Nord Stream 2: ECFR opinions

Nord Stream 2, the €9.5 billion, Russian-led offshore natural gas pipeline that is to be built in the Baltic Sea from St Petersburg to Lubmin on the Baltic Coast in Northeast Germany, has been contentious since its inception in 2015. Voices across Europe and in the United States have either championed it or warned against it, and both sides do so for a multitude of reasons. The issue has returned to the fore recently with the crisis between Russia and Ukraine in the Sea of Azov, and as Europe and the US consider strategies going forward regarding their relationships with Russia.

What follows is an array of opinions on the topic from ECFR experts illustrating the difficult path ahead toward a consensus.

Build or cancel – but do it well

By Kadri Liik

The one good thing about the debate about Nord Stream 2 is that it is not the debate about Nord Stream 1. Unlike NS1, it does not divide Europeans neatly into two camps – these days, it is easy to find Germans who oppose the pipeline and northern or eastern Europeans who say that they do not care. And, whereas the NS1 debate was closely linked to the big question of Europe’s partnership with Russia and Russia’s reliability as a partner, the NS2 debate is a blend of political views, business interests, and different strategies of energy diversification. This makes the debate messy, but compromises possible.

Energy security: NS2 does not necessarily increase Europe’s dependence on Russian gas – it would still be the same gas, just coming via a different pipeline. Russia does not gain any meaningful leverage over Europe or any of its countries if the gas is freely tradable in the European internal market; it largely is in western Europe but much less so in the east. Equally, the entirety of Europe needs to be able to rely on alternative sources of gas (or other energy) if Russian leverage is not to ensue. This is not a fairytale – since the gas cutoffs of the early 2000s Europe has been investing in interconnectors, reverse flows, alternative fuels, and price transparency. It might not yet be where it needs to be –with NS2, capacity for west-east flows into central Europe would have to be increased. But it can get there.

Poland: Thus, the argument often heard from Poles – that any reliance on Russia will a priori increase its leverage over Europe – is not entirely correct. But Poland is also motivated by business interests. It would like to become a hub for alternative gas supplies into Europe, mainly liquefied natural gas (LNG). The cheap Russian gas from NS2 could make this business plan – already a fairly optimistic one – all but unviable, although even without NS2 these plans seem to be far too optimistic. At the same time, some investment in alternative gas – along the lines that Poland is proposing – is needed exactly in order to avoid Russia’s monopolistic stranglehold over Europe’s energy supplies. So one could say that in order to (safely) have NS2, Europe also needs to invest in LNG hubs – and why not in Poland? Another question is where the investment would come from – given that, if built in parallel with NS2, that project would make little economic sense and be all about energy security and solidarity.

Ukraine: Interestingly, this is exactly the sort of conclusion that Europe, starting with Angela Merkel, has for now reached about the pipeline that exists in Ukraine: that NS2 needs to complement, not replace it. If Russia closed down the Ukrainian pipeline, Ukraine would lose significant sums of transit fees and feel that Europe has abandoned it to Russia’s mercy. On the other hand, no country is entitled to transit fees forever, and Ukrainian gas transit has great potential to be a source of corruption and shady deals between shady characters. So Merkel’s solidarity with Ukraine is a very good political step at the moment, and in the context of Europe’s unity and its relations with Russia. Its merit, if viewed in the context of Ukraine’s healthy economic future, is more questionable.

America: The position of the US is, let’s be honest, hard to understand. In some statements it seems to oppose NS2 in order to advance American gas exports, punish Russia, and annoy Germany. Its other statements, though, seem borrowed from Berlin – in Helsinki, for instance, Donald Trump said that he supports NS2 as an addition to, not replacement of, the Ukrainian pipeline. Be that as it may, one thing is clear: if NS2 gets cancelled because of brutal pressure from America, then this will be really bad for Europe. Such a turn of events would cause dramatic rifts among its members – not unlike those of 2003, but in a much more chaotic international and domestic context, and hence much more dangerous to the European project.

Germany: In this situation, Germany needs to carefully weigh and balance its very different interests. Its consumers are interested in cheap gas and its business is interested in doing business. Its politicians believe in engaging Russia and/or strengthening European unity – often both. Its lawyers believe in due legal process (which makes it hard to cancel NS2 or even adapt the laws that govern it.)

In the end, whether NS2 gets built or not is not particularly important. What is much more important is that the process should be handled in way that strengthens Europe both economically and, especially, politically. This is what will really matter in the years to come. Either outcome – cancelling NS2 or going ahead with it – allows for that. And either outcome also allows for a complete collapse of all important relationships.

Only in Germany’s interest

By Nicu Popescu

From outside Germany, Nord Stream 2 seems hard to explain in a way that does not look like a narrow-mindedly self-serving German project that upsets almost everyone. It not only upset states that have complicated relations with Russia – like Poland, Ukraine, or the Baltic states – but also states that want more engagement with Russia – like Italy and Bulgaria – and that do not understand why South Stream was terminated but NS2 was not. In purely financial terms, Nord Stream is seen as a project from which Germany will make money at the expense of Ukraine, which currently receives income for gas transit, and at the expense of business opportunities of European Union member states which had hoped to benefit from South Stream. Italy, Bulgaria, and Ukraine all feel that they are losing billions of euros of existing or potential revenues to Germany.

