Maximum Pressure on Germany Is a Big Mistake
New sanctions from the United States risk pushing Berlin firmly into Moscow’s geopolitical corner.
By Jeff Rathke, Max Hammer
Most everyone in the U.S. Congress, it seems, wants a tougher Russia policy—it is one of very few areas of bipartisan agreement in today’s Washington. It is not hard to see why: Moscow’s destabilizing role is manifestly obvious in the Russian intervention in Ukraine, its military support to the brutal Bashar al-Assad regime in Syria, and the active measures to undermine democratic institutions in the United States and Europe.
Congress has been frustrated by the hesitancy of the Trump administration to use against Russia many of the wide-ranging tools legislators gave the executive branch in the Countering America’s Adversaries Through Sanctions Act, which President Donald Trump reluctantly signed in August 2017. Two years later, Congress is moving ahead with legislation that could soon force Trump’s hand by imposing new sanctions on the Nord Stream 2 pipeline between Russia and Germany, which is nearing completion. The objective is to kill or delay the pipeline, to protect Ukraine’s future as an energy-transit country, and to penalize Russia for its destabilizing foreign policy.
But congressional action to halt Nord Stream 2 carries risks of weakening European solidarity against Russia and could help unravel the sanctions architecture imposed jointly by the United States and the European Union since 2014. The United States could better achieve its desired ends for the pipeline through a more cooperative policy—one that leverages Germany’s influence to strengthen Ukraine and to complicate Russia’s strategy of using energy as a weapon.
The pipeline is Russia’s most important economic venture in Europe, and it has a political objective: to send gas directly to its most important European market, Germany, and to bypass and isolate Ukraine, leaving Kyiv to Moscow’s tender mercies. The project has been opposed by U.S. administrations of both parties since it was announced in 2015. Trump went so far as to label Germany a “captive” of Russia because of its purported energy dependence on Moscow. Nevertheless, the Trump administration has stopped short of carrying out its threats of sanctions against the companies involved in the pipeline. The brandishing of sanctions, however, has contributed along with other Trump policies to declining German public trust in the trans-Atlantic relationship—a recent survey showed that only 19 percent of Germans considered the United States a trustworthy partner, a decline of 5 points in the past six months that placed the United States well behind Russia in German opinion. Low levels of trust contribute to declining U.S. influence over German policies.
The threat of sanctions is now more pronounced. Two bills in the House and the Senate, instead of penalizing the major gas companies involved, would target a perceived weak link: the specialized pipe-laying companies working on Nord Stream 2 (and on the Russian state-controlled gas company Gazprom’s TurkStream project, which will bring Russian gas across the Black Sea to Turkey and eventually to Europe). The bills would sanction pipe-laying companies involved in the project, freezing their U.S. assets and prohibiting them from doing U.S. business. Only a handful of companies possess the pipe-laying technology Nord Stream 2 needs, and they are in high demand worldwide. One of them, the Swiss-based contractor Allseas—which is heavily exposed to the U.S. dollar and U.S. business—is essential to completing the pipeline, and the proposed sanctions could cause the company to withdraw. The bills have bipartisan support: The Senate Foreign Relations Committee passed the bill by a vote of 20 to two at the end of July, after the House version passed the House Foreign Affairs Committee with similar bipartisan approval. The bills’ widespread support across parties and chambers increases their likelihood of passing with a veto-proof majority, which could kill the pipeline or delay its completion by years.
What are Washington’s objections to a gas pipeline serving the European market? The bipartisan U.S. opposition to Nord Stream 2 stems from four main factors. First, some in Washington believe the United States could export liquefied natural gas to meet increased European demand rather than allowing Russia to expand its market share. While U.S. liquefied natural gas exports to Europe have increased in recent years and play an important role in diversification, Russian gas is cheaper and that price advantage will limit eventual U.S. market share. The second argument is that Europe’s energy security will be diminished if Nord Stream 2 is completed and Russia’s market share grows. This prediction, however, may be overstated. Thus far, European gas demands have grown slowly—they are only predicted to return to 2010 levels by 2025—and a new pipeline isn’t certain to change that; in any event, Germany imports a smaller share of its gas from Russia than during the Cold War. Third, there is the objection that Russia should be punished for its violations of international law and norms, including its invasion of Ukraine and annexation of Crimea.
