The Future for the German-Russian PipelineEnergy 6 September 2020
Threats of sanctions from the U.S. have put a stop to the construction of the Nord Stream 2 natural gas pipeline from Russia to Germany. The multibillion-euro project is now at risk, and leading German politicians are not amused.
Thus far, Trump’s foreign policy tactic of “maximum pressure” has primarily been used on other countries. But U.S. Secretary of State Mike Pompeo has announced that the pipeline falls under 2017 Countering America’s Adversaries Through Sanctions Act (CAATSA), effective immediately. The act was originally passed as a lever against enemies like Iran and North Korea, but now Germany has also become a target of extraterritorial sanctions.
Residents of Rügen Island learned what exactly that means in early August. Three Senators from the U.S. sent a letter to the operators of Mukran Port, threatening them with consequences if they continued to provide logistical support for the pipeline project. Such threats have an effect: Late last year, the Swiss company Allseas withdrew two pipelay vessels after it received a similar threat from U.S. senators.
Placing Germany on the same level as Iran and North Korea in the debate over the pipeline marks a new low in the German-American relationship. “Sanctions between partners is clearly the wrong path. Germany and Europe make their own decisions about energy policy,” said German Foreign Minister Heiko Maas, a member of the center-left Social Democratic Party (SPD).
He was echoed by Manuela Schwesig, the SPD governor of the state of Mecklenburg-Western Pomerania, which is where Mukran Port is located and has borne the brunt of the halt in construction. “The behavior of the U.S. government is scandalous,” she said. “We can’t accept that. I expect the federal government to make it clear to the U.S. that we do not accept such behavior.”
But it is not that easy. For Berlin, the conflict with the U.S. is a sensitive tightrope walk. On the one hand, it must try to protect domestic companies from the American aggression. On the other, it makes Berlin look even more like a sponsor of the project, which promises to provide a significant financial boost to Russian President Vladimir Putin.
Given the recent poisoning of Russian opposition politician Alexei Navalny, calls for sanctions against Putin have grown louder. Were Berlin to now step in on behalf of the multibillion-euro joint project, say critics, it would seem rather counterproductive. Indeed, there have been increasing demands for Germany to end its involvement in the Nord Stream 2 pipeline, which would get the Russian president’s attention. At the same time, though, it would be a victory for Washington and Trump’s foreign policy, which many have begun to view as a form of extortion.
But it is not just the Americans who have concerns. There are plenty of European countries that have long been skeptical of the project. After then-Chancellor Gerhard Schröder (SPD) reached an agreement with Moscow on the construction of the pipeline in 2005, Radek Sikorski, the Polish defense minister at the time, said it reminded him of the Hitler-Stalin Pact – the 1939 deal between Nazi Germany and the Soviet Union that set the stage for the Nazi invasion of Poland. Other EU member states in Eastern Europe have also been critical, though not quite as strident.
The view from Poland and the Baltic states is that Germany has displayed a substantial degree of historical amnesia with the construction of Nord Stream. To access cheap natural gas, say such critics, Berlin is prepared to ignore the deeply rooted historical concerns of Germany’s EU partners.
A Lever for Putin?
Furthermore, they say, the deal demonstrates the shocking degree to which the Germans have underestimated the danger emanating from Putin’s Russia. The suspicion is that the pipeline is part of his geo-political ambitions, giving him yet another lever with which he can exert pressure. It would allow him to simply cut off the gas supply to countries formerly in the Soviet sphere of influence without affecting flows to customers further to the west.
Slovakia, Bulgaria, Romania, the Czech Republic, Hungary, Latvia and Estonia are all dependent on natural gas from Russia. At greatest risk, however, is Ukraine, where Russia has been supporting separatists in the country’s far east for many years. Some 40 percent of the natural gas imported by the EU from Russia flows through Ukraine.
The transit fees Ukraine charges are a significant contributor to the country’s economy, and once the Nord Stream 2 pipeline is finished, those fees will disappear. Eastern European countries warn that Russia will be able to simply skirt the country altogether while continuing to deliver gas to Western European countries. That, in turn, will allow Moscow to exert more pressure on Kiev, thus potentially sabotaging the country’s attempts to establish closer ties to Europe.
Polish Prime Minister Mateusz Morawiecki says that Moscow will be making “big money” with the Europeans, funds that Moscow could immediately invest in arms. Morawiecki used the occasion of U.S. Secretary of State Pompeo’s mid-August visit to praise the U.S. sanctions against companies involved in the construction of Nord Stream 2.
Many EU countries that have thus far been critical of the pipeline, however, felt the need to show solidarity with Germany in the face of the harsh U.S. sanctions. In mid-August, 24 of the 27 EU member states sent the State Department a sternly worded note of protest in the form of a video conference. Hungary, Latvia and Romania did not join the protest. Still, there are plenty of other EU member states that wouldn’t be sad to see the project fail. “Estonia has always been critical of Nord Stream 2,” says Estonian Defense Minister Jüri Luik. “I wouldn’t be disappointed if it failed.”
The view in Brussels is a different one. Should the U.S. find success with its bullying tactics, says one diplomat, every EU member state would have to prepare for being a U.S. target at some point – and thus dependent on assistance from its partners in the bloc. Today, the focus is on Nord Stream 2, “but tomorrow it could be on computers, ships, cars or something else,” says Daniel Caspary, head of the German conservatives’ group in the European Parliament. “We have to resist at the beginning.”