The German mantra – that it is a purely commercial project – does not go very far in explaining this. Germany might think so, but no one else sees it this way. Russia certainly sees it as a strategic project, as do Ukraine or Poland. And, whether Germany wants it or not, NS2 will have strategic implications for large swathes of central and eastern Europe.

All these perception problems become even more acute in the context of the Kerch Strait incident and European discussions about building up the EU’s strategic autonomy so it can act in the military, economy, and sanctions domains. Take Ukraine first. Russia has been enforcing sanctions on Ukraine since 2014. By slowly strangling its neighbour’s goods exports through the Kerch Strait, Russia is not only hitting Russian-Ukrainian trade, it is also hitting economic relations between eastern Ukraine and the EU (and between eastern Ukraine and the Middle East). So, as these major economic pressures on Ukraine escalate, NS2 would also cause Ukraine to lose €2bn annually in gas transit fees.

Such issues also infect how EU member states see European solidarity and transatlantic relations. Germany’s insistence on Nord Stream is certainly undermining trust in it among other EU member states when it comes to other issues, such as sanctions on Iran, relations with the United States, or efforts to build up a more strategically autonomous EU.

So Germany might consider NS2 to be in its interest. It has the right to do so. But it is likely to cost it on plenty of other dossiers.

Big business and high politics

By Josef Janning

Energy is big business and high politics at the same time. It is profitable business for an oligopoly of companies in each of the large European Union markets. And the crucial role of energy to the economy, to the economic cycle, and to overall security makes it an unavoidable issue for policymakers at the highest level.

Once in operation, Nord Stream 1 and Nord Stream 2 will become the major supply line for natural gas from Russia to Germany. It could largely replace other gas corridors now running through eastern European and central-eastern Europe European countries, even if it will not do so for some years yet. Germany’s energy reliance on Russia will remain what it is today but the country would be less exposed to political rifts between Russia and transit countries. One traditional pillar in the energy relationship between the Russia and Germany (going back to Soviet times) has been to maintain this link outside of, and independent of, politics. Russia has proven to be a highly reliable supplier – and Germany has proven to be a prime customer.

With regard to market effects, German energy companies could grow further as a major hub for the marketing of Russian gas to neighbouring countries, including to the east, where Poland is also seeking to build a hub position on liquefied natural gas imported from the Gulf and the United States. Should both hub strategies seek to squeeze out each other, energy politics will become a major issue of friction. Should they find ways to complement each other, north-eastern and south-eastern European countries’ great dependency on gas deals with Russia could be reduced through diversification of sources and neutralisation of geopolitics. The latter presupposes keeping energy out of sanctions politics, as was the case in 1980 after the Soviet invasion of Afghanistan.

Risking the EU project

By Piotr Buras

To understand the implications of Nord Stream 2, let’s ask the simplest question: Who will be the main beneficiaries of the new pipeline? While predictions about future gas consumption in Europe, gas prices, and geopolitical developments are difficult to answer, some assumptions are easy to make. It is safe to say that Gazprom – the Putin regime – is beneficiary No. 1. It will have a new channel to transport 110 bcm gas and strengthen its position as the key supplier to Europe. While the current capacity of gas transport routes from Russia to the European Union (250 bcm) already exceeds the demand of 155 bcm (2017), for Russia NS2 makes sense if it wants to circumvent Ukraine. It is an effective tool to weaken the enemy: gas transit an important source of income for Kyiv, and a strategic asset. And, since NS2 is exempted from the EU Third Energy Package (Gazprom is allowed to both sell the gas and to own the transportation route) the business should pay off economically.

The second big beneficiary is most probably the European – mostly German – energy companies involved in the project. The scope of the future demand for gas is uncertain, of course, but it will be offset by the strategic partnership with Gazprom and direct access to the gas source in Siberia. Germany could benefit too – by increased revenues from German companies’ gas sales in central-eastern Europe (through the pipelines OPAL and EUGAL, which bring gas from the Baltic Sea to the Czech Republic). This is how Germany becomes what you call a “gas hub”. But this is probably the end of the list of beneficiaries. European customers? The long-term gas partnership with Gazprom will somewhat lower incentives to invest in renewables and thus be to the detriment of the goal of decarbonisation and lowering of gas prices. Central-eastern Europe? The dominance of Gazprom on the energy market here (which is much greater than in western Europe) will be rubber-stamped – with all the geopolitical implications this entails.

Energy union? The goal of diversification will be undermined. EU political cohesion? The answer is obvious. NS2 is the best example of a project which is highly beneficial for its main stakeholders, and detrimental to the interests of others and the EU as a whole.