Nord Stream 2: Ukraine As Bargaining Chip

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The United States and Germany reached a deal on the Nord Stream 2 natural gas pipeline. Washington acknowledged that sanctions on companies involved in this project would not stop its implementation, and Berlin pledged to help Ukraine and demand from Moscow to extend the transit of the Russian gas through the Eastern European country.

The controversial pipeline that is 98 percent complete will provide natural gas from Russia, under the Baltic Sea, directly to Germany. Nord Steam 2 will run through the exclusive economic zones and territorial waters of Russia, Finland, Sweden, Denmark and Germany. Although it is believed to be the “Russian geopolitical project”, in reality it is a product of a wider energy deal between Russia’s energy giant Gazprom and several European oil and gas companies, namely Royal Dutch Shell, German utility company E.ON, French multinational electric utility company Engie, and Austrian multinational integrated oil and gas company OMV.

Mainstream media, Western politicians and analysts tend to portray Russia as a major rival of the Western powers, often even an enemy, while on the ground the Kremlin and its “dear Western partners” develop their energy cooperation. Despite sanctions imposed on Moscow in 2014 following the conflict in the Donbass and the Kremlin’s incorporation of Crimea into the Russian Federation, in 2015 Gazprom and its European partners signed the deal on Nord Stream 2. Moreover, Russian energy companies are developing their business in Iraq – a country that is still in the US geopolitical sphere of influence. Gazprom already operates in Badra oil field, which is one of the most important elements in Iraq’s energy system, and Lukiol is actively involved in drilling at Eridu field. Such actions are virtually impossible without at least a tacit approval from the United States – the only superpower.

The US and Russia also made deals regarding the European energy market. The very fact that the US President Joe Biden, prior to his recent meeting with the Russian leader Vladimir Putin, de facto gave the green light for this project to be finished is a clear indication that the two countries have made some arrangements regarding future gas supplies in Europe. As a result, the American President hosted German Chancellor Angela Merkel on July 14, and a week later the two countries announced they have reached a deal regarding the Nord Stream 2 pipeline. Merkel then spoke with Putin and the two leaders reportedly discussed the possibility of extending a deal on transit of Russian gas via Ukraine after 2024.

Ukraine – a country that still plays the role of a regional gas hub – could lose up to $3 billion annually if Russia stops using its territory for gas transit to Europe. The country’s officials fear the Nord Stream 2 project will allow Germany “to usurp privileges” in Europe’s energy sector. In other words, Germany will become a new European gas hub. Still, according to the US – Germany deal, Berlin is obliged to seek from Russia to extend transit through Ukraine for another 10 years, from 2024 to 2034. Formally speaking, Germany’s obligations are not Russia’s obligations, which means that the Kremlin – at least in theory – could refuse to keep using Ukraine as a transit country.

In reality, however, it would not be the first time for Russia to agree on Western demands, although at this point it remains highly uncertain if Gazprom will continue to use Ukrainian territory for gas supplies to Europe. From a purely technical perspective, Ukrainian pipelines are in a very bad state, which means that someone will have to fund reconstruction of the nation’s gas transportation system. Given that Ukraine sees Russia as an arch-enemy, it is not very probable that Kiev will try to get any loans from Moscow. It remains to be seen if Western nations, or even China, will be willing to fund such expensive projects.  

Germany and the US, for their part, will endeavor to promote and support investments of at least $1 billion in the Green Fund for Ukraine that will promote the use of renewable energy. Also, according to the US – Germany Joint Statement, Berlin will provide an initial donation to the fund of at least $175 million and will work toward extending its commitments in the coming budget years. That money will, however, not be enough to substitute losses that Ukraine will accrue if Russia’s Gazprom and Ukrainian state-owned Naftogaz do not extend their contract on gas transit. Therefore, the West is expected to put enormous pressure on the Kremlin to keep using Ukraine as a transit country. Ukraine, on the other hand, will remain a political object in the energy game played by the US, Russia and Germany. The West needs it as an instrument against Russia – in case the Kremlin eventually crosses certain “red lines” –  but does not seem to be willing to compensate Ukrainian transit fee losses. Russia reportedly aims to bypass Ukrainian territory in gas transit to Europe, but may have to eventually agree on Western conditions. In any case, both sides will keep using this country as a bargaining chip in their energy game.

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