25 July 2019

Despite Looming U.S. Sanctions, the Nord Stream 2 Pipeline Will Likely Proceed

Competition over energy supplies in Europe has become a key component of the U.S.-Russia standoff, as evidenced by Washington's threats to derail the Nord Stream 2 pipeline by imposing harsh economic sanctions. However, the United States has yet to follow through on these threats, and it remains unlikely that it will for fear of irking Germany and the major European energy companies that have heavily invested in the project. Thus, the White House is more likely to pursue measures that result in delays in the pipeline's construction rather than a complete cancellation, while continuing to back diversification projects and efforts to increase its own energy supplies to Europe. 

As part of its ongoing standoff with Moscow, the United States has long floated the possibility of sanctioning Nord Stream 2. But in recent months, U.S. opposition to the pipeline between Russia and Germany has become much more acute. For the first time, U.S. President Donald Trump directly acknowledged that Washington was, in fact, considering sanctioning Nord Stream 2 on June 12. This comes less than a month after U.S. Energy Secretary Rick Perry warned that a U.S. sanctions bill targeting the project could come into effect in the "not too distant future." 

The Big Picture

The battle over a new natural gas pipeline between Germany and Russia exemplifies the increasingly heated U.S.-Russia energy standoff in Europe. The vast pipeline infrastructure connecting Russian energy resources across the Continent has underpinned Moscow's economy while granting it significant political sway over its EU import partners. Eager to diminish this influence, the United States has attempted to restrict Russian energy projects and back the diversification of natural gas providers to Europe, whether via the Southern Gas Corridor (which circumvents Russia) or by increasing its own energy exports.

Trump and Perry's statements could mean the White House is seriously considering a proposed sanctions bill that, if fully imposed, would have the power to essentially grind construction a screeching halt. However, such a move would risk angering Germany at a time when the White House is trying to sway Berlin on a number of other important issues, including increasing its defense spending and barring Chinese telecommunications giant Huawei from rolling out its 5G network. Thus, the United States is likely to stick with a more middle-of-the-ground approach that still throws a wrench in the project's timeline without completely killing it. 
Weighing the Pros and Cons

Nord Stream 2, which began construction in May 2018, was originally scheduled to come online at the end of 2019. The $11 billion pipeline would enable Russia to send 55 billion cubic meters of natural gas directly to Germany via the Baltic Sea — thereby circumventing the current, anti-Russian transit states of Poland, Ukraine, Estonia, Latvia and Lithuania. Meanwhile, for Berlin, the pipeline has a more practical consideration; it would enable Germany to diversify from coal and nuclear power, while also helping it avoid disruptions to its natural gas supply associated with Moscow's bilateral feuds with these transit states.

Though while Germany and Russia both stand to benefit, Nord Stream 2 has also garnered significant backlash in Europe. Over the last decade, the European Union has built up its transportation and legal infrastructure in order to reduce Moscow's ability to use natural gas as a political lever against member states, especially those in Eastern Europe. The new German-Russian pipeline has thus sparked fears among some EU countries — especially those in Eastern Europe — about increasing the Continent's reliance on Russian gas.

But by far, the largest and most formidable Nord Stream 2 opponent has been the United States. As part of its ongoing standoff with Moscow, Washington has bolstered its political, economic and military ties with Ukraine, Poland and the Baltic states in recent years. And should the project be completed, the United States has argued that Russia would use the new pipeline for geopolitical leverage against these countries by making them more vulnerable to energy supply cuts, while at the same time depriving them of valuable transit revenue.

The Looming Threat of U.S. Sanctions

Thus, Washington has continued to threaten to obstruct the pipeline between Germany and Russia by way of harsh economic sanctions. On May 15, four U.S. senators introduced a bipartisan bill that would do just that by imposing sweeping financial and travel sanctions on entities and individuals involved in the project, including companies that produce underwater pipe-laying vessels. There are only two companies (Italy's Saipem and Switzerland's Allseas) affiliated with the project that have access to such pipe-laying vehicles. Thus, these U.S. sanctions — if fully imposed — would have the power to stop the project in its tracks. 

