Nord Stream 2: It’s not (just) the economics, stupid!

Russian gas has long been an instrument of political influence on Ukraine, the former ‘Eastern Europe’, and the continent as a whole. This is abundantly clear in Moscow’s full-on promotion of the Nord Stream 2 project where contested cost forecasts, energy diplomacy, and the tying in of firms from EU countries are all part of a strategy with geopolitical as much as commercial aims.

At the end of June, Moscow notched up a notable victory, neutralising one source of opposition to Nord Stream 2 by sealing an agreement with Slovakia’s pipeline operator Eustream that, if the Eugal Poland–Slovakia pipeline is built, Nord Stream 2 volumes could flow through the Slovak and Czech systems, safeguarding transit fees that had looked to be in peril.

Russia already delivers gas westward through Ukraine without straining pipeline capacity. So, from Kiev, the notion of building new routes — Turkish Stream as well as Nord Stream 2 — looks like a scheme to get to market while bypassing a mistrusted neighbour. According to Ukraine’s state-owned Naftogaz, by the time Nord Stream 2 became fully operational, taking gas to Germany through Ukraine will cost 20pc less than it does now. Gazprom, needless to say, has a different interpretation. And, beyond the numbers, the Russian camp argues that there is good reason to be mistrustful of Ukraine. Certainly, since 2005 there has been a litany of disputes over transit payments to Kiev and accusations of diversion of transit gas to the domestic market — just some of the reasons Gazprom considers strong enough to justify circumventing that country.

But the Kremlin has three non-energy related reasons to push for Nord Stream 2. The first is undermining Ukraine’s economy at a time when the two countries are at an armed standoff. The average Gazprom payment for transit of gas through Ukraine is $2bn/yr. Loss of that income would be a serious blow to Kiev. In 2015, Ukraine’s exports amounted to $35.4bn, and imports $38.7bn. Loss of that $2bn/yr could herald a devaluation of the hryvnia, with painful consequences for Ukraine’s fragile economy, which has only begun to recover on the back of IMF aid and the accompanying recipes for recovery. With economic turbulence could come yet further political instability for a government that the Kremlin wants to see the back of.

The second possible political gain for Moscow from Nord Stream 2 is erosion of EU sanctions against Russia, imposed after the annexation of Crimea. The new pipeline project is supported by several European countries that are committed to imposing sanctions against Russia, sanctions that require renewal every six months. The Nord Stream 2 consortium includes German utilities Eon and Wintershall, Anglo-Dutch major Shell, Austria’s OMV and Engie of France. Might they constitute a lobby against sanctions? If the pipeline is built, the sanctions would look like a tired joke or just diplomatic rhetoric.

And the third possible win is encouraging splits within the EU. The European media have noticed how much attention the Kremlin pays to European critics of the EU within individual countries as well as to stresses and strains between member countries. And Nord Stream 2 is already dividing European politicians. Germany is actively supporting the project while Italy, Bulgaria and some Balkan countries are against a new pipeline. Divisions in the EU bring glee in Moscow.  New infrastructural ties with countries like Slovakia and the Czech Republic are an echo of old spheres of influence.

To believe that Gazprom’s agenda is purely commercial is a fundamental misunderstanding.

One thought on “Nord Stream 2: It’s not (just) the economics, stupid!

  1. So basically it all boils down to ‘Nord Stream II would not be good for Ukraine’. Something Ukraine did not consider when it ignored price disputes with Gazprom, reasoning that Russia had no alternative but to transit through Ukraine as it gleefully siphoned off gas for its own use which was intended for Europe. Russia’s only recourse was to shut off the gas altogether to curtail Ukraine’s thievery, which promptly earned it the durable reputation of an unreliable supplier, thanks to Ukraine. There is no reason Russia should care whether Ukraine’s economy collapses, since its government has declared Russia an enemy and made it clear it wants nothing to do with it. If Russia has an alternate route around Ukraine, Europe’s gas supply will become considerably more secure, while there is no reason to believe Naftogaz when it talks about transit costing less because the rate is not set by Naftogaz, but by the Ukrainian government, which recently announced it was doubling transit fees. Ukraine likes to mouth off, but does not expect to suffer any consequences.

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