One reason for that point of view is the viewpoint widespread in Brussels that the U.S. isn’t just interested in protecting the EU from Russian influence, but is primarily focused on finding a new market for liquified natural gas from the U.S. “If U.S. sanctions are introduced, the EU should implement countermeasures,” says Bernd Lange, head of the powerful International Trade Committee in the European Parliament. A Social Democrat from the German city of Hannover, Lange says that any damage to the European economy should be compensated for through “tariffs and sanctions.”
“You can have different views of Nord Stream 2,” says David McAllister, head of the Foreign Affairs Committee in the European Parliament. “But either way, the extraterritorial sanctions from the U.S. government are inappropriate.”
European Commission President Ursula von der Leyen is already working on developing more effective weapons that are commensurate with the methods being deployed by the Americans. She had barely even been in office for two weeks when she proposed in the middle of December to revise the EU Enforcement Regulation, which is a key tool in protecting the bloc’s trade interests. The revised regulation is to allow the Commission to act against other countries in trade disputes even before the World Trade Organization has reached a verdict.
Whether the new regulation will have an effect remains to be seen. Reinhard Bütikofer, a member of the European Parliament with the Green Party, has complained that the change to the regulation is akin to “trying to break into a steel safe with a can opener.” He has warned against “completely ill-considered counterattack rhetoric.” In the short term, he says, there are “no prospects that the EU will be able to successfully defend itself from U.S. sanctions.” Ultimately, he says, the most important question for large European companies is whether they can do without the U.S. market. “And in the vast majority of cases,” Bütikofer says, “the answer is no.”
The German government had long hoped that the construction of an LNG terminal in Brunsbüttel outside of Hamburg would be enough to assuage the Americans. Officials in the Economics Ministry in Berlin believe that the U.S. has gone after Nord Stream 2 so aggressively primarily because it wants to sell its own gas to Europe. Ted Cruz, for example, one of the signatories of the letter sent to Sassnitz, is from Texas, where a great deal of gas is exploited through the technique known as fracking.
Acting on that assumption, the German government also agreed to pay to connect the LNG terminal to the German natural gas grid, to cut through the red tape and to accelerate construction. But the ratcheting up of sanction threats clearly shows that the terminal has not been enough to appease Washington.
A Threat to America’s Security?
There also is not much hope that Washington’s position on Nord Stream 2 will fundamentally change should Democratic presidential candidate Joe Biden be elected to the White House in November. A spokeswoman for Senator Cruz told DER SPIEGEL that sanctions have strong, bipartisan support in both houses of Congress. “It’s not just a consensus in the U.S.,” she said. “Many European governments support Senator Cruz’s approach and have expressly rejected the construed and false reports on the American initiative.” Cruz believes, she said, that Nord Stream 2 rewards Russia’s policy of aggressive expansion and economic blackmail. As such, the pipeline is a threat to America’s security, she said.
German diplomats point out that the threatened sanctions cannot be implemented immediately. The Protecting Europe’s Energy Security Clarification Act, which would include the sanctions, is part of the defense budget, which isn’t likely to pass before the elections. But everyone seems to agree that if Biden is elected, he won’t have the luxury of appearing weak on Russia. Still, the German government is hoping that it would be able to negotiate some kind of deal with a Democratic-run White House.
The companies involved, meanwhile, have long since begun preparing for possible political difficulties and priced in an extended construction delay. In 2016, the Russian conglomerate Gazprom took over the entire project as sole shareholder. The five European stakeholders that had been involved to that point – Uniper in Germany, OMV in Austria, Engie in France, Wintershall in Germany and Shell in the Netherlands – limited their involvement to covering 10 percent each of the planned construction costs of around 9.5 billion euros.
Because that money has already been paid out in full, those companies can no longer be targeted with sanctions. They no longer have any official role in the project and could withstand additional construction delays of up to several months. Should the need ultimately arise, they may have to write off their investments. A loss of almost a billion euros each would, of course, be painful, but is part of the risk of doing business for companies of that size. The write-offs for the nuclear power plants that were phased out in Germany, for example, were several times that amount.
Germany’s energy sector could also survive without natural gas from Russia for quite some time. But in the coming years, the last nuclear power plants in Germany will be shut down and an increasing number of coal-fired power plants are also being taken offline. For the period of transition to renewable sources, more natural gas will likely be needed to make up for fluctuations in solar and wind power. In the long term, however, natural gas is to become less and less important for electricity and heating.
There are some who even believe that the Nord Stream 2 pipeline will not be used for natural gas at all soon, instead becoming instrumental in the production of hydrogen. To meet the goals of the Paris Agreement, European industrial companies will have to radically change production strategies and transition away from fossil fuels and toward hydrogen in the coming years.
But until enough environmentally sustainable hydrogen is available, the gap could be plugged by hydrogen manufactured via the chemical transformation of natural gas, a process called steam-methane reforming. In the case of Nord Stream, that transformation could take place right at the source in Russia. The CO2 thus released could conceivably be pumped back into the ground in the Russian gas fields and the hydrogen could then be sent to Europe via the pipeline. The benefits for the climate could be enough to unite Europeans and weaken the U.S. position.