However, despite its recent uptick in heated rhetoric, the White House has so far hesitated to take concrete action against Nord Stream 2, likely due to several factors. First is the fact that nearly 60 percent of the project's construction has already been completed. And while it's technically still possible to stop the remaining 40 percent of project via U.S. sanctions, doing so would come at the cost of damaging the United States' close and strategically important relationship with Germany. Such an extreme move would also risk driving a wedge between Washington and the European energy companies involved in financing nearly half of the project as well, which includes Uniper and Wintershall (Germany), Shell (the United Kingdom and the Netherlands), OMV (Austria) and Engie (France). 
The Danish Question

However, U.S. sanctions aren't the only thing standing in the way of the pipeline's completion. The project has also had trouble obtaining the permits needed to access Denmark's waters on the Baltic Sea that fall within the pipeline's planned route. Gazprom, the Russian state gas producer leading the project, had repeatedly called for consultations over construction applications with the Danish government, but to no avail. Nord Stream 2's chairman, Gerhard Schroeder, recently cited U.S. political pressure on Denmark as the main culprit for the holdup. 

As a result, Gazprom recently decided to abandon its permit request for Danish territorial waters altogether. On July 1, the company applied for two other route options that would cut through Denmark's exclusive economic zone, while conveniently remaining outside of the country's territorial waters. This workaround is believed to be an easier and faster process for approval, since projects involving Denmark's economic region is subject only to an environmental review by the Danish Energy Agency and doesn't require additional vetting from the Danish Ministry of Foreign Affairs. Should this strategy prove successful, Gazprom said the Danish stretch of the project — which spans about 81 miles — could be completed within five weeks. 

The Fate of Nord Stream 2

With these factors in mind, there are three main scenarios that can play out in the coming months, which will ultimately determine whether Nord Stream 2 will be completed, and if so, when.

Scenario #1: Full U.S. sanctions

In this scenario, the United States fully follows through on its threats by imposing sanctions against Nord Stream 2 before the end of the year, including the provision against companies operating pipe-laying vessels. This would freeze construction in its tracks, which would take a major economic toll on Russia, as well as the European countries and companies that have a sizable stake in the project — most notably, Germany. The upshot would be further intensifying Russia's standoff with the West, while also stoking new political tensions between the United States and Germany. This would leave open the possibility of both Moscow and Berlin retaliating against Washington by slapping back economic sanctions of their own.

Scenario #2: No U.S. sanctions 

On the other end of the spectrum is Nord Stream 2 moving forward unimpeded, with the United States forgoing placing any sanctions against the pipeline. In this scenario, Russia would also get backing from Denmark within the next few months in order to complete Nord Stream 2 by the end of the year. 

Scenario #3: Somewhere in between 

In the final scenario, U.S. sanctions would be rolled back in scope or partially implemented in a manner that postpones the project but doesn't go so far as to completely thwart it. Given the U.S. interest in hamstringing Russian energy projects in Europe, while factoring in the economic and political implications of a complete freeze of Nord Stream 2, this scenario remains most likely. Such delays would avoid a major fallout with Germany, while still granting the United States leverage to extract concessions out of Russia in the meantime (such as easing Moscow's position on transit volumes and rates for Ukraine). 

To avoid major fallout with Germany, the United States is more likely to roll out sanctions in a manner that postpones the pipeline project but doesn't go so far as to completely thwart it.

It's also worth noting that the Trump administration has yet to follow through on truly hard-hitting sanctions against Russia since taking office, making it all the more unlikely that it'll do so with Nord Stream 2. In December 2018, Washington reversed severe sanctions involving the major Russian aluminum company Rusal due to the subsequent blow on global supply chains. Indeed, some sources affiliated with Nord Stream 2 have noted that Washington never actually intends to sanction the project and that the threats are meant instead to deter foreign investment in future Russian energy projects. 

Thus, the Nord Stream 2 project will probably move forward, albeit on a longer and more costly timeline than originally intended. And in the meantime, the United States will continue to put pressure on Russia's energy position elsewhere in Europe, both by backing diversification projects and increasing its own natural gas exports to the Continent.

No comments: