The king of bad ideas: reviving Nord Stream 2 (Dekleptocracy Report #37)
Pipes destined for Nord Stream 2 stacked at Mukran Port, Pakistan, 2020. Source: Wikimedia Commons.
BOTTOM LINE UP FRONT
With the dust settling on President Donald Trump’s Presidential Address to Congress, we take a look at something simmering in the background. Namely, two of Europe’s leading newspapers are reporting that American investors are negotiating with Russia to revive the Nordstream 2 gas pipeline, with Trump’s special envoy leading the charge. We note that there’s really no rationale for the American economy for repairing and activating the system, which never came online after being sabotaged in late 2022. So why should we care about what appears to be a longshot venture? Because, according to reporting, US sanctions would be lifted from thousands of Russian individuals and companies as a condition of any deal — bringing an avalanche of dirty Russian money into the US economy. But US states and private investors can push back by forswearing any investments that would likely run up against European sanctions — and they should. Abandoning our Ukrainian allies is shameful enough, but to add insult to injury by going into business with Putin’s cronies, which would benefit only a handful of US investors close to the administration, would damage our moral standing beyond repair. Read on below, and please also be sure to check out the latest issue of our sister publication, Kleptocracy in America. Sadly, it’s more timely than ever.
IN-DEPTH
THE KING OF BAD IDEAS: REVIVING NORD STREAM 2
In September 2022, saboteurs of uncertain allegiance severely damaged three of the four pipelines that made up the Nord Stream 1 (NS1) and Nord Stream 2 (NS2) natural gas pipelines. Whoever did it, it appeared to be the coup de grâce for one of the worst projects in Europe’s post-war history. Developed in 2011 as an extension of NS1, NS2, which never became operational, came to symbolize the externalities of long-serving German Chancellor Angela Merkel’s Ostpolitik. In essence, it was a bargain whereby Germany could rid itself of both nuclear (post-Fukushima) and coal (post-Paris Agreement) energy with cheap Russian pipeline gas. Instead of a win-win for Russia and Germany, however, NS1 and NS2, along with the pipeline network transiting Ukraine (covered in a previous newsletter) became Vladimir Putin’s, er, trump card in political brinkmanship with Europe, just as it had in the so-called “gas wars” with Ukraine beginning after the Orange Revolution in 2004. Yet, if the March 2 reporting in Bild and the Financial Times (FT) is accurate, it appears Putin and the Trump administration are cooking up a plan to restart NS2. A textbook example of self-harm – American LNG has supplanted much of Russia’s former gas exports to Europe – this intrigue promises far graver consequences for the US, demonstrating that the American economy is open to Putin and his cronies, and that the president’s backroom deals trump rule of law, requiring a local and popular response.
First, what we think we know. The FT’s story tells how close Putin advisor Matthias Warnig, a former officer in the East German secret police, the Stasi, and the former chief of NS2’s now bankrupt operating company, reached out to the Trump team in recent months. Warnig is one of a very few non-Russians described as a “close friend” of Putin and, according to the Dow Jones Risk Database, the US, UK and Ukraine have all sanctioned him for his senior role in running Putin’s economy, the engine required for Russia’s war machine (notably, Warnig has been a critic of the Ukraine invasion, a position he has survived by virtue of not being Russian). According to Bild, Trump’s special envoy, Richard Grenell, has undertaken unofficial visits to the Swiss HQ of NS2’s operating company for talks with Warnig and a consortium of investors. As the FT has reported, American businessman Stephen Lynch floated a proposal to buy NS2 last year, although the current talks are “with a different US-led consortium from Lynch.”
Whatever the degree of Lynch’s involvement, the outlines of the deal appear to be that US investors would acquire the company. It would require the US to lift sanctions against several Russian individuals and institutions, although the articles suggest a blanket removal of US Treasury sanctions put into place since 2014. Russian gas giant Gazprom, pushed to the brink by the halting of NS1, NS2 and Ukraine’s decision to halt gas transit at the end of 2024, would potentially get a crucial lifeline if it can sell the gas. Germany would be required to cooperate, issuing licenses to allow the gas to flow to European buyers. The ostensible justification within the Trump administration for such a deal? The US would obtain an important Russian energy asset and additional leverage on future peace talks between Russia and Ukraine and, sotto voce, added power over Europe.
Not Realpolitik
That this volte face is a complete departure from Trump’s approach to NS2 in his first term is to state the obvious. From the introduction of a US sanctions regime against Russia following its annexation of Crimea and launch of a dirty war in Donbas in 2014, the US government loudly deterred companies from working with Gazprom. And Grenell, the interlocutor this time, was the US ambassador to Germany in 2019 and sent letters threatening companies working with the pipeline operator with potential sanctions. The letters warned that NS2 threatened to deepen Europe’s dependence on Russian energy. This prediction was broadly accurate. But, with some irony, it was surging US LNG production that helped most European countries avoid a major energy crisis following Russia’s full-scale invasion of Ukraine three years ago and the end of Ukrainian gas transit at the beginning of January. Today, the EU – except for authoritarian prime ministers in Hungary and Slovakia, who continue to demand the resumption of pipeline gas – can stake out an energy future built on a diversity of suppliers.
