December 23, 2019
What’s behind the NordStream2 sanctions
This will be our last newsbriefing for the year. We wish all our readers a happy Christmas, and all the best for 2020. The next scheduled briefing will be on Monday, January 6.
Some of the big developments since our Friday briefing have been that Brexit got finally done, the Bank of England has a new governor, and the US sanctions against the NordStream 2 gas pipeline took effect.
There really isn’t much more to be said about Brexit - so we won’t. Andrew Bailey is in our view a good and plausible choice for governor of the Bank of England. Our main story story this morning, therefore, is the escalating transatlantic conflict around the NordStream2 gas pipeline. The US' defence budget, which includes the sanctions law, finally passed Congress last week and was signed into law by President Donald Trump. As a result Allseats, the Swiss company that was deploying the gas pipeline in the Baltic Sea, said it was suspending work with immediate effect.
The Germans were predictably furious, since their whole energy policy depends on a steady supply of Russian gas. This is a geopolitical and environmental nightmare for the rest of the EU. We thought the comments by Richard Grenell, the US ambassador to Berlin, were particularly interesting. He described the decision as a US policy to force a diversification of European energy policy. He called the decision profoundly pro-European, because this was an issue where Germany pitted its own interest against that of the rest of the EU. The Green MEPs Reinhard Bütikofer took up the same line of argument when he mocked the SPD’s defiant response that European energy policy should be decided in Europe and not in the US. This is what Bütikofer wrote:
"The reality is that the German government has pushed NordStream 2 against the EU, against majorities in the council, the parliament and the commission. This was a German-first policy."
The main beneficiary of a collapse in NordStream2 would be Ukraine, and it is not hard to see why the US administration might be pushing this issue right at this moment given the continued support by President Volodymyr Zelensky for Trump during the latter's impeachment process.
The sanctions are a small part of the national defence authorisation act, which authorises a $738bn defence budget for 2020. The FT reports that the US senators who sponsored the sanctions part of the bill wrote to Allseas, warning them of crushing and potentially fatal sanctions if they were to continue working on the pipeline for a single day. The purpose of this threat was to warn the company not to use the 30-day cool-off period in the sanctions section of the bill to complete the project, as involved companies initially thought they might be able to do. The letter said explicitly that any attempt to use the 30-day period to complete the project would have devastating consequences for the shareholders of the company.
The Nordstreat 2 consortium responded by saying that the project will be completed. They are only a couple of months away from completion. Of the 1200km-long pipeline, only 54km are missing.
The sanctions are unlikely to kill the project. What we now expect is that the companies involved in the project will find someone else to complete the job. We presume this will be a Russian company that is immune to additional US sanctions. We expect that this dispute will ultimately be folded into a broader list of US sanctions and tariffs against European companies. We expect this to become one of our main themes in 2020.
Germany had hoped to counteract one of the arguments against NordStream2 by brokering a gas-transit agreement between Russia and Ukraine last week. The deal is for an initial period of five years, with an renewal option for another 10 years.