Nord Stream 2: delayed, but still a threat

Regardless of the growing problems and complications, the Russians’ determination to complete Nord Stream 2 has not diminished. Even though the gas pipeline will be launched with a significant delay, it will still pose a challenge to energy security in Central and Eastern Europe. Gazprom’s increased transmission capacity will not only improve the flexibility of Russian trade policy, but it may be a tool used to reduce the attractiveness of gas supplies from other sources, thus undermining the relevance of implementing diversification projects.

Five years have passed since Gazprom and its Western European partners announced the plan to build the Nord Stream 2 gas pipeline. Despite political tensions between Russia and the West, and the anti-Russian sanctions imposed by the EU, the US and other countries, the Russian company and its Western European partners launched the project, and construction began in September 2018. Opponents of the project consistently tried to block it, delaying or hindering it with the use of legal and political instruments: amending the EU gas directive, opening the antitrust investigation in the Polish Office of Competition and Consumer Protection, blocking the establishment of an international joint venture, extending the permitting procedure for the construction of a gas pipeline in Denmark, and, finally, introducing American sanctions against Nord Stream 2 in December 2019.

We are currently observing another chapter in the fight against the controversial gas pipeline, the primary element of which will involve the new US sanctions. Although the announced restrictions may have a negative impact on the project’s schedule and future operating conditions, it is unlikely that they will force the major stakeholders to withdraw from the project, which is 94% complete.

US pressure

In recent months, we have observed an increase in sanction pressure on Nord Stream 2 from the United States. It is worth noting that of all the actions taken by the project’s opponents, it is the American restrictions that have so far proved to be the most effective measure in influencing the pace of the project. The sanctions introduced in December 2019 led to Allseas’ withdrawal from participation in the project (the company was responsible for laying the pipes) and suspension of the construction of the gas pipeline.

The new issue of Washington’s sanctions took on a dual nature. On the one hand, there is a legislative procedure in Congress aimed at tightening the restrictions introduced to the US defence budget in December 2019. While the sanctions at that time applied to the ships used to lay pipes and the companies that owned them, new proposals from a group of American Senators are moving towards including more subjects under the new restrictions. All entities in any way involved in carrying out the project would be covered by the sanction mechanism.

On thr other hand, in July this year, Secretary of State Mike Pompeo announced that the CAATSA, passed in 2017, and the sanctions it laid out may also be applied to Nord Stream 2. Until now, the regulations of this act have excluded such Russian projects for export gas pipelines (i.e. Nord Stream 2 or TurkStream). Under CAATSA, the US president was given the option to introduce—in coordination with allies—sanctions targeting the construction of Russian export pipelines. Any entity that makes an investment in a Russian project worth at least 1 million USD or with a total value of 5 million USD over a period of 12 months may be sanctioned.

While it is not certain whether the US administration will decide to impose the CAATSA sanctions against Nord Stream 2, it is increasingly likely that such sanctions would be tightened under the new US defence budget. Firstly, the legislative procedure regarding new sanctions is faster than in the case of restrictions introduced in the defence budget in 2019. Secondly, the ongoing election campaign ahead of the US presidential elections scheduled for November may be conducive to adopting the new sanctions package.

There are many indications that Congress may treat the new package of anti-Russian sanctions as a warning meant to deter Moscow from attempts to interfere in the electoral process.

Meanwhile, Americans are aware of the sanctions’ political implications; therefore, the new package (once again) provides for the introduction of point-based restrictions that only affect the Nord Stream 2 project. This is to minimise the risk of political consequences for transatlantic relations.

Russian determination

Regardless of the growing problems and complications, the Russians’ determination to complete Nord Stream 2 has not diminished, as evidenced by the activities of recent months. Gazprom is preparing to complete the project using its vessels, although, to avoid sanctioning restrictions, Gazprom did take the decision to change ownership of one of the units.

The Russian side is also continuing its legal battle over Nord Stream 2. Back in July of last year, Nord Stream 2 AG (100% controlled by Gazprom) appealed against the amended gas directive to the Court of Justice of the European Union. Although the CJEU recognised that the complaint was inadmissible in June of this year, on July 28, Nord Stream 2 AG appealed that decision. In parallel, Gazprom has taken steps to exclude the Nord Stream 2 gas pipeline from the restrictions resulting from EU law. In August, Gazprom also filed an appeal over the actions of the Polish Office of Competition and Consumer Protection, which is conducting antitrust proceedings against entities involved in the Nord Stream 2 project.

At the same time, representatives of the Russian authorities, Gazprom, and Nord Stream 2 AG have—as may be expected—been criticising the announcements of further US sanctions, as evidenced by the recent statements of the Kremlin spokesman, Dmitry Peskov, or Russian Foreign Minister Sergei Lavrov. They point out that the restrictions are against the economic interests and energy security of Europe, represent unfair competition from the USA, and expose dozens of European companies directly or indirectly interested in the project to losses.

Western European concerns

Germany is also not withdrawing its support for the project. Officially, the German government is limited to the sanctions and the plans to introduce further restrictions. At the same time, it emphasises the use of diplomatic channels for talks on this matter. The head of German diplomacy, Heiko Mass, emphasised that the US actions infringed the law and sovereignty of Europe, and that Germany strongly opposed the US extraterritorial sanctions. The Austrian Ministry of Foreign Affairs also spoke out against the restrictions.

