Russia’s Nord Stream 2 Is A Fait Accompli. Are The U.S. And Ukraine The Losers?
Russia’s Nord Stream 2 natural gas pipeline was hit with a different type of hurricane — one with category 5 political and economic forces. But it is now a fait accompli: an $11 billion project that was set up to bypass Ukraine and that stretches 745 miles before it filters into Germany’s Baltic coast. It still needs final approval from Germany, which could come as early as next month.
U.S. opponents of the line had argued that it makes Western Europe too dependent on Russian natural gas. Much of that clamor, though, has been coming from representatives of oil and gas producing states and the U.S. companies trying to sell more liquefied natural gas (LNG) to our European partners. But Germany, which stands to benefit the most because it is closing its nuclear and coal plants, insists that it also has the muscle to counter that leverage. Moreover, the continent is building LNG receiving terminals to diversify its suppliers.
The pipeline was almost finished before the Biden Administration got to Washington. Trying to stop it would have been counterproductive. However, if Russia would abuse its strength and especially against Ukraine, the White House says that it would take punitive action. At least three times this century, Russia has stopped sending its gas through Ukraine that is dependent on those transit revenues — to the tune of billions of dollars each year. Russia has also cut off Ukraine during the winter months — a country that, interestingly, has a wealth of natural gas that is trapped in bureaucratic red tape and political cronyism.
“For the United States, the decision to lift sanctions and allow the project to be completed puts an end to the severe strain in the U.S.-Germany relationship, while also providing a graceful exit from sanctions that had no chance of succeeding and preventing the line’s completion,” says Robert Amsterdam, an international lawyer at Amsterdam & Partners. “U.S. unilateral sanctions were an extraordinary example of U.S. overreach. It signaled that companies with legitimate businesses — which Washington disapproved of for political reasons — could be targeted at will.”
With its abundance of unconventional natural gas, the United States has become a net exporter of LNG since 2017. To that end, the U.S. Federal Energy Regulatory Commission has approved a dozen LNG export terminals, on top of the five that currently operate. The United States now has markets in the United Kingdom, Spain, and France. But Germany could become the most lucrative. Cheniere Energy, Royal Dutch Shell, and Total are among the major global LNG exporters.
Ukraine Elbowed Out
The United States and Germany said that they would create a green energy fund for Ukraine and initially bankroll it with $1 billion. Germany has already committed $175 million. For its part, Ukraine has said that it has a goal of generating a quarter of its electricity from renewables by 2035, which seems unrealistic given that wind and solar provide a fraction of its current power.
Moreover, Ukraine needs assurance that Russia will continue to send natural gas to Europe through Ukraine. Their deal expires in 2024. And Ukrainian President Zelensky discussed this with President Biden when he visited Washington this month. Diplomacy is the right approach with Russia — unless, of course, it ratchets up its offensive in eastern Ukraine or against its political opponents.
Russia now supplies 39% of Europe’s natural gas. The United States supplies 3.5%, although a third of all U.S. LNG went to the European Union between January and November 2019, the European Commission says. The pipeline is a companion to Russia’s Nord Stream 1 pipeline and it allows Russia’s Gazprom to double its natural gas capacity headed to Europe.
Western Europe had vowed to cut off Russia after its 2014 invasion of Crimea, which was gifted by Russia to Ukraine in the 1950s. The continent said the same exactly a year ago after Russia was caught poisoning opposition leader Alex Navalny and who is now imprisoned. For that, Russia was kicked out of the Group of Eight (now seven). But attorney Amsterdam said that such outrage almost always gives way to economic pressures. In this case, it means more natural gas supply at reduced prices.
“Germany’s backing of Nord Stream 2 is motivated by economic logic,” says Amsterdam, in a talk with this writer. “The pipeline serves as a direct source of gas at rates up to 40% cheaper than LNG spot prices. Berlin decided long ago that this is more important than diversifying its gas supply.”
Russia, he adds, benefits immensely — now able to reduce Ukrainian and Polish “chokepoints” while gaining more economic leverage in Western Europe. It also has the potential to lead to greater U.S.-Russian tensions and to perhaps, a realignment of the geopolitical chessboard; not only would Ukraine’s diplomatic ties to the West strengthen but so too would its economic and energy connections.
Tear Down That Wall
Ukraine’s best course? It has the third-largest natural gas reserves on the European continent. But during a visit to Kyiv in September 2021, Ukrainian citizens explained to this reporter that political favoritism and burdensome rules have kept foreign investment at bay. Because the gas goes undeveloped, Ukraine is more dependent on Russia — a country with which it is now at war in the eastern Donbas region. Ukraine’s hands are tied and it is thus forced to forsake its desire to identify with the West and succumb to Russia’s influence.
The pressure is on President Zelensky, who rose to power in 2019 and who immediately tried to bond with the United States — before getting caught up in American politics and the impeachment process. He is ridding Ukraine of political corruption and stopping the policy of awarding gas contracts to insiders. But he has gone further and has streamlined the permitting process. The goal is to recruit multinational oil and gas developers and to wean its dependence on Russia.
Ukraine has gas reserves of at least 905 billion cubic meters, says Radio Free Europe. Its production was 68 billion cubic meters during the Soviet Era. But it fell by more than half in 1991 when Russia shifted production to Siberia. Naftogaz, the national company, accounts for about 75% of that output, the news organization says. And most of the rest is connected to “well-connected tycoons or former government officials.”
“Ukraine fears the specter of Gazprom turning off gas spigots again in the dead of winter now that an alternative pipeline to Western Europe has been completed,” notes attorney Amsterdam. “It also fears the potential loss of $2 billion a year in gas transit fees.” All of this, he adds, weighs heavily on the Biden Administration, which imposed “symbolic sanctions” last month on Russia.
But President Biden is playing the hand he was dealt — having to deal with a pipeline that was nearly completed and having to work with European allies who want Nord Stream 2 to go online. More than that, if the United States wants to compete with Russian natural gas, then it needs to do so on the merits and through diplomatic efforts — moves that may cause Russia to change its stance on Ukraine and its political opposition. Imposing economic trade walls or making idle political threats may backfire and further alienate Russia.