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Intersecting Geo-economics and Geopolitics: Nord Stream 2 and Europe

Swasti Rao
Dr Swasti Rao is Associate Fellow at Manohar Parrikar Institute for Defence Studies and Analyses. Click here for detailed profile.

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    Swasti Rao
    December 10, 2021

    Nord Stream 2 (NS-2), a 1200-km long Russian undersea gas pipeline project that intends to deliver natural gas from Siberia to Germany, has been controversial since inception, and is back in news as a major geopolitical flashpoint. Biden administration (the third US administration in succession to oppose the project) imposed on it a fresh round of sanctions on 23 November 2021 under Protecting Europe's Energy Security Act of 2019.1 The sanctions came only a couple of weeks after US Senator Jim Risch, ranking member of the Senate Foreign Relations Committee, on 5 November 2021, introduced amendments to the FY National Defense Authorization Act that would provide Ukraine with material support in the face of Russian aggression.2 Meant to put pressure on Russia, these sanctions and amendments have come at a time when Russia is deploying troops along the Ukrainian border fuelling speculations of a potential invasion on the lines of Crimea in 2014.3 As per Ukraine’s defence ministry, about 90,000 troops have been deployed in border areas and especially along the vulnerable eastern part of Ukraine where Russia has been fanning separatism since decades.4 Russia, on the contrary, seems to be worried about Ukraine’s military build-up along the same and wants NATO to guarantee against eastward movement.5 Russian position, however, needs to be taken with a pinch of salt because its approach towards gas pipeline politics and isolating Ukraine has been around since almost a decade.

    On the economic front, the already sky-high prices of natural gas have jumped by 10 per cent in Europe after Germany's energy regulator Bundesnetzagentur suspended the approval process for Russia's NS-2 gas pipeline in mid-November. The regulator said the Swiss-based "Nord Stream 2 AG" operating company (branch of the Russian Gazprom) first needs to comply with the German law before it could be certified, thereby potentially delaying the project's start date.6 It wants the Russian company behind the project to form a local subsidiary (currently based in Switzerland), to operate the German part of the pipeline.

    It can be said that the gas pipeline project sits at an intersection of several geopolitical and geo-economic cross-currents that today determine the economic security as well as the geostrategic balance of Europe.

    Ukraine’s Dilemma

    NS-2 is one of the several pipelines that Russia has laid underwater in the Black Sea and Baltic Sea to replace pipelines that already run through Eastern Europe, especially through Ukraine. Earlier this year, Hungary too has agreed for a new long-term gas supply deal with Russia that will, once again, bypass Ukraine.7 From the Ukrainian perspective, this project constitutes an “integral element of Moscow’s policy targeted towards the Ukrainian state whose long-time strategic goal is to eliminate Ukraine from the European gas transit network and to weaken the state, also by hitting its budget”.8  Transiting gas from Russia to Europe through Soviet era pipelines, is an integral part of Ukraine’s economy fetching them US$ 2.5–3 billon transit fee per annum.9 The Ukrainian fears find further ground because Russia does not want to extend its gas transit contract with Ukraine after 2024 when the current deal between Naftogaz (Ukrainian gas company) and Gazprom (Russian gas giant) ends. Instead of repairing the already existing facilities at half the price, Russia is interested in replacing those with a new mega expensive NS-2 that will create different gas flows for Eastern Europe and Western Europe. Through bypassing Ukraine, Russia is killing two birds with one stone. Weakening and isolating Ukraine and increasing its influence in Europe, both to the disapproval and dismay of US and NATO. NS-2 has been leveraged as a political weapon by Putin and been responded to in the same spirit by NATO and allies.

    Rationale Behind Nord Stream 2

    How did NS-2 come about? Central European countries are highly sensitive to Russia–Ukraine relations as one-third of Russian gas exports to Europe travel through Ukraine. In case of erstwhile disputes between the two, Russia had unabashedly turned off its gas pipelines to Ukraine which resulted in millions of Europeans without gas during the winters of 2006 and 2009.10 Hence, some European states started exploring other alternatives to acquire gas supply without disruption and that led to Nord Stream 2 (as well as TurkStream, a southern pipeline that carries gas from Russia to the Balkans via Turkey) in June 2015.11 The European Commission had insisted on the maintenance of gas transit through Ukraine and to keep the Nord Stream project under EU regulations. The first insistence failed but the second was partly fulfilled. Russia from the beginning asserted that European Commission worked under the pressure of Western allies and insisted on the purely economic nature of the project.

