Germany Puts Its Head in Russia's Energy Pipeline Noose

U.S. President Donald Trump, like his predecessor Barack Obama, has opposed the Nord Stream 2 pipeline project. Trump in particular has criticized German Chancellor Angela Merkel for her refusal to increase defense spending while at the same time supporting the pipeline that will funnel billions of dollars to Russia. Pictured: Merkel and then Russian President Dmitry Medvedev, along with other European leaders, take part in the launch ceremony for the first leg of the Nord Stream gas pipeline, on November 8, 2011 in Lubmin, Germany. (Image source: kremlin.ru)

A Swiss company working on the controversial Nord Stream 2 gas pipeline directly linking Russia to Germany has suspended pipelaying operations after U.S. President Donald J. Trump signed into law new sanctions.

The sanctions are part of an effort by the United States to halt completion of the €9.5 billion ($10.5 billion) pipeline, which would double shipments of Russian natural gas to Germany by transporting the gas under the Baltic Sea. Opponents of the pipeline warn that it will give Russia a stranglehold over Germany’s energy supply. Proponents counter that with European domestic natural gas production in rapid decline, the pipeline will enhance security of supply.

American sanctions may delay Nord Stream 2, but they are probably too late to kill the project. More than 80% of the 1,230-km (764-mile) pipeline has already been laid and the project is expected to be completed in 2020, according to Russia’s Deputy Prime Minister Dmitry Kozak.

On December 17, the U.S. Senate, by a vote of 86 to 6, passed the National Defense Authorization Act (NDAA), the annual defense spending bill, which includes the Nord Stream 2 sanctions language. The measure previously cleared the U.S. House of Representatives on December 11 by a vote of 377 to 48. President Trump signed it into law on December 20.

The legislation requires the U.S. State and Treasury departments to submit a report within 60 days that identifies “vessels that are engaged in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline project, the TurkStream pipeline project [a new gas pipeline stretching from Russia to Turkey across the Black Sea] or any project that is a successor to either such project.”

Approximately 350 companies are involved in building the undersea link, including the Swiss company Allseas Group SA, whose ships have been laying the last section of pipe in Danish waters.

On December 21, Allseas said that it had suspended its activities until further notice. Its decision came after U.S. Senators Ted Cruz and Ron Johnson warned AllSeas CEO Edward Heerema that the company would face “crushing and potentially fatal” sanctions if it continued work on the pipeline:

“Allseas and its key personnel who knowingly sell, lease, or provide those vessels for the Nord Stream 2 project will be sanctioned if those activities do not cease immediately. For the next half decade your company and those personnel will be entirely barred from the U.S. In the meantime, any transactions they attempt to conduct with anyone who is in the U.S. or using the U.S. financial system will be blocked. Moreover, all property you have within our jurisdiction will be frozen, including assets related to Allseas USA headquartered in Houston, TX, any financial assets in U.S. banks, and any physical vessels or materials owned by Allseas that come into the U.S. …

“If you were to attempt to finish the pipeline in the next 30 days, you would devastate your shareholders’ value and destroy the future financial viability of your company.”

Russia will now have to find alternative vessels to complete the pipeline. This will result in delays and additional costs to completing the pipeline, but it is unlikely to halt the project. On December 26, Russian Energy Minister Alexander Novak said that only 160 km (99 miles) of the pipeline remains to be completed and that Russian ships would finish the work within months.

During his nomination hearing on October 25, John Sullivan, the next U.S. Ambassador to Russia, said that sanctions may impose a substantial cost on Russia, but will not stop the pipeline: “My concern is we may already have reached the point where the Russians will have the resources and ability to complete the pipeline no matter what we do.”

U.S. lawmakers have warned that the pipeline would funnel billions of dollars to Moscow and help Russian President Vladimir Putin solidify his influence in Europe. The chairman of the Senate Foreign Relations Committee, Republican Senator James Risch, said in a statement:

“Projects such as the Nord Stream 2 pipeline are a threat to European energy security and a provocation by the Russian government. Imposing sanctions that will prevent the completion of the Nord Stream 2 pipeline is an important tool to counter Russia’s malign influence and to protect the integrity of Europe’s energy sector…. I hope all parties involved will realize that stopping this project is in the best interest of our friends and allies who wish to curb Putin’s efforts to make Europe reliant on Russian energy.”