The fourth concern is the most important: that Nord Stream 2 would allow Russia to circumvent Ukraine in providing gas to Central and Western European customers such as Germany, Italy, Austria, Slovakia, and the Czech Republic, thereby depriving Ukraine of vital transit revenues totaling about $2 billion to $3 billion per year, amounting to 3 percent of its GDP. If Russia can deliver its gas without Ukraine, that could lower Moscow’s threshold for further aggression in eastern Ukraine, where Moscow-controlled forces have instigated and fought since 2014 a conflict that has killed more than 13,000 people. Gazprom, which leads the partnership, wishes to complete the pipeline by the end of 2019 in part to increase its leverage over its Ukrainian equivalent, Naftogaz, whose energy transit deal with Gazprom is due to expire by the end of the year.
Europe itself is divided on Nord Stream 2, and Germany long tried to ignore the significant opposition from many EU partners. This blind spot in Berlin has contributed significantly to a backlash from some neighbors. Nord Stream 2 has yet to secure approval from Denmark for the portion of the pipeline that will cross that country’s exclusive economic zone. A new government has recently taken office in Copenhagen, and an environmental review is ongoing. There is no deadline for Danish authorities to issue a permit, and Nord Stream AG executives have expressed concern this could delay the planned completion date of December 2019. Previous Danish governments were critical of Nord Stream 2, as are most EU member states. Berlin unwisely ignored these voices until recently, when the German government agreed in February to the application of EU regulations that require the separation of ownership of the pipeline from the gas supplier and for at least 10 percent of capacity to be made available to third parties. Nord Stream AG is taking the EU to court over these regulations.
It’s clear that the United States and Denmark have the power to delay or even possibly kill the pipeline project. Would it be worth it? New U.S. sanctions might delay Nord Stream 2 and buy time that strengthens Ukraine’s bargaining position. But they would also cause collateral damage in the U.S.-German relationship. If pipe-laying firms withdraw from the project, it would leave the five major European energy companies (from Germany, France, Austria, the United Kingdom, and the Netherlands), which are providing 50 percent of the financing for the project, with sunk costs of close to 1 billion euros each in the project. The German government would find it hard to accept U.S. sanctions without reaction.
Since 2014, Germany has been the linchpin for sustaining EU sanctions against Russia for its aggression in Ukraine. Increasingly, countries such as Italy, Greece, and Hungary express a desire to end the sanctions, but Berlin has held the EU together. It is risky for the United States to subject Germany to increased political pressure on Nord Stream 2 at a time when solidarity on the more comprehensive sanctions effort is eroding. It would add to a growing list of U.S.-German tensions, including U.S. tariffs on European aluminum and steel, U.S. demands that Germany increase its defense spending, the consequences of U.S. withdrawal over the Iran nuclear deal, and the question of how best to respond to China’s growing international economic role and the influence of its technology companies worldwide. It is hard to imagine a German government going out on a limb on other U.S. requests—whether for German participation in a maritime escort mission in the Persian Gulf or for German ground troop commitments in Syria—while Washington is sanctioning German companies over Nord Stream 2.
What can Germany and the United States do to better manage this disagreement over Nord Stream 2? Berlin should seek to neutralize and address the most potent argument against the pipeline: Ukraine’s vulnerability to Russian economic and military coercion. This could include not only supporting the existing efforts of the EU to reform the Ukrainian energy sector in cooperation with Kyiv and making up for potential lost revenues if transit volumes decrease. It would also mean exerting pressure on Russia to reach a mutually acceptable gas transit agreement with Ukraine before the current one expires at the end of 2019. Germany should also use its leverage as the major consumer of Russian gas and establish a binding link between gas flows through Nord Stream 2 and Ukraine’s continued role as a transit country, so that if Russia were to cut off Ukraine, it would lose its main market in Western Europe. The use of coercive national economic measures is not something Germany is accustomed to, but it would be a valuable gesture of solidarity in this context.
Meanwhile, Washington should acknowledge that it has already achieved many of its desired goals on Nord Stream 2 through the EU decision to apply its regulations to the project, a step that Berlin had previously resisted and Washington advocated. The United States should prioritize its international economic objectives in a way that allows its partners, including Germany, to understand what is most important on the U.S. global economic agenda: China, World Trade Organization reform, reducing the U.S. goods trade deficit, and sanctions on Russia for its aggression toward Ukraine. Until America’s European allies have a clearer sense of U.S. objectives, the potential for a cooperative common agenda will remain elusive.