Europe’s progress since 2022 is one reason to question whether reviving NS2 and putting it into operation for the first time will achieve any of the Trump administration’s ostensible goals. The pipeline does not reach any of Russia’s most willing gas customers in Central Europe (Austria, Hungary and Slovakia). And Germany does not appear to be on board. Reuters reported on Monday that Germany has not been involved in the talks and its Economy Ministry said tersely: “Independence from Russian gas is of strategic importance to the German government in terms of security policy and it is sticking to it.” Incoming Chancellor Friedrich Merz appears set – in the face of Trump’s pledges to remove troops from Europe and abandon Ukraine – to distance himself from the timid policies of his predecessor and take concrete action to strengthen European defense.
Cheap Russian gas does not look like part of this equation and Merz is unlikely to see political advantage in caving to future American pressure to approve the flow of gas through NS2. If Merz learns from Justin Trudeau’s recent experience in Canada, where the Liberal Party was rescued from electoral oblivion, at least in polling, for standing up to perceived American bullying, he won’t cut a deal for NS2 while European Commission President Ursula von der Leyen pursues the elimination of Russian hydrocarbons from EU energy markets. After the depredations of the past three years, from mass rape to child abduction to the wholesale destruction of European cities, not to mention terrorist acts on European soil, even most conflict-avoidant Germans now understand not only the Russian state’s true moral dimensions today, but also that it is an aggressive military threat that can’t be bought off. Bereft of an obvious customer base, NS2 does not even make much of a bargaining chip in any ceasefire, let alone for theoretical long-term settlement, to end Russia’s aggression in Ukraine. So, where is the realism, the Realpolitik in Trump’s play for NS2?
Discrediting America
This is not to say that there is not a business rationale somewhere for reviving NS2 – Stephen Lynch’s reported plans predate Trump’s re-election and he is a businessman with a long track record in Russia. Most obviously, such a deal would lead to the removal of many of America’s more than 6,000 sanctions on Russian entities, which is within the power of the executive branch. This would benefit an investor in Russia, assuming they were not one of the hundreds of US and European companies previously invested there who were comprehensively fleeced by Putin’s government when they sold their interests after the full-scale invasion. But for the US administration, sanctions, not the deeply uncertain prospects of gas sales, should be the instrument retained for gaining compliance in any negotiations. That would be the realist position.
The restoration of business as normal with Russia by removing sanctions does not even have a lot to offer in broad economic terms as a fillip for an economy amid the coming tariff wars. It would take market share from American LNG, including gas produced in a key swing state like Pennsylvania. And the reality of US-Russian bilateral economic relations is that both countries don’t trade much with each other anyway. In 2021, before the full-scale invasion, the US sold US$10.3 billion worth of goods to Russia (similar to our exports to Panama) and imported US$29.2 billion. Even these miserly figures have declined rapidly since. In 2019, the Russian government acknowledged that “bilateral U.S.-Russia trade has always been insignificant”. Against this background, it is hard to interpret a removal of sanctions as anything other than a benefit solely for individual businesspeople around the president whose business interests happen to align with Russia’s giant gas station economy, not America’s.
This means Americans must oppose a deal that opens our markets to Putin and his cronies, as they control the Russian economy, in exchange for a derelict pipeline concern without an operating license or customers. How? Individual states and organizations can use their very real power in financial markets to transpose current sanctions into state law, taking into account past challenges. Massachusetts Executive Order 597, passed in 2022, requires state bodies to review any relationships with Russian government entities and encourages private organizations to do the same. Dozens of states have laws that prohibit boycotts and divestments against Israel, and whatever one thinks of such laws, they create a precedent for state-level regulatory measures with foreign policy implications. Institutions like large public employee pension funds, university endowments and giant mutual fund managers should make clear that they’d be unwilling to invest in Russian assets on both moral and compliance grounds. Individuals and companies should also be reminded that legislation like the Magnitsky Act and Global Magnitsky, that target individuals and companies engaged in human rights abuses remain on the books. The same is true of the Foreign Corrupt Practices Act and the Foreign Agent Registration Act, with prosecutions possible if a future administration decides to “un-pause” them. And if the UK and the EU continue to enforce sanctions, doing business with large parts of the Russian economy will remain off limits to any company hoping to do business in Europe. Our elected officials in Washington may be literally physically intimidated from opposing a pointless and immoral money grab, but the people and the states can call it out for what it is and take action.