Democratic Senator Jeanne Shaheen added:

“The Nord Stream 2 project is another means by which Russia can spread its malign influence by exploiting Europe’s energy dependence — a tactic that the Kremlin has a history of deploying. Many European leaders have voiced their concerns loud and clear regarding this pipeline and the threat it poses to Europe’s independence…. I believe that this bill will help preserve our collective efforts within the transatlantic alliance to counter Russian aggression.”

A German-Russian Project

Nord Stream 2 is led by Russia’s Gazprom, with half of the funding provided by Germany’s Uniper and Wintershall, the Anglo-Dutch company Shell, Austria’s OMV and France’s Engie.

Despite the multinational participation, the pipeline is essentially a German-Russian project promoted from its inception by Germany’s center-left Social Democratic Party (SPD), which, even during the Cold War, viewed closer economic ties with Russia as a way to defuse East-West tensions.

Germany’s former SPD chancellor, Gerhard Schröder, a confidant of Russian President Vladimir Putin, has been Europe’s leading proponent of the pipeline. Schröder, who led Germany between 1998 and 2005, has been the Chairman of Shareholders’ Committee of Nord Stream since 2006. He is also Chairman of the Board of Directors of Rosneft, Russia’s biggest oil producer. He has used his connections in Germany and elsewhere in Europe to lobby for both Nord Stream 1 and Nord Stream 2.

In 2017, when Nord Stream was suffering from several serious setbacks, the former SPD leader and Foreign Minister Sigmar Gabriel revived the project, as did his successor, Frank-Walter Steinmeier, who is now Germany’s president.

Not surprisingly, Germany’s current Social Democratic Foreign Minister, Heiko Maas, has criticized the U.S. sanctions as foreign interference. “Decisions on European energy policy are made in Europe, not the USA,” he tweeted on December 12. “We fundamentally reject foreign interventions and sanctions with extraterritorial effects.”

Europe is, in fact, deeply divided over the Nord Stream project and Germany is in the minority position. Russia is the largest supplier of natural gas to the EU, according to Eurostat. Just over 40% of EU imports of natural gas come from Russia, followed by Norway (at around 35%). Nord Stream 2, when combined with the existing Nord Stream 1, would concentrate 80% of the EU’s Russian-imported gas along that pipeline route.

Germany’s Nordic, Baltic and Eastern European neighbors have accused Berlin of ignoring their concerns that the pipeline is a threat to Europe’s energy security and that it will strengthen Gazprom’s already dominant position on the market.

A report by the Swedish Defense Research Agency found that Russia has threatened to cut energy supplies to Central and Eastern European more than 50 times. Even after some of those states joined the European Union, Russian threats continued.

In December 2018, the European Parliament, by a vote of 433 to 105, condemned Nord Stream 2 as “a political project that poses a threat to European energy security.” It called for the project to be cancelled.

Ukraine has said that the Nord Stream 2 pipeline will deprive the country of more than $3 billion in transit fees and undermine existing economic sanctions imposed by the West to compel Russia to resolve the conflict in eastern Ukraine and end its occupation of Ukraine’s Crimea region.

Roughly one-third of Russia’s gas supplies to the EU currently pass through Ukraine, but a ten-year pipeline contract between Russia and the Ukraine expires on December 31, 2019.

Nord Stream 2 should have been operational at the end of 2019, but the project was delayed after applications to lay pipes under Danish waters were left pending since April 2017. Nord Stream Chairman Gerhard Schroeder blamed U.S. political pressure on Denmark as the main reason for the delay in approving the permits. “Denmark is putting Europe’s energy security at risk,” he said.

After Denmark’s Social Democratic Party won the Danish general elections in June 2019, the new government removed the last major hurdle to complete the Russian-led project. On October 30, the Danish Energy Agency approved a permit for Nord Stream to lay pipes in a 147-km section in the Danish Exclusive Economic Zone (EEZ) southeast of the Danish island Bornholm in the Baltic Sea.

A Russian Trap

U.S. President Donald Trump, like his predecessor Barack Obama, has opposed the pipeline project. Trump in particular has criticized German Chancellor Angela Merkel for her refusal to increase defense spending while at the same time supporting the pipeline that will funnel billions of dollars to Russia.

