When Polish regulators struck down a deal this past month to construct Nord Stream 2—a gas pipeline connecting Russia with Germany via the Baltic Sea—we wondered whether we were seeing the death of the project. Poland’s concern centered on the anti-competition effect the pipeline would have in Europe by making the continent more reliant on Russian supplies of natural gas, and the Polish President’s antitrust authority confidently declared that the intervention “would stop the deal.”That hasn’t happened, or at least it hasn’t happened yet. Gazprom still seems intent on going through with Nord Stream 2, though now it’s having to come up with the financing itself, since the five European energy majors interested in joining the majority ownership group (Royal Dutch Shell, OMV, BASF, Uniper, and Engie) backed out after Warsaw played its hand. The Russian company isn’t exactly swimming in cash these days, which raises the question: Why hasn’t Gazprom given up on Nord Stream 2?The answer is that, though the stakes may be high, but the costs and risks are worth it to the Kremlin. The Financial Times:
[I]t is difficult to see Nord Stream 2 — on which it signed initial agreements with European partners last year — as anything other than a geopolitical game.Gazprom’s projects appear aimed at ending Ukraine’s role as a transit country for Russian gas, by the time the current transit contract with Kiev expires in 2019. That might seem understandable given the impact of past gas squabbles between the two countries. But it also serves the Kremlin’s agenda by stripping Kiev of several billion dollars a year in transit fees.Maros Sefcovic, the EU’s energy commissioner, has told the Financial Times the northern pipeline looked like a “sort of punishment” for Ukraine, after its 2014 pro-western revolution. He added the project was “contrary to what we want to achieve” in creating a new EU energy union.
A knock upside the head of Kyiv is certainly part of what Putin is playing for, but there’s also bigger game afoot: Russia wants to make sure that the Europeans stay as dependent as possible on Russian gas. The EU energy union’s goal of supplier diversification implies a loss of leverage for Moscow, not only in terms of pricing, but also in strategy. Even the threat of gas shut-offs in winter has put East European nations on notice in the past, and Russia likes to be able to divide the increasingly fissiparous Europeans when it needs to.And indeed, Nord Stream 2 is not the only way Russia hopes to widen its energy distribution channels to, and leverage over, Europe; the so-called Turkish Stream pipeline (which also conveniently keeps Ukraine out of the loop) would serve a similar purpose. That project, too, has seen more than its fair share of ups and downs. The plan appeared dead after Turkey shot down a Russian plane along its border with Syria in November 2015, but has been resuscitated as Putin and Erdogan attempted to make nice this past month. The Russian President is headed to Turkey in October, and the pipeline is likely on the agenda. An agreement has been reached on evenly splitting the costs of constructing the pipeline, but no announcement has yet been made on what kind of concessions Ankara would demand of Gazprom on the price of gas itself—an earlier sticking point.In a way, each project is a hedge on the risks of the other. If both can be somehow made to work, it’s all upside for the Russians—but either one succeeding would be a win. The FT notes that Gazprom is set to announce more details on Nord Stream 2 development at a gas conference in St. Petersburg next week, after which Putin will head to Turkey for negotiations. We’ll be watching closely to see how it all works out.