Paul Gregory
The European Union took a first step with its February 8 vote towards turning Russia’s gas monopoly, Gazprom, from an instrument of Russian power politics into a regulated utility, deprived of its monopoly power. In an odd twist, Germany, the self-proclaimed guardian of European unity, found itself politically isolated from the rest of Europe, which sided with U.S. President Donald Trump. A bitter pill for Germany to swallow.
Meanwhile, Putin and Germany complained that U.S. intervention was exclusively for its own plans to sell its expensive LNG to Europe.
As the European Union (EU) permanent representatives gathered in Brussels on Friday, February 8, to vote on the EU’s Gas Initiative of the Third Energy Package, Russia’s Nord Stream 2 (NS2) undersea pipeline project was in jeopardy. Even Germany’s reliable ally France had declared its intent to vote against the German-Russian project. Without France, Germany could not block an anti-NS2 vote, and an alarmed Angela Merkel swung into diplomatic overdrive. In hasty negotiations, Merkel and France’s Emmanuel Macron reached a compromise agreement that allows all parties to fight again another day.
Eastern and Central Europe and Ukraine strongly oppose the Russian-German project being built by Gazprom in conjunction with five European energy giants. Their objections: NS2 will bypass the Ukrainian and other pipelines that currently transport about half of Russian gas to Europe through their territories. NS2 will make Germany the hub of gas trade and distribution, and a new gas transport infrastructure must be built for economies east of Berlin. Although supporters claim NS2 will not increase Europe’s dependence on Russian gas (because of competition from LNG), NS2 combined with Gazprom’s proposed Turk Stream pipeline would semi-circle Europe’s energy market from both the south and the east at a time when North Sea production is waning.
Moreover, at present prices, LNG is not competitive with piped-in Russian gas.
Merkel’s counterattack revealed her deep commitment to NS2. She pressured NS2-opponent Romania, which chaired the February 8 meeting, to bring forth an alternative proposal for a vote. Phone lines between Paris and Berlin buzzed as Merkel sought a compromise that would gain France’s support. Indeed, when the commissioners met on Friday, they passed with only one “no” vote (Bulgaria) the compromise worked out by Merkel. The next step will be expected approval by the European parliament, presumably before the May 2019 parliamentary elections.
The main point of contention was whether the EU would subject pipelines originating outside of the EU, such as NS2, to EU regulation as spelled out in the EU’s Third Energy Package. EU rules require pipelines operating in the intra-European market to unbundle transportation from production. For NS2, this means that Russia’s natural gas monopoly, Gazprom, would have to sell its pipeline to a third party to separate production from delivery. The application of EU guidelines to NS2 would also subject Russian gas sold in Europe to regulation by Brussels. Such regulation would outlaw Gazprom’s past ban on reselling its gas to other countries and would prevent Gazprom’s giving favorable rates to friends and punishing foes with higher prices.
The compromise is that Germany would be in charge of insuring that Gazprom honor the EU rules on unbundling, price regulation and access by third parties to its pipeline network.
Putting Germany in charge of NS2 regulation may be like putting the fox in charge of the hen house. Although Merkel has vocal opponents of NS2 in her own party, her coalition partners, the Socialist party of Germany (SPD), has been throughout an avid supporter of NS2, the chairman of which is former German chancellor Gerhard Schroeder. Merkel’s shaky coalition with the SPD constrains her. If she were to come out against NS2, her “grand coalition” government would fall, and new elections would have to be called with quite uncertain results.
The United States under President Trump has taken a strong anti NS2 position, Trump raised his objections to NS2 at the NATO summit in July. The U.S. ambassador to Germany, Richard Grenell, threatened the five European partner companies with sanctions if they cooperate on the NS2 plan. Russia and supporters of NS2 in Germany complain that the U.S. is simply trying to force its expensive LNG on Europe and opposes Nord Stream 2 for selfish commercial gain.
In its editorial, the influential Der Spiegel, criticizes Merkel for failing to gauge the depth of European opposition to increasing commercial entanglement with Russia. Germany’s argument is that Nord Stream 2 is just a commercial undertaking between two consenting powers, but Germany’s support of Nord Stream 2 has been a political disaster that has isolated Germany from the rest of Europe.
Sober voices in Europe are basically questioning whether Europe should tie itself even more to a pipeline that depends on the good behavior of a country that illegally annexed Crimea, started a war in East Ukraine, denied shooting down a passenger plane, intervened in Syria to save a client and brazenly violated the law of the seas by seizing Ukrainian war ships and sailors, and engages in relentless hybrid warfare and propaganda against the Western world.
Is it coming close to the time that Europe and the rest of the world punishes a rogue state, in the heart of Europe, for its many violations of international law and norms?Paul Gregory is a research fellow at the Hoover Institution. He is Cullen Professor Emeritus in the Department of Economics at the University of Houston, is a research fellow at the German Institute for Economic Research in Berlin, and is emeritus chair of the International Advisory Board of the Kiev School of Economics. Gregory has held visiting teaching appointments at Moscow State University and the Free University of Berlin.
Gregory was the director of the Russian Petroleum Legislation Project of the University of Houston Law Center from 1992 to 1997 and has written broadly on Russian energy.
The holder of a PhD in economics from Harvard University, he is the author or coauthor of twelve books and more than one hundred articles on economic history, the Soviet economy, transition economies, comparative economics, and economic demography. His most recent books are Women of the Gulag: Portraits of Five Remarkable Lives (Hoover Institution Press, 2013), Politics, Murder, and Love in Stalin's Kremlin: The Story of Nikolai Bukharin and Anna Larina (Hoover Institution Press, 2010), Lenin’s Brain and Other Tales from the Secret Soviet Archives (Hoover Institution Press, 2008), Terror by Quota (Yale, 2009), and The Political Economy of Stalinism (Cambridge, 2004), which won the Hewett Prize. He co-edited The Lost Transcripts of the Politburo (Yale, 2008). His archival work is summarized in "Allocation under Dictatorship: Research in Stalin's Archive" (Journal of Economic Literature.) Gregory is the producer working with director Marianna Yarovskaya of the documentary film Women of the Gulag, short listed in the 2019 Oscar competition.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.
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