/energy-nordstream-eu/eni-ceo-says-nord-stream-2-would-raise-gas-prices-in-italy-idUKL5N18K4KG [8] US Energy Information Administration, “Italy,” accessed November 20, 2020, https://www.eia.gov/international/analysis/country/ITA [9] De Maio, “A Tale of Two Countries.” [10] US Department of State, “Fact Sheet on U.S. Opposition to Nord Stream 2,” December 27, 2019, https://www.state.gov/fact-sheet-on-u-s-opposition-to-nord-stream-2/ [11] TASS, “Deputy Energy Minister Tikhonov detained for 2 months in case of embezzlement,” September 9, 2020, https://tass.com/emergencies/1199185 [12] Josep Borrell, “Russia / Poisoning of Alexei Navalny: Remarks by the High Representative / Vice-President Josep Borrell at the EP plenary” (speech, Brussels, Belgium, September 15, 2020), https://eeas.europa.eu/headquarters/headQuarters-homepage/85149/russia-poisoning-alexei-navalny-remarks-high-representative-vice-president-josep-borrell-ep_en. [13] Radio Free Europe/Radio Liberty, “Russia’s Gazprom says it will complete Nord Stream 2 alone,” January 29, 2020, https://www.rferl.org/a/russia-s-gazprom-says-will-complete-nord-stream-2-alone/30403428.html. See also Reuters, “Putin: Nord Stream 2 pipeline will be finished by year-end or Q1 2021,” January 11, 2020, https://www.reuters.com/article/us-russia-germany-pipeline/putin-nord-stream-2-pipeline-will-be-finished-by-year-end-or-q1-2021-idUSKBN1ZA0NA [14] International Group of Protection and Indemnity Clubs, “IG Circular: Nord Stream 2 and TurkStream – Update on new U.S. sanctions,” September 21, 2020, shipownersclub.com [15] Oleksandr Kharchenko, “Ukraine quietly launches a gas market revolution,” Atlantic Council, September 3, 2020, https://www.atlanticcouncil.org/blogs/ukrainealert/ukraine-quietly-launches-a-gas-market-revolution/ [16] Adam Easton, “Poland ready to offer Germany access to gas via Baltic Pipe: govt spokesman,” S&P Global, September 10, 2020, https://www.spglobal.com/platts/zh/market-insights/latest-news/natural-gas/091020-poland-ready-to-offer-germany-access-to-gas-via-baltic-pipe-govt-spokesman [17] Piotr Muller quoted in Adam Easton, “Poland ready to offer Germany access to gas via Baltic Pipe: govt spokesman,” S&P Global, September 10, 2020, https://www.spglobal.com/platts/zh/market-insights/latest-news/natural-gas/091020-poland-ready-to-offer-germany-access-to-gas-via-baltic-pipe-govt-spokesman [18] Angela Merkel quoted in Reuters, “Merkel says Nord Stream 2 not possible without clarity for Ukraine,” April 10, 2018, https://www.reuters.com/article/us-germany-ukraine/merkel-says-nord-stream-2-not-possible-without-clarity-for-ukraine-idUSKBN1HH1KW [19] Angela Merkel quoted in Hans von der Burchard, “Merkel demands tougher EU response to poisoning of Russian opposition leader,” Politico, August 28, 2020, https://www.politico.eu/article/alexei-navalny-merkel-demands-tougher-eu-response-to-poisoning-of-russian-opposition-leader/ [20] US Congress, Senate, Protecting Europe’s Energy Security Clarification Act of 2020, S.3897, 116th Congress, 2nd sess., introduced in Senate June 4, 2020, https://www.congress.gov/bill/116th-congress/senate-bill/3897/text

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