The Nord Stream 2 pipeline is a hotbed of conflicting interests. The pipeline, currently under construction between Germany and Russia in the Baltic Sea, has driven a wedge between the US and Germany, as well as between Germany and the European Union. The US sees the pipeline as an example of German hypocrisy in its policy towards Russia, while the EU has attempted to force energy regulations on the pipeline at the insistence of Central European states. This issue is just one example of the transatlantic relationship in crisis.
The pipeline is an expansion of the current Nord Stream 1 pipeline, which pumps 55 billion cubic meters of natural gas from Russia to Germany a year. Nord Stream 2 would double that amount to 110 billion cubic meters. Construction began in May 2018 and is expected to be completed by the end of 2019.
The pipeline runs through the exclusive economic zones of 5 countries: Finland, Sweden, Denmark, Germany, and Russia. Denmark, citing environmental concerns, is the only country to not yet issued a permit for the pipeline. The pipeline’s opponents hope Denmark’s refusal to issue a permit will scuttle the project, but project developers could just build around Denmark’s territorial waters.
Eastern EU member states signed a petition against Nord Stream 2 in March 2016 because of their status as energy transit countries. For these states, the Russians pay a premium to pump gas through their borders. With the proposed pipeline, these states would be cut out of the process and lose a crucial source of revenue.
German Economic Rationale
The third-largest exporter in the world, only behind China and the US, Germany is dependent on energy imports to fuel their domestic industry, especially as they transition from domestic nuclear energy after the 2011 Fukushima disaster, with 98% of its oil and 92% of its gas imported from other countries. While the German government is making a long-term transition towards renewable energy, there is a short-term reliance on natural gas and oil.
The Nord Stream 2 pipeline would reduce costs for German manufacturers by
cutting removing Central European transit countries from the equation. Elimination of transit costs, which raise energy prices for German firms, enables the federal government to lower the price of energy. German firms believe this would provide a much needed stimulus to the economy, which contracted by 0.1% in the second quarter and is only projected to grow by 0.4% for the year.
The Germans also see the pipeline as part of their broader foreign policy of defence and détente towards Russia. They have defense against Russia through sanctions, which date back to the Russian annexation of Crimea and subsequent invasion of eastern Ukraine. However, the Germans are wary of excessively isolating Russia, fearing that further alienation could augment international aggression as Putin’s domestic approval ratings drop. When Putin’s approval ratings dropped to 54% in 2013, he invaded Ukraine and watched his popularity spike to 83%. Berlin’s plan to prevent Putin’s invasion of another sovereign state to secure his domestic standing is two-fold: the two components are economic sanctions to discourage further Russian aggression, and stronger economic ties between the two states, with The Nord Stream 2 pipeline integral to the latter policy. Ultimately, the Germans believe an economically integrated Russia is a peaceful Russia.
US Security Fears
In contrast, the US wants to kill the pipeline because they want to protect Ukraine and
First, the US wants to protect Ukraine’s status as an energy transit country. Russian gas is responsible for 2-3% of the Ukrainian GDP, or about $2-3 billion. The completion of the Nord Stream 2 pipeline means the cessation of gas flow through Ukraine, resulting in the devastation of the Ukrainian economy. The US believes the damaged economy will make Ukraine more vulnerable to Russia. Despite Ukraine’s shift towards the EU since the 2014 annexation of Crimea and invasion of eastern Ukraine, undermining the Ukrainian economy allows the Russians to end Kiev’s westward drift.
Second, the US sees the pipeline as a threat to European security. The US believes the pipeline gives Europe greater exposure to Russian manipulation because it would grow Russia’s share of Europe’s energy market. If Russia desires to extort any European state, they can simply threaten to shut off the Nord Stream pipelines.
However, these US sanctions are viewed by Germany and other European states as a thinly veiled way to increase US natural gas sales. Implementation of the proposed sanctions on the pipeline’s construction could allow the US to sell its gas to Europe instead of Moscow. However, the cost of US gas relative to that of Russian gas is more expensive, defeating the pipeline’s original purpose. Additionally, the US’s implementation of these sanctions would confirm to the Europeans the US’s involvement in European affairs as reliant on financial incentives.
The EU has also attempted to utilize their regulatory powers to delay the pipeline due to the concerns of Central EU member states that collect transit fees from Russia. Still, it has begun to implement these regulations in a way that completely undermines the regulatory regime constructed over the last few decades.
The Nord Stream 2 pipeline is outside the EU’s typical regulatory regime because it is not publicly financed by the EU, member states, or an intergovernmental multilateral fund. Notwithstanding these structural barriers, the European Commission announced in 2017 a modification of the Gas Market Directive to include the regulation of offshore pipelines from third-party countries in EU territorial waters, a decision to acquire more control over the Nord Stream 2 project. However, this law expands EU control to all current pipelines between EU member states and third party countries, not just Nord Stream 2. As a result, pipelines currently involving Algeria, Morocco, and Tunisia to various EU member states will need to be reevaluated under the new regulations, creating legal chaos for the EU.
The Nord Stream 2 pipeline controversy exposes the conflicting interests present in Europe. Despite economic and political integration, states can still possess domestic goals that clash with the goals of the overall union, even if that state plays as large of a role in EU leadership as Germany does.
To move forward, the EU and the US must allow Germany and Russia to complete the project without interference, either in the form of sanctions or regulations, but Germany must do more to quell the concerns expressed by outside parties, namely by working with Ukraine and other transit countries to diversify their energy sectors.