Ahead of a NATO summit in Brussels in July 2018, Trump said that it was “very inappropriate” that the United States was paying for European defense against Russia while Germany, the biggest European economy, was supporting gas deals with Moscow. He added that Germany had become “a captive” to Russia:

“When Germany makes a massive oil and gas deal with Russia, we’re supposed to be guarding against Russia and Germany goes out and pays billions and billions of dollars a year to Russia.

“We’re protecting Germany, we’re protecting France, we’re protecting all of these countries. And then numerous of the countries go out and make a pipeline deal with Russia where they’re paying billions of dollars into the coffers of Russia.

“So, we’re supposed to protect you against Russia and you pay billions of dollars to Russia and I think that’s very inappropriate. Germany will have almost 70 percent of their country controlled by Russia with natural gas. You tell me, is that appropriate?

“Germany is totally controlled by Russia, because they are getting 60 to 70 percent of their energy from Russia and a new pipeline.

“I think these countries have to step it up [on defense spending], not over a 10-year period, they have to step it up immediately. Germany is a rich country, they talk about increasing it a tiny bit by 2030. Well they could increase it immediately, tomorrow, and have no problem.

“If you look at it, Germany is a captive of Russia. They got rid of their coal plants, they got rid of their nuclear, they’re getting so much of their oil and gas from Russia. I think it is something NATO has to look at. It is very inappropriate.”

In February 2019, the London-based Economist magazine warned that, because of Chancellor Merkel’s dependence on her coalition partner, the SPD, to remain in power, Germany had fallen into a Russian trap:

“When a megaproject makes no commercial sense, there are two possibilities. Either its sponsors are fools, or they have other motives. Since Vladimir Putin is no fool, one must assume that his pet pipeline is not really a business venture — and that the fools are the Europeans, in particular the Germans….

Economically, it is unnecessary…. European demand for imported gas, because of energy efficiency, weak demand for manufacturing and the rise of renewables, is not expected to reach a level that would require the new pipeline anytime soon. Unsurprisingly, Russia’s majority state-owned energy behemoth, Gazprom, is the scheme’s only shareholder.

“The project’s real aims are political. There are three main aspects to this. First, Nord Stream 2 harms Poland and Ukraine, two countries that Putin loathes and one that he invaded in 2014. Currently most Europe-bound Russian gas passes through Ukraine. Nord Stream 2 will make it easier for Russia to cut supplies to Ukraine without affecting Germany; it will stop Ukraine from dragging Germany into a dispute with Russia by interfering with the supply of gas; and it will deprive the Ukrainian government of transit fees. Without Nord Stream 2, there is a limit to how much mischief Russia can do to Ukraine before it endangers its own economy….

“Nord Stream 2 will increase Europe’s dependence on Russian energy…. By cutting out transit countries and fee it will be able to charge its customers less. This will be good for German energy consumers at least in the short term. But further relying on Russia contradicts EU policy, which for the past decade has been to diversify its energy supply, partly for security reasons….

“Angela Merkel, Germany’s chancellor, appears to value cheap energy more than European security. This is rash. As Russia has demonstrated in 2006 and 2009, when it restricted the supply of gas through Ukraine, it is ready to use gas as a political weapon.

“Initially, Nord Stream has divided Western allies, setting Eastern Europe against much of Western Europe, and driving a wedge between Europe and America, which has long opposed the pipeline….

“In short, Nord Stream 2 could make Ukraine, Poland and the Baltic states less secure, undermine the EU’s security strategy, give Russia a big stick for threatening Eastern Europe and sow discord among NATO allies. To Mr. Putin, causing so much trouble for a mere $11 billion must seem like a bargain. For Europe it is a trap.

“The mystery is why Germany has fallen into it and has been twisting French arms to do the same. Since the invasion of Ukraine, Mrs. Merkel has become one of the strongest advocates of EU pressure on Russia. Perhaps the demands of German businessmen heightened since her wrongheaded decision to close Germany’s nuclear power stations in 2011, trump all else. Or perhaps something darker is at fore. She relies for her coalition on the Social Democrats (SPD), staunch defenders of Nord Stream 1 and 2. The SPD’s Gerhard Schroeder, a former chancellor, now sits on the board of Nord Stream 2 as well as Rosneft, Russia’s oil giant.

“No one has proved that any of this has influenced German policy towards Russia, but many Germans are alarmed at the possibility.”

Soeren Kern is a Senior Fellow at the New York-based Gatestone Institute.