[NGW Magazine] Nord Stream 2: Russia Plays with Fire

The first few months of the year have not seen any softening in Russia's foreign policy, but this is precisely the time that its actions in one sphere could adversely damage it in another, as it seeks approvals for a key new pipeline.

By the end of February 2018, Russia’s relationship with Ukraine had deteriorated sharply after the Stockholm court demanded that Gazprom/Moscow pay more than $2bn to Kiev and in early March, Gazprom announced it would not sell gas to Ukraine on the new, disadvantageous terms the court demanded.

In addition, the Kremlin’s alleged attempt on the life of a Russian ex-spy and his daughter in the UK led to further deterioration of Russia’s relationship with the West. In reply, Kiev pointed out that Russia was not a reliable partner and said not for the first time that Nord Stream 2 should be scrapped. All of this renewed doubts that Nord Stream 2 pipeline will be built, but these problems will not necessarily kill the project. 

Tensions between Ukraine and Russia erupted almost immediately after the collapse of the Victor Yanukovich regime and the tensions in Donbas in 2014. In the increasingly bitter conflict, gas lines and gas supplies started to play an important role in the confrontation between the two countries. Most of the gas lines had been built during the Soviet era and this led to a peculiar love/hate relationship between Kiev and Moscow. 

On one hand, Kiev wanted to free itself from dependence on Russian gas, but it could not afford the luxury of diversification. In addition, Ukraine was loath to lose its role as the major transit state. For this reason, it bitterly opposed Nord Stream 2 while Moscow clearly regarded Nord Stream 2 as one of its major priorities.

In response to the attempted assassination, the US imposed sanctions on several oligarchs connected with Russia's newly-re-elected president, Vladimir Putin, including Gazprom CEO Alexei Miller. And since then, there has been the April 7 suspected chemicals attack on Douma, Syria, which would appear to be the final nail in the coffin for Moscow's plans.

Still, the Nord Stream 2 project continues, with first Germany and then Finland consenting to the offshore route crossing their territory, the latter’s final approval coming April 12, leaving Denmark and Sweden yet to decide whether to approve or not. 

Moscow’s chances for success

While it seems to be a reckless move, Moscow is not in immediate danger of losing its access to western customers. Kiev has made it clear that it has no intention of taking Russian gas while it moves through Ukrainian territory, demonstrating that it is a law-abiding country. More important, Russia already has Nord Stream I and permission to use the Opal gas line almost at full capacity, enabling it to send most of the gas to Europe anyway.

One should also remember that the heating season for this year is approaching its end. More importantly, Moscow’s actions emphasise the difference between Western Europe –  mostly Germany, with which Moscow has no issues – and eastern Europeans, who could create problems for Germany and other central European countries in the future; and here, Moscow has exploited an increasing rift inside the European community.

The increasing tension between the US and “old Europe,” as Donald Rumsfeld, George W Bush’s Secretary of Defence, has been re-emerging for a long time. It started soon after the end of the Cold War, when Berlin became doubtful that it needed the US' nuclear umbrella; and Washington saw Germany not so much as an ally but as a competitor. The conflict became an open one upon Donald Trump’s victory and led to growing economic and hence geopolitical distancing between the two countries. 

The conflict between Washington and Berlin intensified the conflict inside the EU. To understand the process, one should remember recent history. Most eastern Europeans ran headlong to the EU with the notion, deeply ingrained in their historical memory, that what they regarded as their low-level standard of living was due to their control by Russia.

Still, their entrance into their European family was often deeply disappointing, and quite similar to the feelings of the Soviets and eastern Europeans of the Cold War era, who found political and intellectual liberty but not necessarily employment, affordable housing or health care – which they had taken for granted in their socialist, totalitarian societies.

The situation with eastern European states became structurally similar. It is true that the Soviet empire had brought totalitarian socialism and controlled eastern European satellites’ foreign policy, but it also brought the almost-free flow of natural resources, including gas and oil. The USSR was also a bottomless market for anything that these eastern European countries had produced.

