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September 10, 2020

RUSSIA/US: Expanded Nord Stream 2 sanctions loom

BY Andrius Tursa

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The expansion of US sanctions on the Nord Stream 2 (NS2) pipeline could further push back the completion of the project. However, a potentially drawn out adoption process in the US would limit the effectiveness of the proposed measures. Regardless of the sanctions, Gazprom will remain committed to completing NS2, but EU internal energy market rules could complicate the operation and profitability of the pipeline.

On 4 June, a bipartisan group of US senators led by Ted Cruz introduced the Protecting Europe’s Energy Security Clarification Act aiming to expand sanctions on Russian energy export pipelines, most notably NS2. The existing sanctions on NS2 – imposed as part of the National Defense Authorization Act (NDAA) for 2020 – have already halted the project by limiting foreign companies from engaging in deep-water pipelaying in the Baltic Sea. Gazprom is currently upgrading its own pipelaying vessel to finish the offshore pipeline’s remaining section (around 160km). Consequently, the proposed bill aims to disrupt this by expanding the list of activities for which foreign entities would face sanctions, such as asset freezes, US entry bans and visa revocations, with the following services:

  • site preparation, trenching, surveying, placing rocks, stringing, bending, welding, coating, lowering of pipe, and backfilling;
  • technology upgrades, installation of welding equipment, retrofitting or tethering of vessels;
  • underwriting or insurance for vessels;
  • testing, inspection, certification associated with the operation of the NS2 pipeline.

There seems to be bipartisan support for the bill, which is expected to be attached to the NDAA for 2021. However, the adoption timeline could be drawn out as legislative activities in the US are still disrupted by Covid-19. It is unlikely that the final version of NDAA will be adopted before the end of the summer. In fact, the NDAA for 2020 was signed into law only in the second half of December. Such delays could limit the effectiveness of the proposed sanctions as Gazprom expects to finalize the project by early 2021.

Even if enacted swiftly, the sanctions would not force the Kremlin to abandon the EUR 9.5bn NS2 project, which has financial backing from major European energy companies and is more than 90% complete. To reduce the risk of potential sanctions, Gazprom has already transferred the ownership of its pipelaying vessel to a subsidiary, and further transactions are possible. Moreover, Gazprom does not face immediate pressures to finish up the pipeline as its new gas transit deal with Ukraine is valid until the end of 2024 and the gas demand in Europe is expected to remain subdued in the medium term.

While Russia did not directly reciprocate to the previous round of US sanctions on its energy export pipelines, the Kremlin has been seeking to exploit divisions on the matter between the US and major European countries. Russia’s foreign ministry branded the proposed sanctions as “anti-European“, echoing similar comments from the German economic minister. Many in Berlin question the degree of US commitment to the transatlantic relationship, while betting on EU regulation to address Gazprom-related concerns among Germany’s European partners.

Indeed, Gazprom’s attempts to exempt NS2 from EU internal energy market regulation experienced a setback in May when the German regulator denied a respective waiver and the EU General Court dismissed the project company’s subsequent complaint. While the ruling could still be appealed, the application of EU energy rules could complicate the operation and profitability of the pipeline.

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