Nord Stream 2 will divide the EU, but new US sanctions will do more harm

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Officials and analysts agreed that there are very few possibilities to block Nord Stream 2. [Gazprom]

Nord Stream 2 will increase Russia’s influence over its neighbours and divide the European Union. But US sanctions against the pipeline will do more harm than good.

Rem Korteweg is head of the ‘Europe in the World’ unit at the Clingendael Institute

On Tuesday (25 July), the US House of Representatives passed a sanctions bill which will tighten existing sanctions against Russian companies and individuals, make it more difficult for the White House to lift them, and give US president Donald Trump the authority to enact new sanctions, including on Russian energy projects. Later this week, the bill is expected to pass the Senate and await Trump’s ratification.

The bill states that Russia is using energy exports to coerce its neighbours. It takes specific aim at Nord Stream 2, a planned pipeline that would cross the Baltic Sea and deliver natural gas from Russia directly to Germany. According to the bill’s authors the Gazprom-led project has “detrimental impacts on the EU’s energy security”.

Nord Stream 2 is a highly questionable project. Russian gas reaches Europe through a number of transit routes, primarily through Ukraine, Belarus and Germany. Gazprom says that Europe needs more pipeline imports because domestic European production is declining. But Nord Stream 2 would hardly unlock new Russian gas resources; instead it offers an alternative route for existing gas. Gazprom seems to see this as its primary benefit. The company has said it wants to stop gas supplies through Ukraine by 2019, as it questions Ukraine’s reliability as a transit country.

But the subsequent loss of transit fees would weaken Ukraine’s economy, decrease the beleaguered country’s energy security, and so undermine the EU’s policy towards Kiev. It also raises questions about EU energy security as nearly 80% of Russian gas exports to Europe would flow directly to Germany through a single set of pipelines. The pipeline would also increase Russia’s sway over Central European gas supplies. Even the European Council’s president, Donald Tusk, has written a letter criticising the project.

Germany, Austria and others remain adamant that the pipeline is a commercial, not a geopolitical, project. Complicating Europe’s stance on Nord Stream 2 is that a number of large Western European energy companies stand to benefit from the pipeline, while several Central European countries that collect transit fees from existing routes through Ukraine would lose out.

While the EU dithers, the United States is charging ahead, calling a spade a spade. But the European Commission has reacted furiously to the US bill, blaming the United States, amongst other things, for interfering in its internal energy market.

The Commission is right to complain. While Russia does not shy away from extracting political benefits from its energy exports, the Commission challenges Gazprom on legal and regulatory grounds, not political ones. By enforcing its ‘Third Energy Package’, the Commission has had some success in conditioning Gazprom to behave like a normal market player, though more could be done. So far, the Commission’s energy security policy has been based on market regulation, liberalisation and diversification, not on politicising supplies. But US sanctions would do precisely that. It would drag Nord Stream 2 into the geopolitical bear pit, an arena where the legally-minded Commission has a lot less clout.

There are also concerns about a hidden agenda in Washington. Donald Trump wants to adjust America’s large trade deficit with the EU. Rather than raise trade barriers, Wilbur Ross, the US commerce secretary,  and others in the administration, have suggested that Europe could correct the transatlantic trade balance by buying more US liquid natural gas (LNG). According to the International Energy Agency , within the next five years the United States will be among the three largest exporters of liquid natural gas.

So far, US LNG exports to the EU have struggled to build market share due to cheaper Russian gas and infrastructure bottlenecks in Europe. Since February 2016, roughly 1 bcm (billion cubic metres) of US natural gas has reached Europe, roughly equivalent to a measly 2% of Nord Stream 2’s planned capacity.  By slapping sanctions on Russian gas projects, or threatening to do so, US LNG could become more attractive. US gas supplies would surely be a welcome source to help Europe diversify away from Russian imports and reduce Gazprom’s bargaining power. But the Commission should insist this happens based on the principles of supply and demand, not energy mercantilism.

In a recent prospectus, Gazprom stated that US sanctions could delay or stop the construction of Nord Stream 2. The pipeline should perhaps never be built, but the fact that Washington would be making Europe’s energy choices for it, rightly sparks ire in Brussels. The Commission, not Washington, is the chief regulator of the European energy market and Brussels will ferociously protect its turf.

Should Trump ratify the bill and use his new authority to put sanctions on Nord Stream 2, it would raise tensions with the Commission, Germany and others. It would also create yet another source of transatlantic friction, this time, tragically, in an area  where Europe and the US have ample incentive to co-operate. That outcome would serve Vladimir Putin’s purposes just fine.