13 January 2020

Germany, Russia and the US sanctions related to Nord Stream 2

Negoiţă Sorin

Who is fighting on the “theater of stocks” in the Baltic Sea? Can the American sanctions be a clog for completing Nord Stream 2 or is it just a smoke screen for the international opinion? Will Germany accept the Washington decision and take a step back? Will Moscow continue to build the last 300 km length pipeline, even if some “actors” from the “Baltic scene” will be “out of the game”?

Image source: Mediafax

How will EU states provide their natural gases and what is the Nord Stream 2?

In EU, almost a quarter of the energy consumption comes from natural gases, mostly imported (more than 70%). It is estimated that this percentage may increase in the future.

According to available data, the most important supplier is Russia (47%), followed by Norway (34%), Algeria and Libya (together almost 9%). In most (90%), the Russian natural gases are transported through pipelines, almost 50% on the Ukrainian route (the trans-Siberian and Balkan one), 20% through Belarus and 30% through the Baltic Sea with Nord Stream. Only a small part (10%) is transported with the liquefied natural gas ships.

Therefore, there are already two pipelines in the Baltic Sea by which the Russian gas is transported to Europe countries. These are working since 2011 but, during time, they reached the capacity limits, hence, in 2015, Gazprom and a group of European companies[1] have signed an agreement to create Nord Stream 2, which involves the construction of other two pipelines, besides the existent ones.

The new pipelines start from the Russian shore and reach Greifswald village, from Germany, with a total length of 1230 km. This way, Nord Stream 2 is one of the longest offshore pipelines systems in the world, 80% of it being already completed (they only have 300 km left to built).

The project should be completed and start working this year, after a period of almost two and a half years, until October 30th 2019, wherein Denmark- the last of all involved countries, has delayed the final approval for the construction of the Dane segment of this pipeline, with a 147 km length. So they remove all doubts of states not supporting the project on whether the project can be cancelled or not.

The new gases main costs 9,5 million euro, 50% of the amount coming from parts involved in the project- Gazprom, respectively the European companies, and it will allow the overdub of the current Nord Stream transport capacity to 110 million cubic meters of gas per year.

Can Nord Stream 2 divide Europe?

Nord Stream 2 is more than a simple pipeline providing natural gases to European states. The project, which was created in a sensitive moment, in 2015- one year after Crimea’s seizure and the start of the Ukrainian crisis, has, besides an obvious economic impact, important geopolitical effects. Furthermore, it is quite obvious that there are many strategic interests disputed in this project.

On one side there is Russia, the provider, which has the possibility to dodge the countries it does not have great relations with- Ukraine, Poland or the Baltic countries, but also Germany and other European states, like Netherlands and Austria, which could benefit from this additional natural gases supply. As for Germany, this project is extremely important, because it may be the only country in the world which does not want, until 2038, to give up the nuclear energy or the carbon based one. Germany’s will is to exclusively use, in the future, renewable energy, but the natural gas can be an essential temporary solution, most likely for decades from now on. Also, it is noteworthy that other European states could also take advantage of the new Russian-German project.

On the other side of this deal, there are the Central and East European states, which opposed the project since its beginning. In the forefront there are the transit states, particularly Ukraine, but also Poland and the Baltic States. Ukraine is afraid that the pipeline that’s on its territory will become redundant and deprived of the transit taxes, which are an important source for the national budget. Also, Russia could receive an extremely serious tool to pressure Kiev and undermine the Ukrainian economy. Additionally, countries from East Europe are concerned with the fact that Germany and Russia could get to an agreement which will harm their economic interests and lead to complications in the European security environment. Furthermore, according to some of the EU member states, the Nord Stream 2 is opposing the diversification of the energy resources supply and the goal of being independent on the Russian gas.

This second ‘’side’’ is supported by the US, through President Trump’s voice, who thinks that Germany, the main benefiter of the new energy project, could become, through Nord Stream 2, ‘’Russia’s hostage’’.

Indeed, during the Romanian EU Council presidency, it was approved an admissible energy compromise for all EU member states (in April 2019), by extending the regulations normalizing the internal natural gases market coming from pipelines outside the Union, which will be applied to Nord Stream 2 also. Through these modifications the goal was to provide a European natural gases market to be fair and equitable. Among the main elements of the adopted modification, there is the separation of property in terms of gases production and supply, the access of third parties to pipelines’ capacity, the non-discriminatory taxes and transparency demands.

