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Nord Stream II: Merkel’s geopolitical headache

Image credit: Nord Stream 2 (Creative Commons: Twitter)

The much-maligned Nord Stream II is set to go live in November 2019, bringing with it a series of challenges for Angela Merkel and Germany on the world stage. The €9.8bn+ natural gas pipeline will run parallel to its predecessor Nord Stream I, doubling its annual capacity to 110bn m3 and pumping gas from Russia to Germany’s northern coast and then onwards to the greater European market.

Since its inception, Nord Stream II (NS2) has been controversial and is set to become an even greater political headache for German Chancellor Angela as she grapples with competing interests from EU Member States and beyond. Merkel has consistently argued in favour for NS2 for its economic benefits, promoting Germany as a transit hub, helping its transition away from coal and nuclear energy, and reducing European market-wide gas prices. Not everyone sees its benefits.

Ukraine’s Loss is Russia’s gain

For access to Western European markets, most Russian gas currently passes through the Yamal pipeline that runs through Belarus and Poland, and the Brotherhood network, running though Ukraine and Slovakia. NS2’s additional piping will re-route majority gas supply away from Central and Eastern states back to the single Baltic Sea channel. As a result, Ukraine will no longer be a major gas transit country and could see annual losses of approximately €1.75 billion in transit revenues. On top of these potentially crippling economic losses, Ukraine fears that the demotion of its status as a transit country could mean less incentive for European involvement in Ukraine.

Once NS2 goes live, Russia could, in theory, stop gas supplies to Ukraine altogether without affecting the Western European market, something that has happened in the past. Gazprom has intermittently cut off gas leaving Ukraine at times struggling to maintain reliable gas supplies for its people during the country’s harsh winters. Further, Gazprom is refusing to pay €2.26bil that courts have ruled it owes Ukraine over a 2009 gas contract dispute. Ukrainian economic downturns coupled with systemic corruption problems have already left former Eastern Bloc state in bad shape despite EU intervention. Political and economic isolation of Ukraine through NS2 would bring Russia one step closer to realising its geopolitical strategy arguably started with the 2014 annexation of Crimea.

Reducing diversity

The EU imports over half of all energy it consumes, totalling over €1 billion per day, and natural gas plays an increasingly important role in the Bloc’s energy needs. The EU Energy Security Strategy aims to protect EU energy security by diversifying supplier routes and provider countries, and an eventual aim of moving closer to renewable energy sources. When it went online in 2011, Nord Stream I enhanced Europe’s gas supply route diversity by splitting it between East-West and North-South. Nord Stream II will actually reduce diversity as major supply lines will shift back to the single Baltic Sea channel and away from Ukraine, Poland, Belarus, and Slovakia. Dr Alan Riley likens this lack of pipeline diversity to ‘putting all energy supply-security eggs in one basket’, leaving the undersea pipelines subject to potential ship collisions or even orchestrated terrorist attacks.

The Russian gas monopoly Gazprom is the majority shareholder in the project’s construction and aims to control the majority of the pipeline into Europe, thus acting as the producer and supplier. Polish Foreign Minister Konrad Szymanski has strongly pushed for Germany to halt NS2 for fears of it leading to quasi-monopoly of Gazprom’s market position and foster Russian leverage over the northern European gas market. Poland and the Baltic States have petitioned the EU Commission to consider extending its regulatory reach regarding the EU Gas Directive, which would render Nord Stream subject to the strict competition rules regarding ownership unbundling. This would mean Gazprom would not be able to both supply the gas and run the pipeline, thereby stalling completion until negotiations have occurred. Particularly wary of Nord Stream’s consequences on Eastern states, Poland has begun a process to wean itself off Russian gas, moving instead towards US supplier Sempra.

Driving a wedge between allies

There are further divides among EU member states over Merkel’s support for Nord Stream II, which is perceived by some as running counter to her otherwise strong stance on Putin. It was Merkel after all, along with French and Ukrainian leaders, who brokered the Minsk Accord in response to Russia’s 2014 Crimea annexation and subsequent violence. Merkel’s dealings with Russian gas are seen by some as conflicting with EU policy of economic sanctions in financial, energy and defence sectors, implemented in response to Russia’s aggression against Ukraine.

Across the Atlantic, Merkel’s support has drawn the ire of the President Trump and numerous high-ranking US officials, who have interests in selling American gas to the EU, and whose disapproval stems from the perception that Nord Stream investments run counter to US sanctions against Russia. The Trump administration’s has threatened to target Russia’s economic lifeblood and impose direct sanctions on Gazprom, which would halt the project. However, this would also result in sanctions for companies based in US allied states like Germany, England and Holland’s firm Shell, Austria’s OMV and France’s Engie, which have each invested €600mil in the pipeline.

Fortunately for EU cohesion, France and Germany have just recently come to a compromise regarding pipeline operation. The agreement, still to be debated in the EU Parliament, would allow Germany to choose and implement gas distribution within EU Gas Directive guidelines. But the Brexit deadline and EU elections are looming. Given time is of the essence, in order to placate tensions between EU member states and between Germany and the US, Merkel’s most viable option should be to postpone the pipeline’s activation. Ukraine could continue its gas supplies in the interim and the delay would also make a clear and consistent gesture to Putin ‘to accept economic consequences of its political isolation’ and thus to rethink its meddling in Europe and Ukrainian affairs.

Dominic Simonelli is the Europe and Eurasia Fellow for Young Australians in International Affairs.

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