There seems little to connect Ukraine bracing for a Russian attack and inflation spiking across Europe. But rising prices in Europe have been exacerbated by a natural gas shortage — and thus higher energy prices — that many believe is being induced by the Kremlin to weaken the West’s unity over Ukraine, one of several 'hybrid warfare' techniques at Vladimir Putin's disposal.
The Nord Stream 2 (NS2) gas pipeline linking Russian gas with German consumers is a vital element in this complex and fluid matrix. So, who stands to win — and who loses if the controversial project is sidelined for good?
The geopolitical context
1,230 kilometers (775 miles) in length, at fully capacity the €10-billion ($11.5-billion) pipeline would double Russia's direct gas export capacity to Germany to 110 billion cubic meters (bcm) per year. Completed in September, the pipeline has yet to start carrying gas, pending regulatory nods from Germany and Brussels.
Meanwhile, the German energy regulator has suspended the certification procedure for NS2. It said a decision on final certification would not happen until the second half of 2022.
But that will not dampen long-held fears in Washington, Warsaw, and Kyiv that NS2 could be exploited by Russia for political ends. Their fears have only been exacerbated after gas flows from Russia fell to a six-year low in November, pushing up wholesale prices to about $800 per 1,000 cubic meters, far above the normal level of around $300.
Rystad Energy estimates that if Russia boosted its gas exports by 20%, it would lower the market price of gas in western European markets by 50%.
Experts say NS2 does not even need to exist for Gazprom to send gas to Europe.
"There is ample capacity on existing routes, but the Kremlin has made a decision for months to exacerbate the natural gas scarcity in EU storages by declining to book additional capacity beyond contracted levels on these routes," Benjamin L. Schmitt, Harvard University researcher and senior fellow at the Center for European Policy Analysis, told DW. This, he argues, has bolstered claims that Russia is using its gas might to force regulators in Germany and Brussels to speed up the certification of NS2.
Major setback for Germany
Germany faces an awkward choice as it seeks to transition away from fossil fuels. Having decided to ditch nuclear power, and with its renewables still generating only a relatively small amount of power for the foreseeable future, gas transit infrastructure that cuts out often troublesome transit countries like Poland and Ukraine might once have seemed ideal.
But — facing US pressure to use NS2 as leverage to deter Russia from any further incursion into Ukraine, worries about EU energy sector unbundling, and the ruling Green party's opposition to the project — Berlin finds itself in a bind.
"I’d say probably Germany would suffer most from the longer-term suspension of NS2," Anna Mikulska from the Center for Energy Studies at Rice University told DW. "It would not have direct access to gas from Russia and can’t even think of becoming a gas hub for the region," she adds.
Seeking to resolve the impasse, Berlin has sought to assuage Ukrainian fears of being sidelined. New chancellor, Olaf Scholz, says Germany would "do anything" to ensure that Ukraine remains a transit country for Russian gas exports to Europe. Berlin managed in July to convince the Biden administration to co-finance a $1 billion fund for Ukraine to help diversify its energy sources. Berlin has also promised to reimburse Ukraine for gas transit fees it will lose from being bypassed by NS2 until 2024.
But, at the same time, a US-German joint statement on NS2 set the metric by which Berlin committed to seeking sanctions on Russia at EU level.
"This was 'Moscow using energy as a weapon,'" said Schmitt. "And this is happening right now."
"Yet Berlin has yet to even publicly acknowledge this reality, let alone seek sanctions at the EU level," Schmitt adds. "This is a de facto weakening of the very agreement Germany itself signed up for."
Meanwhile, cracks between the Greens and the Social Democrats (SPD) in the government are appearing.
"In my view, the biggest losers will be German and Austrian gas consumers whose bills have shot up 25% (like my own)," Albrecht Rothacher, author of Putinomics. How the Kremlin Damages the Russian Economy, told DW.
Others play down the impact.
"Germany would in fact not be significantly affected by stopping NS2, since the pipeline isn't designed to bring significant new gas to the German market, rather it is aimed at circumventing Ukraine by bringing those same volumes through NS2," Schmitt explained.
The European Union
EU leaders warned Russia in December that action against Ukraine would result in "massive consequences" after Western intelligence services said more than 100,000 Russian troops had amassed near Ukraine's borders, with some talking of an attack in late January.
The European Commission has said it is ready to impose additional sanctions on Russia, intensifying those that came into existence after Russia annexed the Crimean peninsula in 2014.
All EU members have to agree on sanctions, but so far they remain divided on how to handle Russia.