The Americans are driving a hard bargain

Almost the entire Washington political class is opposing the Nord Stream 2 project. Therefore, in December last year, the two US Congress chambers have approved, in majority, the imposition of economic sanctions to companies approving Gzprom’s completion of Nord Stream 2 pipeline. These sanctions were included in the Law on national defence budget for 2020 (National Defense Authorization Act 2020), put forward by president Trump, on December 21st, within a ceremony at the air base Andrews.

They are particularly targeting the companies part of the submarine pipeline construction in the Baltic Sea, as well as their owners. The measures are foreseeing their US visa cancellation, but also the blockage of US properties of individuals that are part of the project. The identification of involved companies and people should be made in 60 days, and then the targeted ones should stop their activity in 30 days.

These measures’ goal is fighting Russian leader’s actions, Vladimir Putin, to increase Russia’s influence on the European continent. American officials think that Nord Stream 2 is a security risk for Europe, as the pipelines could increase the energy dependency on Moscow. However, US’s interests are not only geopolitical-based, but also economic. On one hand, the additional gases delivery to Europe will substantially increase Russian state’s incomes and, on the other hand, the Americans are aware that this will reduce the natural gases distribution in US. The proof is the money already invested by the American state in creating an infrastructure necessary to extract and transport the liquefied natural gas (LNG). It is obvious that Trump wants Germany to cover the necessary gases from US and not Russia.

However, the following question persists: Why the Americans have reacted so late, when the project is almost close to an end? After analyzing this situation, one may say that the US Congress and White House decisions relied on Dane Government’s adjournment, which initially opposed route’s continuation through its territorial waters. But the recent approval of free “access”, from October 2019, has hastened sanctions’ approval, being the last method to slow down the works.

Germany and EU’s reactions to American measures

The German federal government looks at the new main as to an economic project, which may be an important contribution to Europe’s energy security. However, Germany tried, from the very beginning, to use a double strategy when approaching this project. The German chancellor, Angela Merkel, admits, on one side, that the project has a geopolitical component, but she also ensured Ukraine that is seriously considering its concerns. Furthermore, she repeatedly highlighted that she wants to prevent a possible Nord Stream 2 consequences, which is getting the Ukrainian transit route “out of the game”.

In fact, the Foreign Affairs Minister from Merkel’s Cabinet, social-democrat Heiko Maas, has criticized the American sanctions immediately after being approved in Congress. He clearly refused the foreign interferences and extra-territorial sanctions, stating that “European energy policy is decisive in Europe, not the US”. Also, the spokeman for political-economic issues of the Christian-democratic faction from Budenstag, Joachim Pfeiffer, thinks that Americans’ sanctions are not only an “unfriendly action, but a hostile act from the US against its allies and the entire Europe”. He was supported by his Christian-democratic colleagues, Andreas Nick, who stated, for Deutsche Welle, that sanctions against Nord Stream 2 will unify Germany behind the project, being a national sovereignty issue.

Neither did the German-Russian Chamber of Commerce hold much thought and declared, through its chief, Matthias Schepp, that the new Russian-German project is essential for European energy security and has even called for sanctions in response to US.

The EU also joined the criticism of measures imposed by US and, through the European Trade Commissioner, Phil Hogan, ruled against sanctions on any companies in the member states that carry out legal activities. He stated that "The (European) Commission objective has always been to ensure that Nord Stream operates in a very transparent and in a non-discriminatory way with the appropriate degree of oversight ". Consequently, the European Commission is currently examining the possible repercussions of US sanctions.

President Putin is determined to complete Nord Stream 2 despite US sanctions

Vladimir Putin was bothered by the US Congress decisions and said he would respond with appropriate measures against the United States, if Washington will implement the sanctions against companies involved in the Nord Stream 2 project.

Furthermore, according to Putin's spokesman, D. Peskov, Moscow sees the sanction imposition as an "unfair" attempt to keep "American artificial domination on European markets", to force Europeans to buy gas at a higher price than the Russian one. Moreover, the Russian official said that US’s actions are "a clear example of unfair competition".

In the same note, Russian Foreign Minister Sergei Lavrov criticized, since last summer, the amendments to the EU Natural Gas Directive, which, in his opinion, were meant to prevent the completion of Nord Stream 2 pipeline construction. On this regard, he stated: " Against this background, certain forces' attempts to 'put a spoke in the wheel' and hinder the implementation of this project leave us perplexed. This is how we assess the amendments to the 'Gas Directive' of the "Third Energy Package' of the European Union that entered into force on May 23 and effectively violate the fundamental principle of investor protection from changes in a receiving party's legislation. Given the haste with which the previous, Romanian, presidency of the Council of the EU expedited their adoption, we have no doubt that the sole aim of these amendments was to hinder the completion of this construction”.