    Supporters of the project have argued that the pipeline will double supplies of cheap natural gas from Russia to Germany from the original 2011 Nord Stream, which runs parallel to the new project. However, facts tell another story. Repairing the current Ukrainian–Polish pipeline would only cost around €6 billion. The construction of NS-2, however, would cost more than €11 billion.12 Also, in effect, it is merely diverting gas from the pre-existing Ukrainian–Polish pipeline, which means that Europeans will receive the same amount of gas, but from a different source. Further, €11 billion is not the final construction cost of the project because one pipeline alone like the NS-2 will not fulfil its function in isolation. Additional distribution gas pipelines on both Russian and European sides will be needed. Consequently, the overall construction cost of NS-2 route should include all the additional necessary infrastructure required to achieve this objective.13

    Additional Leverage for Russia

    Gas flowing directly from Russia to Germany by way of the Baltic Sea, would mean that the Russians will be gaining an additional leverage as well as energy monopoly over the Europeans. Additionally, this pipeline could increase Russia’s naval presence in the Baltic Sea, a move that would unsettle the Baltic States.14 Russia’s hybrid warfare against the latter has been a matter of concern for NATO and allies. Along the same lines of targeting Russian population in Crimea in Ukraine, Russia has been deploying strategies to isolate the economically weaker Russian ethnic sections of the Baltic populations to tear away from their respective countries and join Russia. A referendum followed by Russian annexation of these territories cannot be ruled out completely specially after the Crimean experience.15

    Europe is wary of the fact that if relations between Europe and Russia were to sour, the Russians could quickly turn off gas supplies to Germany, similar to what it did to Ukraine. It is noteworthy that post Merkel Germany is more sensitive to Russian threats of disrupting geo-strategic balance. Traditionally, Germany has kept politics and economic interests separate when it comes to relations with Russia. However, this equation started changing with Navalny’s (Putin’s detractor) poisoning last year. With the government of the new Chancellor Olaf Sholz, changes have started to appear. Heiko Maas who had been the foreign minister for the past three years and a keen advocate of the Nord Stream 2 pipeline has been replaced by Annalena Baerbock, co-leader of the Greens who have a very sceptical view towards Russia and China.16 It is noteworthy that the Foreign Ministers of Germany and France met the Foreign Minister of Ukraine, on the sidelines of the Eastern Partnership Foreign Ministers’ Meeting in Brussels on 15 November 2021. There, Germany and France issued a joint statement and reaffirmed their steadfast and unwavering support for the independence, sovereignty and territorial integrity of Ukraine.17

    Implications for Poland

    Not only Ukraine, but Poland is also threatened by NS-2 and has already begun to find ways to counter the construction of this pipeline. For example, back in 2018 Poland signed a 20-year liquefied natural gas deal with US with considerable foresight to reduce its dependence on Russia and the NS-2. The deal should provide for 15 per cent of Poland's daily gas needs over the next 20 years.18 Whether Ukraine will choose a similar path is likely, but something only time will tell.

    Economic Cost of the Delay

    NS-2 has been very expensive to construct and now that it is completed but waiting for German approval while also facing US sanctions, the wait is proving excruciatingly expensive to a pandemic-hit, winter-facing Europe. Germany did perhaps try to rectify its course by concluding a deal with the US in July 2021, which includes an agreement to invest in green energy in Ukraine while addressing concerns over the geopolitical impact of potential dependence on Russian gas.19 However, this deal has to come alongside a more proactive US energy security policy towards Central and Eastern Europe. Decisions such as these will take time to show fruitful results.

    Meanwhile, the gas pipeline politics continues to jeopardize Ukraine’s national security, further damaging the pandemic-hit European economy and leaving its people shivering as winter sets in. With the financial stakes running high, the pipeline is likely to become operational sooner than later. However, its political and economic costs should pave way for leading European powers to take a more comprehensive approach towards energy security at large. The realisation of overt dependence on Russian gas is untenable without, on the one hand, engaging in green sources of energy, and on the other, working on gas supplies from Turkmenistan that has the world’s fourth largest natural gas reserves untapped by Europe.20 The geo-economic engagement with Turkmenistan would come at a difficult bargaining with China but should be worth the effort for a gas-craving Europe.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

    Keywords: 
    Europe
    Russia
    Russia-Ukraine Relations
    EU-Russia Relations
    Energy Security
    Gas

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