EU position on Nord Stream 2 spells disaster for Ukraine
15 Feb 2019|

France’s last-minute compromise with Germany on a proposal to bring the Nord Stream 2 project fully under EU energy regulations—potentially fatal to the project—will likely ensure that the controversial project will be completed. France had earlier indicated that it would support a proposal for the entire offshore gas pipeline to come under EU regulations, but at the eleventh hour agreed to a compromise proposal that EU oversight should only commence ‘at the territory and territorial sea of the member state where the first interconnection point is located’, which is the German Baltic port of Greifswald.

The French–German position still needs to be ratified in the EU Parliament, but despite significant opposition to the project from Baltic and Eastern European states, it will likely receive the required votes.

Moscow was quick to criticise the new position, warning the EU not to adopt tighter energy rules. It does appear that the EU’s new proposal will likely mean that the market—and not Gazprom, the Russian company behind the project—will determine gas prices, and make the operation of the pipeline more expensive. But Russia is also probably objecting because the new EU position will limit the scope for corruption by involving European companies in the project. Despite these protestations, the EU’s revised position is a qualified victory for Moscow and effectively ends a two-year impasse.

From a purely economic perspective, European support for Nord Stream 2 is understandable because it should provide a more reliable and (in the long term) cost-effective solution to Europe’s energy needs. Germany, the strongest advocate of Nord Stream 2 in the EU, has characterised it as a ‘purely economic project’ providing cheaper and more reliable gas supplies that also helps Berlin diversify its energy sources at a time when Chancellor Angela Merkel has committed to phasing out coal and nuclear power.

However, Nord Stream 2 is about much more than cheaper and more reliable energy, and unfortunately the EU’s new position does little to resolve two of the issues at the heart of the project.

First, Nord Stream 2 will make Europe more dependent on Russian gas supplies at a time when Russia appears increasingly intent on destabilising the EU. Nord Stream 2 will dramatically increase the availability of Russian gas to European markets, effectively doubling the capacity of the existing Nord Stream 1 pipeline to 110 billion cubic metres per year. This will make Russia by far the largest gas supplier to Europe just as gas is becoming more prominent in Europe’s energy mix. Nord Stream 2 will also operate parallel to the TurkStream pipeline in the Black Sea, which will service Turkey and eastern and southern Europe.

Second, it’s not clear whether the EU will be able to safeguard Ukraine’s interests as a transit country for Russian gas.

Approximately half of Russia’s current gas supply to Europe passes through Ukraine. During early negotiations on the Nord Stream 2 project, the question of Ukraine’s ongoing role as a transit hub was a key issue for Brussels. The EU vice president for Energy Union stated, ‘If the aim of these projects is to gradually drain the Ukrainian transit route, it is simply unacceptable for the EU, as it will change the European gas balance [and] place central and south east European countries into a very difficult situation.’

But the fact that Gazprom is investing so heavily in offshore capacity, which is significantly more expensive to construct than onshore capacity, suggests that this is exactly what Moscow is trying to achieve. Analysis by the Oxford Institute for Energy Studies concluded that the combined capacity of Nord Stream 2 and TurkStream—both of which are routed to specifically bypass Ukraine—would enable Gazprom to meet the demands of all European countries, effectively ruling out Ukraine as a transit point for Europe’s energy supply.

Unfortunately, there’s little evidence to suggest that this ‘red line’ will or can be enforced by Brussels once Nord Stream 2 comes on line, and it’s possible that any European enforcement attempts may actually backfire.

The implications of this outcome for Ukraine are significant. It would deny Kyiv an important source of revenue: transit tariffs charged on gas moving through its transit network provide annual revenue of around US$2–3 billion (approximately 3% of GDP). It would also deny Kyiv a geopolitical lever that can be used in negotiations between the two countries, including those relevant to Ukraine’s own supply of gas from Russia. By effectively making Ukraine’s ageing gas distribution network irrelevant to Russia’s supply of gas to Europe and capacity to earn foreign revenue, Moscow would also be free to expand its hostilities against Ukraine without fear of disrupting the gas supply to Europe.

European countries that remain opposed to the Nord Stream 2 project have voiced their objections on geopolitical grounds. Latvia, Lithuania, Estonia and Poland have called Nord Stream 2 ‘an instrument of Russian state policy’ that ‘should be seen in the broader context of today’s Russian information and cyber-hostilities and military aggression’. Polish Prime Minister Mateusz Morawiecki also expressed his disagreement with Germany’s position, noting that once Nord Stream 2 is built, ‘Putin can do with Ukraine whatever he wants … and then we have potentially his army on the eastern border of the EU’.

Critics of Nord Stream 2 in Poland and other eastern European countries, whose views are informed not only by acute geopolitical considerations but also history, appear to understand what policymakers in Berlin, Vienna and Amsterdam do not—that the project is about much more than energy security. Not only will it embolden Russian President Vladimir Putin to think that he can act with impunity in Ukraine and elsewhere, it will also make both Ukraine and the EU more vulnerable to Moscow’s malign influence in the future.