[GGP] Why Nord Stream 2 Will Not Be Built

Despite the recent decisions, first by Finland and then Sweden, to permit the Nord Stream 2 pipeline to use their Exclusive Economic Zones, it is unlikely that the project will be implemented. The battle right now over the controversial project, which would allow Gazprom to circumvent Ukraine, Belarus, and Poland in shipping gas to the West by delivering it directly to Germany, has focused on getting the approval of governments for the transit of their territorial waters and of the European Union for the overall project. But those are not the only obstacles that must be overcome for construction to start on the pipeline.

Over the past 10 months, the United States has introduced a critical new factor into the equation. In July 2017, in response to the Trump Administration’s dalliance with the idea of easing sanctions on Moscow, Congress passed a tougher sanctions bill that inter alia required the Administration to develop a list of individuals in Putin’s circle, implicitly making them subject to sanction for their association with President Putin’s aggressive policies. The list was compiled by January and used as the basis of initial sanctions on April 6, including sanctions against Oleg Deripaska and Viktor Vekselberg, an unnerving warning shot to Moscow’s financial elite.

These sanctions have the consequence of increasing substantially the difficulty of finding partners for the project. In part this is a result of the way that business is conducted in Russia today. The geopolitical goal of Nord Stream 2 is to allow Moscow to sell its gas in the West without relying on the pipeline systems in Ukraine. By design, this would deliver an economic blow to the government in Kyiv that Moscow is trying to destabilize, and would also prevent any interruption in the flow of Russian gas to Europe if it decided to widen its current war against Ukraine.

But President Putin also intends for Nord Stream 2 to serve his domestic interests, and this will make it much harder to build the pipeline for two reasons. First, he wants to use it to reward his cronies who were hit earlier by Western sanctions. Reports indicate that Arkady Rotenberg and Gennady Timchenko, oligarchs and long-time associates of the Russian President, will be principal builders of the pipeline. Rotenberg and Timchenko as well as their pipeline building companies have been sanctioned by both the United States and the European Union. This means that others involved in the project will be operating with Russian oligarchs, if not directly, then through some cut-out company, thus creating for themselves a significant risk of being sanctioned.

Second, President Putin is also using the current Western, and especially American, sanctions regime to bring his own oligarchs to heel. That would explain why the Russian Alfa Group appears to be emerging as the Russian financier of the project. It is about to purchase Wintershall, one of the five European energy companies that support the project in a consortium with Gazprom. In particular, following the recent sanctioning of Deripaska and Vekselberg, the Alfa partners must understand the risk of this undertaking. But it can hardly ignore the will of Russia’s powerful leader. Sanctioning Alfa Bank would likely send Western firms considering participation in Nord Stream 2 scurrying for the exits. The prospects for profit in Nord Stream 2 are dwarfed by the dangers of falling afoul of Congress’s sanctions legislation.

The supporters of Nord Stream 2, particularly in Germany, tried hard to politicize the congressional sanctions legislation. They declared it an unacceptable American effort to impose restrictions on their economic activity. But Congress at least partly offset this criticism by adjusting the language in the legislation regarding pipelines in response to European concerns. Those adjustments left in place the critical language about sanctioning entities cooperating with the Kremlin. That language is barely a political issue. It is simply part of the environment that any firm doing risk analysis needs to consider. But it is a brightly glowing warning light.

What is more, the German position in support of Nord Stream 2 is hardly popular in Europe. Pipeline champions have been unable to establish a unified EU position against the sanctions legislations because there are many in the European Union who would like stiffer sanctions, and there are many who oppose the project. Some, like Poland and the Baltic states, oppose it because they recognize it as a geopolitical project designed to make it easier for Moscow to pursue provocative policies in Eastern Europe. Others, such as Italy, which was soft on sanctions even before the new government, do not support Nord Stream 2 because they would prefer to see a gas pipeline from Russia in the Mediterranean.

Nord Stream 2 also faces serious opposition in the European Commission, which would like to see the implementation of a common EU energy policy consistent with the Third Energy Charter. Opponents there note the peculiarities of the German position. While Berlin normally insists on EU countries working in tandem on policies of mutual interest, it is pushing unilaterally for Nord Stream 2.

The final complication for initiating Nord Stream 2 is found in Germany itself. Yes, the Putinversteher, the Social Democratic Party and interested German business strongly support it. And Chancellor Merkel is formally in favor. She recognizes that after strongly championing sanctions on Russia, she needed to offer her business supporters something. Yet she demonstrated her appreciation for nuance recently when publicly acknowledging that Nord Stream 2 is also a geopolitical project, something its most fervent advocates deny. The Chancellor is a formidable politician, but she is not likely to use all her powers to ensure the success of this project.

Some observers believe that an idea first floated in negotiations between Chancellor Merkel and the SPD on the formation of a government after last year’s election would provide a compromise enabling agreement on Nord Stream 2. This proposal would offer guarantees to Ukraine that even after the building of Nord Stream 2, Gazprom would continue to send the current amounts of gas—90 bcm per year—through Ukraine’s pipeline to its European customers. The Germans have already broached this with Kyiv, which is unenthusiastic, among other reasons, because it remembers the Budapest Memorandum, in which Ukraine gave up its nuclear weapons in exchange for Western and Russian “assurances” of its territorial integrity and sovereignty.

This proposal is less a compromise and more a sign that the partisans of Nord Stream 2 recognize that their position is weakening. The odds are growing that Nord Stream 2 will disappear, not with a bang, but with a whimper.

This article by John Herbst was originally published by The American Interest

John Herbst is Director of the Atlantic Council’s Eurasia Center. He served as the U.S. Ambassador to Uzbekistan from 2000 to 2003, and as the U.S. Ambassador to Ukraine from 2003 to 2006.

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