Paul Gregory, Professor Emeritus, Department of Economics & Research Fellow, Hoover Institution, Stanford
Trying to find out where Nord Stream 2 (hereafter NS2) – the underwater gas pipeline from Russia to Germany – is located is like solving five complicated puzzles at once. Competing interests, changing legal bases and dynamics make it difficult to start or stop. One thing is certain: Russia is playing a long game that it will not withdraw from until NS2 is up and running.
The NS2 consortium, consisting of Russia’s state-owned natural gas monopoly (Gazprom) and German, Austrian and Dutch energy supply giants, seemed 95% ready and ready to go into operation at the beginning of 2021 with EUR 11 billion.The administration had already exhausted its sanction card and there were only a few regulatory issues left to resolve.
That was before the “attempted murder” (to use Angela Merkel’s characterization) of the Russian opposition leader Aleksei Navalny on August 20 above the East Siberian skies. The Navalny case, which in addition to a Russian hacker attack on the German Bundestag and an obvious political assassination attempt on the streets of Berlin, raised German voices in favor of stopping NS2.
European leaders understood that the increasing number of murders of Russian opposition activists had to be approved (or not objected to) by President Vladimir Putin himself. In the Navalny case, the physical evidence was unequivocal: German medics concluded that Navalny had been poisoned with a banned neurotoxin used in previous killings of Russian opposition activists. The German result was confirmed by French and Swedish laboratories.
The Navalny poisoning therefore raised the question: Do Germany and the rest of Europe really want to be energy dependent on a rogue regime that routinely perpetrates state killings?
The EU and NATO reacted with outrage when the facts of the Navalny poisoning became clear. The Navalny case sparked calls for a “transparent” investigation, but all parties recognized that no investigation would extend to the highest levels of the Kremlin itself. Anger mounted when the Kremlin claimed the attempted murder was a false flag operation to embarrass Russia, that Navalny had poisoned himself (as Putin suggested to French Emmanuel Macron) or that Germany’s prestigious Charite hospital caused food poisoning misdiagnosed.
With every absurd Russian claim, voices rose that the Kremlin should pay a real price, which leads us to Germany and Nord Stream 2:
In 2010 Germany passed the energy turnaround that reduced 90% CO. calls2 Energy savings and 60% renewable energies by 2050. These benchmarks should be achieved by phasing out nuclear power and coal and switching to wind and solar energy.
When Germany wanted to implement its energy transition, electricity prices soared. In order to maintain the competitiveness of German industry, the price increases were mainly borne by the households. In addition, the lignite industry – an important employer in the depressed eastern states – had to expire, thereby shifting votes to the right-wing extremist and left-wing parties.
Gazprom NS2’s planned second Baltic Sea pipeline, which runs directly from northern Russia to a coastal hub in Germany (which happened to be in Angela Merkel’s constituency), was seen as a way of bridging Germany with cheap natural gas while it pushes its energy transition. In addition, NS2 would make Germany the hub for European natural gas by replacing gas transport with Ukraine.
NS2 has strong supporters in Germany, Austria and the Netherlands. Huge utility companies from these countries, which paid half the cost of NS2, joined Merkel’s coalition partner (the SPD) and extreme right and left parties as solid supporters of NS2. The opposition came from Merkel’s own party, especially two potential ones Candidates Merkel, Friedrich Merz and Norbert Roentchen, as well as from the Greens, who oppose all forms of CO2 energy.
The loudest opposition to the completion of NS2 came from the European Union, particularly Scandinavia, the Baltic States and Eastern Europe, particularly Poland. These opponents feared the domination of Europe by Russian gas and the loss of existing pipelines through Ukraine.
In contrast to its reputation as a guarantor of European unity, Germany has supported an important infrastructure project (NS2) that is rejected by most of its EU partners. When Europe changed its gas directive for third countries (like Russia) in April 2019, Nord Stream 2 seemed out of luck. With the amended gas directive, competition rules such as the decoupling of pipelines and distribution have been enforced. This requirement would have meant that the state monopoly Gazprom would have had to part with sales. There were other onerous requirements such as reserving space for other suppliers and allowing backflows which, if implemented, would jeopardize the economic viability of NS2.
