December 2, 2021
The long-awaited Nord Stream 2 pipeline, which would double the volume of Russian gas exports to Germany, was finally completed in September. However, a volatile geopolitical situation is raising the stakes for the incoming German government, both of going ahead with the €10bn project, and of pulling out.
Built under the Baltic Sea next to Nord Stream 1, and thus doubling the combined annual capacity to 110 billion m3, the 1,225-kilometre pipeline has long been a cause of political controversy. From the Russian side, the motive is clearly to reduce dependence on existing pipelines running through Ukraine, potentially depriving the Ukrainian government of billions of dollars in transit fees each year and reducing Ukrainian leverage over Russia in the future, as well as European countries’ stake in Russia and Ukraine’s ongoing hostilities.
Inevitably, this prospect both alarms and infuriates Ukraine, whose president, Volodymyr Zelensky, has been on a sustained diplomatic offensive towards Europe and the United States to rally opposition to the project, which he described as a “dangerous geopolitical weapon”. The US are also strongly opposed to the pipeline, imposing intermittent sanctions on stakeholders, though the Biden Administration has sought to take a more conciliatory line to preserve good relations with Germany. Many other EU member states are queasy about the project, due to the possible reduction of gas being transported through their own territory, and because it would make the EU too reliant on Russian gas, already estimated at 43% of Europe’s total imports.
At the centre of the argument is the incoming German government, who find themselves caught between international diplomatic and political pressure, and their domestic energy and economic needs. Many of Germany’s partners have been strongly critical of Nord Stream 2; former Polish Prime Minister and President of the European Council Donald Tusk recently described the pipeline as Chancellor Angela Merkel’s “biggest mistake”, running counter to EU interests. However, the project is highly prized by Germany’s powerful business lobby, who are key to German foreign policy formation.
Furthermore, the new government has ambitious plans to phase out coal by 2030 and run the country on 80% renewable energy, and natural gas is considered as an essential bridge to achieving this goal. Incoming Chancellor Olaf Scholz told industry representatives in October that gas power plants “are the prerequisite for us to be able to cope with this period of change”. This point, however, is also contested, as environmental campaigners say that continuing to generate new gas capacity will “lock in” dependence on fossil fuels and run counter to climate goals, especially problematic for a government styling itself as the champion of the European Green Deal.
The bottom line is that the project is considered from within Germany as essential for energy security. In November, however, German regulators postponed approval of the pipeline. Officially, the regulators argued that the operator, a Swiss-registered subsidiary of Gazprom, could only be certified if it was a legal entity formed under German law, but the timing indicates that the decision was being postponed to allow the new government to have their say. The new coalition of the Social Democrats, Greens, and pro-business Free Democratic Party should take office in the first half of December, but the coalition agreement makes no mention of Nord Stream 2.
As if to underline the headache facing the new government, EU wholesale gas prices rose 17% after the regulator’s decision, from an already-high level following a serious supply crunch earlier this year. Gas prices are now around eight times that of before the pandemic. Although gas stores are gradually recovering from ten-year lows at the worst of the crisis, another cold winter this year could place renewed pressure on the European energy sector, spurring inflation further and jeopardising Europe’s fragile recovery. If the German government needed yet another reminder of the multi-level chess game at work, Russia has recently built up an estimated 100,000 troops at the Ukrainian border, and a war of words has broken out between Russia and NATO, both of whom blame the other for the apparent renewed tension.
Germany and the US are now said to be working together on a deal over the pipeline, which could see guarantees from Germany of unspecified retaliatory action in the event that Russia uses energy as a weapon in future, in exchange for the US dropping sanctions. The Biden Administration claims to “fundamentally reject sanctions among allies”, though Republicans in the US Senate have tabled new sanctions measures against Nord Stream 2, thought to have bipartisan support. In November, Republican Senator Jim Risch, a senior member of the committee on foreign relations, said Congress “will continue to push legislation that protects our allies and interests in Europe, while countering the Kremlin’s malign influence projects”. Russia’s European critics, meanwhile, say that using energy as a weapon has long been a key plank of foreign policy. Russia refused to increase gas supplies significantly during the crisis earlier this year, and a recent increase in production was accompanied by an assurance from President Vladimir Putin that any further increases in supply would depend on the approval of Nord Stream 2. Earlier this year, a report from the Berlin office of the European Council on Foreign Relations (ECFR) described Nord Stream 2 as “a suitcase without a handle: hard to abandon; hard to take along”. In this zero-sum game, the German government must eventually decide what to do with this suitcase.
