Why Nord Stream 2 is at heart of US warnings to Putin over Ukraine

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The Nord Stream 2 gas pipeline to Germany was top of the list when US officials brainstormed potential sanctions that western countries could threaten against Russia to show President Vladimir Putin that any invasion of Ukraine would come at a heavy cost.

Owned and built by Kremlin-controlled gas conglomerate Gazprom under the Baltic Sea, Nord Stream 2 is Europe’s most politically divisive infrastructure project.

Moscow and Berlin have said it is a purely commercial enterprise that will safeguard European gas supplies. Kyiv, Washington and many EU countries say it will allow Russia to bypass gas pipelines through Ukraine, and give the Kremlin more leverage to use energy as a weapon against the EU.

But with Russian troops deployed to the border with Ukraine and US intelligence warning of a planned invasion, the White House now wants Germany to commit to preventing it becoming operational if a Russian assault takes place.

“If Vladimir Putin wants to see gas flow through that pipeline, he may not want to take the risk of invading Ukraine,” US national security adviser Jake Sullivan said following a call on Tuesday between Putin and US president Joe Biden.

Why does the US want to target Nord Stream 2?

Few other projects encapsulate Europe’s complex relationship with — and energy reliance on — Russia than Nord Stream 2. When fully operational, the pipeline would ship 55bn cubic metres of gas to Germany every year: equivalent to about 15 per cent of the EU’s annual gas imports.

The US has long opposed the $11bn pipeline. Former president Donald Trump authorised sanctions against companies involved in its construction, arguing that Europe could not ask for US help to deter Russia when it was at the same time funding the Kremlin through gas purchases.

Biden waived those sanctions in May, arguing that the pipeline was almost completed and deciding that maintaining good relations with Berlin was more important.

A map showing the route of Nord Stream 2  displayed on a receiving station in Germany
A map showing the route of Nord Stream 2 displayed on a receiving station in Germany © Krisztian Bocsi/Bloomberg

Russia’s military deployment on Ukraine’s border has shifted that calculus. Citing intelligence reports that the Kremlin could order an invasion as soon as next month, the White House has called on European states to join it in possible sanctions against Moscow to give Putin pause for thought.

In addition to initiatives to target Russia’s financial system, getting a pledge from Berlin to block the opening of Nord Stream 2 would be a blow to Gazprom and the Kremlin’s gas export strategy — leaving them with fewer revenues and perhaps showing that Europe can cut its reliance on energy from Russia.

It would also show how united western countries are in opposing Russian military action — after Germany has spent years defending Nord Stream 2.

What do Berlin and Brussels think?

German chancellor Olaf Scholz was only sworn in on Wednesday, but US administration officials say they are already in touch with the new government.

While broadly supportive of the pipeline, Scholz’s administration would consider halting Nord Stream 2 if an invasion took place, people close to the new government told the FT, as part of a wider slate of western sanctions against the Kremlin.

There is groundwork already laid. In July Biden signed a deal with Scholz’s predecessor, Angela Merkel, in which Germany made a commitment to block the pipeline if Russia used it as a weapon against Ukraine.

In Brussels, EU officials accept that while the 27-member bloc will agree on sanctions collectively, Berlin — along with Paris and Rome — will determine the most critical details. The lack of a prepared EU sanctions list detailing what member states would be prepared to put in place also means the bloc is on the back foot in negotiating a final package with the US.

But a targeting of Nord Stream 2 would be likely to get warm support from the rest of the EU. Poland and the three Baltic states have been its fiercest critics, with Warsaw launching a slew of legal challenges in an attempt to block its construction.

Map showing Nord Stream 1 and 2 gas pipelines from Russia to Germany

European unease about Nord Stream 2 and Russia as an energy supplier have risen this autumn due to a gas crunch and soaring energy prices. Many traders and analysts said the situation was partly due to Gazprom’s decision to limit extra supplies to the continent.

Putin denies using energy as a weapon but, in the midst of the supply crunch, said the only way Russia could increase its gas output to Europe and ease the crisis was if Germany approved the pipeline.

Why is the pipeline not operating yet?

Nord Stream 2 was completed in September and Gazprom said it was ready to start shipping gas. But EU regulators have yet to give their approval. As a pipeline entering the EU, Nord Stream 2 is subject to Brussels legislation designed to promote competition.

Primarily, the rules require “unbundling” — so that companies producing, transporting and distributing gas within the EU are separate entities. They also require that a pipeline such as Nord Stream 2 can be used by others — “third-party access” — and has a non-discriminatory and transparent pricing structure.

Those demands are hard to square with Gazprom’s monopoly on exports.

The unbundling requirement applied only to EU onshore pipelines until 2019, when the EU decided to extend it to pipelines and interconnections from third countries. Nord Stream 2’s exemption was rejected by German courts; the pipeline’s operator lodged an appeal in October.

The Russian end of the gas pipe network to the north-west of St Petersburg © Dmitry Lovetsky/AP

Germany’s regulator — the Bundesnetzagentur — started its four-month examination of the project in September. However, in November the regulator suspended the certification procedure, saying “it would only be possible to certify an operator . . . organised in a legal form under German law”.

Nord Stream AG, the operating company, is based in Switzerland, and the regulator said the company had decided not to transform its legal form but planned instead to set up a subsidiary under German law solely to be the owner and operator of the German part of the pipeline.

This means Berlin has leverage. Until the Bundesnetzagentur certifies Nord Stream 2 as an independent transmission operator, the gas will not flow.

So what happens now?

The US and European capitals are in intense consultations over the sanctions package, which is unlikely to be fully signed off at least before a scheduled European Council meeting of EU leaders next Thursday.

Washington wants the full support of Berlin for its Nord Stream 2 threat as soon as possible, to be able to convey it forcefully to Moscow.

Assuming no Russian invasion takes place, the pipeline still has a number of issues to tackle.

Registering a company in Germany and showing assets and staff in place — as required by the German regulator — may extend the certification process by three to five weeks, which means the earliest the pipeline can start supplying gas to Europe is February, says Maria Belova, head of research at independent Vygon Consulting in Moscow.

But to fully abide by EU regulations, Nord Stream 2 will also have to find a way to show that other companies have access to the pipeline and regulated tariffs, analysts say.

Without the former, Gazprom, which has a monopoly on pipeline gas exports from Russia, may not be able to run the pipeline at full capacity. The Russian government has considered opening up pipeline gas exports to Russia’s second-largest gas producer Rosneft — a step Gazprom has previously opposed but which may expedite the EU’s approval for Nord Stream 2.

As a worst case, the latest the start-up process could begin is June 2022, given EU rules on how long Brussels can take for a full review of the project and the maximum deadline for a final certification.

Additional reporting by Roman Olearchyk in Kyiv and Erika Solomon in Berlin

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