It is not yet clear what a sanctions package would include. Biden's officials mentioned cutting off Russia from the SWIFT system of international payments, but the key option is pressuring Germany to block NS2.
However, European countries will not be meaningfully impacted if NS2 is canceled, because they can get the gas they need through existing pipelines, experts say.
"The problem right now isn't a lack of pipeline capacity, but that Russia isn't shipping sufficient gas to Europe," Chris Miller, assistant professor of international history at Tufts University, told DW.
The United States
In May, the US waived sanctions on Russian companies overseeing NS2.
"I suspect Biden’s inclination is to keep the big sanctions stick in the closet, in hopes that the threat will deter further Russian aggression in Ukraine," comments Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics.
The US has seen a surge in gas production and falling prices in recent years and has been seeking to find new markets. Poland and Ukraine have both expressed interest in buying LNG from US suppliers, but it may be years before infrastructure is ready to make it viable commercially.
The US might also benefit from political divisions within the EU, as would a rapacious China, which has already started acquiring Eastern European infrastructure.
Poland and Ukraine
Poland and Ukraine presently earn revenues from transit fees that Gazprom, the state-owned Russian gas giant, pays in return for sending its gas via their gas networks to Western Europe.
Kyiv and Warsaw also fear the potential weakening of their political bargaining power in the event of the pipeline bypassing them under the Baltic Sea directly to Germany. Ukraine's large gas reserve facilities could also become obsolete.
"Of all the parties and stakeholders involved, if NS2 was finally stopped, the biggest loser would be Putin's Kremlin," Schmitt believes. "By stopping NS2, Gazprom would still rely on the Ukrainian gas transmission system to deliver volumes to EU markets, thus serving as an additional strategic deterrent against further Russian destabilization of Ukraine."
Poland has, however, moved to find new sources of gas, signing deals with Norway, Qatar and the US, building LNG (liquified natural gas) terminals on its Baltic Sea coast, while harboring ambitions to become a regional gas hub.
"Poland will gladly take the position of the regional gas hub once all its infrastructure is finished," Mikulska said.
Russia to lose big politically
Putin denies using energy as a weapon, though he has made it clear that the only way Russia can increase its gas output to Europe is if Germany approves the pipeline.
Putin has time on his side. "NS2 is not particularly important for the Russian government in financing itself, because even if it doesn't come online Russia can send gas to Europe via other pipelines," Miller explained.
But Russia has the most to lose if NS2 is canceled, he adds. "It will be a meaningful political defeat for the Kremlin, even though it won't cost the Kremlin much in financial terms," he said.
Mikulska says the controversy around NS2 could play to Putin's advantage.
"Keeping up the NS2 controversy is not that negative for Putin politically. The issue divides Europe internally and the US and some of its Western European allies," Mikulska said. "The NS2 issue becomes a useful cover-up for that. A kind of Machiavellian type of idea where it's better to be the one that's feared."
Gazprom — the lone shareholder
There is only one shareholder of NS2, Gazprom. So, how would NS2's suspension hurt the energy giant?
"In as much as it would increase the cost, yes," Mikulska said. "The financing partners — ENGIE, OMV, Shell, Uniper and Wintershall Dea — should be fine as long as Gazprom adheres to the financing terms."
However, there is an interesting twist, she added. "If Gazprom defaults on its payments, according to the financing agreement, the companies can take over the share of the company."
Kamil Lipinski, an analyst from the Polish Economic Institute (PIE), suggests that in the event of an EU ruling that the single-party ownership of the pipeline itself and the gas it will transport contradicts EU energy rules and that Gazprom would need to "unbundle" its various interests, its Russian domestic rivals could benefit by getting their feet into the lucrative gas export trade.
"Unbundling or suspension of the NS2 project would be a clear signal for Gazprom’s more market-oriented competitors on the Russian internal gas market, like Rosneft and Novatek, encouraging them to challenge the position of the company in the export area," Lipinski told DW.
However, Mikulska says Putin’s strategy — if that is what it is — may have backfired.
"Not only is there a delay, but in addition, Gazprom has not been able to capitalize on the very high prices of gas on the European market," Mikulska said.
There is also the possibility that Gazprom did not have enough gas to send to Europe, given the need to refill its storage after a cold winter, an outage at the Urengoy plant and the early onset of cold weather this year, Mikulska added.
"I think this is highly possible and even more damaging for Gazprom, as it would indicate the company doesn't have the capabilities to be the true swing producer, the Saudi Arabia of gas for Europe, and hence would weaken its bargaining position and geopolitical standing," Mikulska concluded.
Edited by Ashutosh Pandey