Thursday, 04 March 2021 04:31

How to solve the Nord Stream 2 dilemma Featured


If Gazprom could be persuaded to increase gas transit revenues for Ukraine, that would give the Biden administration a reason not to impose sanctions to block Nord Stream 2’s completion and ammunition to fend off criticism from those who want the pipeline to remain unfinished, writes Steven Pifer.

As Russia and Gazprom push to complete the last kilometers of the Nord Stream 2 gas pipeline, the Biden administration faces a dilemma. Opinion in Congress and Washington is dead set against the project, but President Biden does not want a big fight with Chancellor Merkel.

On February 18, Washington announced sanctions on the ship laying Nord Stream 2 and its owner. They amount to little and will not placate pipeline opponents. However, a better gas transit contract for Ukraine could provide a way to move past US pipeline sanctions.

When, or if, completed, Nord Stream 2 will bring up to 55 billion cubic meters of gas per year from Russia under the Baltic Sea to Germany (in 2019, Germany consumed 95 billion cubic meters of gas). Its 1,200 kilometers are 94% complete. Of course, it needs to be 100% to work.

A geopolitical or a commercial project?

Americans and many Europeans outside of Germany see Nord Stream 2 as a geopolitical project. A purely commercial venture would have updated existing pipelines that transit Ukraine, Belarus and Poland—at a fraction of the cost of a new undersea pipe. Moreover, Nord Stream 2 will not bring new gas; it will simply divert gas from those other pipelines.

Moscow engaged in this expensive undertaking to circumvent Ukraine and deny gas transit revenues to Kyiv. That is part of a multi-vector Russian effort to weaken its western neighbour.

Given the Kremlin’s egregious misbehaviour—the conflict in Donbas, killings and attempted killings of regime opponents, and cyber and disinformation campaigns—Nord Stream 2 offers a big target for US sanctions. Congress has happily obliged, authorising sanctions against entities that take part in construction of, provide services for, or certify the pipeline.

In a February 17 letter, a bipartisan group of Congressional representatives expressed their readiness to work with the executive branch “to counter Russian malign influence, including by ensuring Nord Stream 2 is never completed.” They will not regard the administration’s new sanctions as enough and will press for more.

Germany’s dilemma: finish the pipeline while avoiding sanctions

Berlin, hoping to finish the pipeline, seeks to persuade Washington that it will ensure that a regulatory mechanism will act to constrain any Russian market manipulation attempts; provide support to build terminals that could receive American liquified natural gas; and agree that certain Russian actions could trigger a halt to gas imports via Nord Stream 2.

These proposals will not suffice for pipeline opponents. A regulatory mechanism makes sense, but who knows now how it will work in practice? LNG terminals will not overcome the price advantage that gas shipped by pipeline enjoys. And Americans and Germans could well differ over what Russian actions should justify turning off the gas flow.

Others in Berlin suggest a moratorium to allow time to sort things out, bringing in not just the Russians, but perhaps also the Americans, Poles, Ukrainians and European Union. This idea has two variants. One would impose a moratorium now; the other envisages completing the pipeline and then pausing before actually beginning the flow of gas.

The second variant would not go down well with skeptics in Washington. What if the pipeline is completed but discussions among the parties fall into deadlock? Would Berlin and Moscow just go ahead and let the gas begin to flow?

Wanted: a creative way forward

One other measure could help resolve the question and obviate sanctions. Russia’s Gazprom is committed to sending 40 billion cubic meters of gas per year through Ukrainian pipelines through the end of 2024. If Gazprom could be persuaded to increase the amount of gas it pumps through Ukraine’s pipelines and extend the period of the contract, that would provide a tangible benefit for Kyiv.

Securing significant additional gas transit revenues for Ukraine would give the Biden administration a reason not to impose sanctions to block Nord Stream 2’s completion and ammunition to fend off criticism from those who want the pipeline to remain unfinished.

Such a deal offers a win-win-win: Kyiv could secure a needed plus-up in revenues to its state budget, while Washington and Berlin remove an obstacle from their bilateral agenda. This problem cries for a solution. US and German officials ought to have the creativity to solve it.