With the EU, they entered an absolutely different arrangement. The dominant powers of Europe, Germany first of all, were capitalist countries. The results were clear: while official statistics provided a rosy picture of eastern European economies and rising living standards, the reality for many eastern Europeans was quite different. Their economies and living standards collapsed, and this explained the rise of “populism,” with its often latent “national-socialist” tinge. If eastern Europeans are unhappy with the US, their dislike of Germany is much stronger. And, as in the case with Russia/the USSR in the past, this hostility is easily anchored in the not-so-distant past.

In this particular circumstance, some eastern Europeans look at the US as a natural geopolitical and economic counterbalance, not just of Russia, but also of Germany. This is, for example, the case with Poland, which wants to increase its reliance on American LNG. The increasing tension between Washington, Brussels and Berlin has provided additional impetus to the simmering conflict between Berlin and some Eastern European capitals, such as Warsaw.

E Europe and Germany: different approaches

EU countries have been divided in their approaches to Nord Stream 2. While eastern Europeans strongly oppose the project, Germany is on Russia’s side. The conflict became clear as long ago as last year. In addition, German support of Nord Stream 2 was solidified by Gerhard Schroder, the former German chancellor, in managing the project. 

One could also add that Germany’s increasing support of Nord Stream – much to US annoyance – provided Gazprom with the sense of optimism and the feeling that Nord Stream II would be built, regardless of US sanctions.

The major argument against Nord Stream 2 is that the project is geopolitical, not commercial, in nature. In this reading, it was just an outfit of the Russian government, and Moscow could cut the supply at any given moment. 

Consequently, only US LNG could be geopolitically safe. Berlin pretends that it understands these concerns, and is ready to build facilities for accepting LNG, and this prevents geopolitical blackmail. At the same time, Berlin insists that the existing LNG terminals do not prevent Germany from receiving gas from Nord Stream 2.

But Warsaw knows that Germany is unlikely to shift to LNG as Moscow is unlikely to stop supplying gas to Germany: German LNG terminals are more insurance against dramatic worsening of the Russo-German relationship, rather than a true alternative to Russian gas. 

By providing permission for Nord Stream’s construction in its territorial waters, during the time of mass expulsion of Russian diplomats and tensions not seen since the coldest part of the Cold War, Berlin showed that it has little interest in supporting eastern Europeans, even those who belong to the EU, and paid no attention to Washington’s admonitions and threats. 

All of these indicate that Nord Stream has good chance of survival regardless of the complications in Russia’s relationship with the West and Ukraine. 

Dmitry Shlapentokh

Prologue to the drama

In the beginning of the post-Soviet era, Moscow continued to sell gas to Ukraine, and charged it less than to Western customers. This arrangement ended with Putin’s advent. For the Russian business community and the Kremlin tightly connected with it, it was just another foreign customer. Any discount had to be explicitly linked to economic and/or geopolitical benefits.

Gas delivery was also used as a weapon to deal with recalcitrant leaders. Ukraine could serve here as a good example. Victor Yushchenko, Ukraine’s president from 2005 to 2010, was the first victim of Moscow’s use of gas as a weapon. Yushchenko was clearly anti-Russian, and suffered from the “gas war” in 2005/2006, when Moscow cut supplies to Ukraine, on the basis that Ukraine had taken gas intended for western European customers.

Pro-Russian Yanukovich, who ran Ukraine from 2010 to 2014, had limited relief from Moscow. But his demise in 2014 and the beginning of the Russo-Ukrainian conflict created new gas problems. Moscow proclaimed plans to build gas lines which would bypass Ukraine completely, to deliver gas directly to Turkey and northern Germany.

Ukraine and several eastern European countries were strongly against the project, which would deprive them of revenue. This conflict between Moscow and Kiev was especially acrimonious, and the two countries were enmeshed in conflict over gas supply. Both sides appealed to international courts, and when the Stockholm court of arbitration decided in favour of Ukraine, Russia took a decisive step: it actually called for the severing of all gas-related ties with Ukraine, and called for the cancellation of the gas supply and the gas transit agreements that the Stockholm tribunal had spent so long redrafting.

The decision appeared to be an impulsive, high-stakes gamble, which could cut Russia off from the western European market just when the construction of the second string of TurkStream and Nord Stream 2 are still up in the air. Only later will it be clear whether it has done more harm than good.

Dmitry Shlapentokh