It was Germany that saved NS2 in a last-minute compromise sponsored by France that allowed Germany to âmonitorâ the provisions of the Gas Directive in a kind of fox-watch-the-hen-house.
On the eve of the attempted murder on Navalny, NS2 were about 165 km away from landing. Denmark’s licensing problems appeared to have been resolved, and Russia had brought in its own pipe-laying ship to replace the Swiss ship, deterred by US sanctions. It seemed that Russian patience had paid off. NS2 would finally be operational in early 2021. Ukraine’s pipelines would break up due to low transmission rates and Russia would consolidate its position as the dominant gas supplier to Europe. Scandinavia and Eastern Europe would become even more dependent on Russia.
Enter Navalny and the growing realization that the only meaningful punishment for Putin would be to cancel or significantly delay NS2.
Merkel’s first reaction was that NS2 is a commercial project that shouldn’t be decided by politics. Realizing the depth of the European reaction (and stepping into her last year as Chancellor), she proposed that the European Union should decide the fate of NS2.
The punt into the EU had two advantages for Merkel: First, German politics is hopelessly fragmented. Two possible Merkel successors have proposed that NS2 be canceled or postponed. Business interests argue that Russia is a reliable partner and that Germany does not have particularly clean hands in the international energy business. Merkel’s coalition partner SPD does not have such scruples. The upcoming chancellor candidate Olaf Scholz is firmly behind NS2, which he describes as a purely commercial project. Former Chancellor Gerhard SchrÃ¶der heads the NS2 board, and his SPD relies on good relations with Russia, no matter how bad.
How is Europe likely to deal with the hot potato NS2?
With its complex organizational structure and the requirement that key issues such as sanctions must be decided unanimously, the EU is unlikely to take a final decision on NS2, but one thing is certain: the decision-making mills are slow to grind in the EU; So we can count on the EU to decide for a long time that it cannot decide.
The European Energy Charter signed in 1994 to encourage infrastructure investment in the former Soviet bloc raises the sensitive issue of money. According to the Charter, private investment projects must be compensated if they are terminated or otherwise damaged by government measures. According to the charter, someone would have to compensate the European utilities and Gazprom for their billions in losses.
The smart money would be the final completion of NS2 and Russia’s continued dominance in the European gas market. Navalny survived, the defenders and lobbyists of NS2 are in full swing. The Trump administration may have run out of sanction options. The European Union is facing bigger problems. With COVID-19-related gas demand weak, Germany and Europe can take their time while Russia pulls out all the stops to defend NS2.
NS2 is completed. The only question is the length of the delay.
Paul Gregory is a research fellow at the Hoover Institution. He is emeritus Cullen Professor at the Department of Economics at the University of Houston, research assistant at the German Institute for Economic Research in Berlin and emeritus chairman of the International Advisory Board of the Kiev School of Economics. Gregory held visiting professorships at Moscow State University and the Free University of Berlin. Gregory was director of the Russian Petroleum Legislation Project at the University of Houston Law Center from 1992 to 1997 and has written extensively on Russian energy.
The Harvard University graduate in economics is the author or co-author of twelve books and more than a hundred articles on economic history, Soviet economics, transition economies, comparative economics, and economic demography. His most recent books are Women of the Gulag: Portraits of Five Remarkable Lives (Hoover Institution Press, 2013), Politics, Murder, and Love in Stalin’s Kremlin: The Story of Nikolai Bukharin and Anna Larina (Hoover Institution Press, 2010), Lenin’s Brain and Other Tales from the Secret Soviet Archives (Hoover Institution Press, 2008), Terror by Quota (Yale, 2009) and The Political Economy of Stalinism (Cambridge, 2004), which were awarded the Hewett Prize. He was co-editor of The Lost Transcripts of the Politburo (Yale, 2008). His archival work is summarized in “Allocation under Dictatorship: Research in Stalin’s Archive” (Journal of Economic Literature). Gregory is the producer of the documentary Women of the Gulag, which was shortlisted in the 2019 Oscar competition, and works with director Marianna Yarovskaya.
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