Nord Stream 2: Its economic and geopolitical implications

By Emanuel Skoog

In December 2019 both Germany and Russia reacted angrily to sanctions imposed by U.S. President Trump, targeting firms involved in the building of Nord Stream 2, an undersea gas pipeline that will enable Russia to double its direct export capacity to Germany [1]. The gas pipeline follows the route of the already existing Nord Stream 1 pipeline under the Baltic Sea. However, the U.S. government has voiced concerns that the pipeline belonging to the Russian state oil firm Gazprom could be used as a tool of coercion and has the potential to turn Germany into a “hostage of Russia” [2].

The sanctions are part of an overall defence bill and will enable the U.S. to deny visas and restrict the property of individuals and companies financing the project [3]. The U.S. decision led to a rebuke from the German Chancellor Angela Merkel outlining that she did not agree with the approach taken by the U.S. In addition, the sanctions were opposed by the EU with a spokesman condemning the imposition of sanctions against EU companies conducting legitimate business [4]. The Russian response followed soon after with Russian President Putin promising to continue with the project without foreign involvement [5]. 

Suggested reports state 94% of the pipeline has already been laid with just 160 km left of a combined length of 1225 km [6]. Both Germany and Russia are committed to Nord Stream 2’s completion which was underscored at a meeting between both heads of state in February this year with Merkel saying that the project will be implemented no matter what’’ [7]. Nevertheless, it will continue to be a thorn in the side of the U.S. and other Eastern European countries like Poland afraid of Nord Stream 2 being a “Russian Trojan horse” in the form of a gas pipeline.

Nord Stream 2 and its controversy

Costing close to $11bn, the Nord Stream 2 project has angered both parties on Capitol Hill. They fear a tightening Russian grip over European energy supplies whilst reducing its own share of the lucrative European market of U.S. liquefied natural gas (LNG) [8]. Nevertheless, the main countries involved in the project, Russia and Germany, suspect that the U.S. is using energy security fears as a disguise for its own economic benefits. The U.S. is keen on exporting surplus gas from its shale gas boom to Europe on LNG tankers. It is argued that the pipeline would decrease EU demand and make it less economically interesting to build costly LNG port terminals necessary for importing U.S. gas [9]. 

For several years EU members have expressed their uneasiness pertaining to the EU’s reliance on Russian gas. Currently, Russian gas makes up 40% of the EU’s combined gas supplies. This is just ahead of Norway, which is not a member of the EU, although they do take part in its single market [10]. Disputes amongst EU members were so strong in early 2019 that they even risked disrupting the project in its entirety [11]. The EU wants to bring pipelines entering the bloc under its energy rules, however, Germany expressed concerns that it would make the new pipeline both unprofitable and unfeasible [12]. However, the bloc agreed to strengthen regulations and not to support plans that might jeopardize its completion. The compromise struck outlines of moving away from having a patchwork of different agreements regarding pipelines entering the bloc and instead having them come under the EU’s rules for the internal energy market [13]. The rules consist of separation of ownership of the pipes from the gas supplier — known as unbundling. In the case of Nord Stream 2 Gazprom controls both [14].

The German and Russian calculus

From a Russian perspective, Nord Stream 2 along with the TurkStream project, (a natural gas pipeline running from Russia to Turkey under the Black Sea) will be able to circumvent Ukrainian pipelines, which presently are the main route for Russian gas [15]. Kiev and Moscow have been at loggerheads since Moscow incorporated Crimea in 2014 into its country and the loss of gas transit fees has the potential to impact the Ukrainian economy negatively [16].

Germany has argued that the pipeline is a project anchored in market-driven fundamentals and has paid little attention to the geopolitical arguments. Furthermore, the country has a lot to gain from the pipeline, not least becoming a major European natural gas hub [17]. In addition, German businesses have invested heavily in the project [18]. But it is not just German firms having a stake in the project. Other European ones, including Anglo-Dutch Shell, OMV of Austria and Engie of France have stakes as well [19]. However, the Swiss-Dutch company Allseas, involved in the project, outlined that it halted its pipe-laying activities in order to avoid U.S. sanctions [20]. Therefore, Russia is now in the process of finding pipe-laying vessels capable of laying the remaining pipes. Putin did acknowledge that there would be a delay of the project and it would either be finished by the end of this year or early next year [21].

The U.S. admits defeat

Among U.S. officials there was a rare concession late last year, as they know they have little leverage to prevent Nord Stream 2 from being completed [22]. However, the U.S. will instead try to impose additional costs on other Russian energy projects [23]. The situation paints a picture of how European allies of the U.S. such as Germany have been unaffected to pressure emanating from Washington to abandon the pipeline [24]. The long-term economic implications of the sanctions might be negligible but the political ramifications could be serious. They underscore the deepening estrangement between many European countries/governments and Washington at a time when European trust in the current U.S. administration is already at almost a nadir.


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German Chancellor Angela Merkel with Russian President Vladimir Putin in Sochi, Russia, 18 May 2018:

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