Counter-sanctions are being called for by representatives of the AfD, former German Chancellor Gerhard Schroeder (currently working for key Russian energy companies Gazprom and Rosneft), and representatives of European companies involved in the project (especially Rainer Zeele, head of the Austrian company OMV). AfD representatives also pointed out that, in the face of American actions, Europe should present a clear political response based on the idea of ‘three times yes’: for Nord Stream 2, for the economic interests of Germany and Europe, and for a comprehensive partnership with Russia, spanning from Dublin to Vladivostok.

Although the French President, Emmanuel Macron, recently expressed reservations regarding the project, signalling that it may contribute to increasing Europe’s energy dependence on Russia, it is unlikely this could affect Germany’s stance.

Is Nord Stream 2 still a threat to Central and Eastern Europe?

Even if the completion of Nord Stream 2 is launched with a significant delay, it will still pose a challenge to energy security in Central and Eastern Europe.

First of all, the launch of a new gas pipeline will reduce Russia’s transit dependence on the transit routes used so far—through Ukraine and Poland. Admittedly, Gazprom is bound by a new transit contract with Ukraine (the documents were signed in December 2019, but only valid until 2024). In turn, the transit contract with Poland expired in May 2020, and since then Gazprom has been reserving capacity as needed. The first auctions showed that Gazprom does not intend to give up this transmission route, which is supported by both the good working order of the trunk line and the transmission tariffs, which are attractive for Russia. However, it is uncertain whether the Russian company would limit the use of the Yamal-Europe pipeline and the Ukrainian route in the future, particularly in the event the Kremlin takes the relevant political decision.

Secondly, Gazprom’s increased transmission capacity will not only increase the flexibility of Russian trade policy, but it may be a tool used to reduce the attractiveness of gas supplies from other sources, thus undermining the relevance of implementing diversification projects. This may apply to many projects carried out on the initiative or with the participation of Central and Eastern European countries.

Thirdly, the discussion on the sanctions and the need to react to them once again confirms the potential political harmfulness of the Nord Stream 2 project. It has become not only a wedge issue within the EU, but also between the EU and the US. The threat of imposing sanctions on European entities involved in the implementation of Nord Stream 2 has raised questions regarding the political consequences for transatlantic relations. There is also a risk that the emerging narrative about the need to defend European energy sovereignty will strengthen voices calling for tighter cooperation with Russia and the formation of a joint Russian–European defence against ‘unfavourable’ actions by the US. This would be an unexpected, yet highly desirable side effect from the standpoint of Moscow’s foreign policy, which views any weakening of the transatlantic ties as a very favourable scenario.

Fourthly, there is also risk from the fact that Gazprom will certainly continue its efforts to lift or ease legal restrictions on Nord Stream 2, which may result in the weakening of legal instruments developed within the EU. Although it seems unlikely that the legality of the amendment to the gas directive would be challenged, the specific nature of court proceedings does not unequivocally rule out the possibility of issuing a decision that to some extent takes Russian demands into account.

Moreover, there are other paths that allow the gas pipeline to be partially or completely excluded from EU restrictions. One of the available options is to adopt an international agreement regulating the principles of operation for Nord Stream 2, as provided for in the amendment to the directive. Establishing a privileged treatment would require the approval of the European Commission, but such consent is possible. This is illustrated by the 2016 EC decision on the OPAL gas pipeline. The applicants for privileged treatment of the project may also benefit from the narrow territorial scope of the amended gas directive, limiting its application to the territorial sea of the EU country where the gas pipeline ends. This means that only the part that crosses the German territorial sea is regulated by EU law. The remainder—96%—of the pipeline is formally outside the jurisdiction of EU energy law.

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Although the new sanctions announced by the US may have negatively impacted the project’s partners and affected its schedule, it is unlikely that they would block its completion permanently. Firstly, the project has full political support from Russia and Germany, which is and has been one of the key factors influencing the implementation of the project at every stage. The likelihood of a change in Moscow’s and Berlin’s stance is dwindling as the project advances. The gas pipeline is 94% ready, and approx. 80% of the officially declared funds have already been spent on its construction (the total investment budget will come to almost 10 billion EUR). Secondly, there is much which seems to indicate the Russian side is taking into account the possibility of introducing further restrictions and is ready to bear the political and financial risk by using its own ships to build the missing section.

New US sanctions, however, could affect the pipeline’s launch schedule and the conditions for its operation. The sanctions package being prepared in Congress also provides for restrictions on companies providing certification services to Nord Stream 2. A lack of certification would make it impossible to use the new trunk line. Furthermore, the threat of including in the sanctions companies that provide any services necessary for the proper operation of the gas pipeline could make it difficult or even impossible for Gazprom to use it. The extent to which Russia would be ready to provide such services through its own companies is unclear.

It is also worth noting that the new sanctions regarding the Nord Stream 2 pipeline would not be critical for Gazprom in the medium term. For the time being, the Russian company has sufficient transmission capacity to meet its contractual obligations towards European customers.

Polish version is available here.