But the Russian minister is confident that the US sanctions will not stop the completion of Nord Stream 2 pipeline. To that end, he said that this energy project will continue despite sanctions promulgated by President Trump. According to a statement (Channel One, December 22th, 2019), the project "I said it will be built, no matter what, despite all these threats. First, I am convinced that the Europeans understand their commercial interest. Second, this implies an interest in the context of maintaining long-term energy security. Third, they were, of course, humiliated. The statements were, nevertheless, made, including those from Berlin which shows that our European partners still retain a sense of dignity”.

To reinforce the optimism of his foreign minister, President Putin said, at a meeting with influential businessmen, at the end of the year, that Russia has a special shipping vessel for pipes’ installation[2] in order to complete Nord Stream 2 pipeline, which will slow down the work, probably a few months, due to sanctions imposed by Washington, but that will bring it to an end. The Russian leader made this clarification amid the Swiss-Dutch company Allseas withdrawal[3] from the project, which suspended its special vessels activity, precisely to avoid US sanctions. However, the other companies participating in Nord Stream 2 gas pipeline construction have announced that they intend to complete, as soon as possible, this project aimed at increasing Russian natural gas supply to Europe.  

Are Ukraine’s concerns real?

Kiev authorities openly oppose Nord Stream 2 project because they are convinced that, after this pipeline is inaugurated, Russia will no longer need its gas to transit Ukraine, which would result in losses of about $ 3 billion annually for the Ukrainian budget. All considering that the contract for the Russian gas transit through Ukraine expires at the end of 2019.

In analyzing the situation, however, it is noteworthy that, as long as the new pipelines in Nord Stream 2 project are not yet ready for use, it is easy to understand that Gazprom will not stop delivering natural gas to Europe through Ukraine. Moreover, Moscow officials have repeatedly sought to reassure Kiev, saying that Russia does not plan to take measures so that natural gas delivered to European states will no longer transit Ukraine, although it could. The statements were reinforced by President Putin himself, who reiterated that he does not deny gas transit through Ukraine, but that Ukrainian counterparts need to come to the negotiating table.

A proof to that end is the new agreement[4] signed by companies Gazprom (Russia) and Naftogaz (Ukraine), one day before the old agreement expired and valid for 5 years. In this regard, Gazprom president stated that „After five days of uninterrupted bilateral talks in Vienna, the final decisions have been made and final agreements have been reached. At the same time, a whole set of agreements and contracts has been signed, and one can fairly say that these arrangements represent a major package deal that has restored the balance between the interests of the parties. The (signed) documents are effective as of today and provide for Russian gas transit via Ukraine after Dec. 31 2019. Gazprom has done everything in its power, once again proving its reputation as a responsible supplier and a reliable partner”.

Translated by Andreea Soare

[1] E.ON german ocmpanies (Uniper sinces 2016, which detached from E.ON into an independent entity and took the fossil energy businesses ) and Wintershall Dea GmbH, the British-Dutch group Royal Dutch Shell, OMV from Austrua adn Engie from France.

[2] In 2016, the Russian group Gazprom bought a special pipeline installation vessel, called Academic Cherskiy, to be used as  last resort if companies will stop working on Nord Stream 2. It seems that the average speed Cherskiy can the pipe installation with is smaller than the Pioneering Spirit, of Allseas. Cherskiy is currently in the Russian port of Nahodka, on the Pacific coast.

[3] The Swiss-Dutch company Allseas has two vessels, Pioneering Spirit and Solitaire, wherewith it installs the pipelines at the Nord Stream 2 pipeline.

[4] The new contract provides that Gazprom will transit through Ukraine at least 65 billion cubic meters of gas in 2020, then at least 40 billion a year between 2021 and 2024, and will bring to Kiev "over seven billion dollars" in total. The contract is part of a broader agreement wherefore Gazprom paid $ 2.9 billion (fine and interest) to its Ukrainian counterpart, Naftogaz, meant to put an end to a lengthy trial before international courts. Instead, Naftogaz abandoned all other processes targeting Gazprom in Ukraine and the West. https://financialintelligence.ro/gazprom-rusia-si-naftogaz-ucraina-au-semna-un-acord-pe-cinci-ani-de-prelungire-a-tranzitului-de-gaz-rusesc-prin-ucraina-catre-europa/