Nord Stream 2: Catch-22 for Germany

18.05.2018

Cancelling Nord Stream 2 would be a colossal blow to Russian-German cooperation in energy supplies and to German credibility in any future negotiations with Russia, both on the state and the business levels, writes Valdai Club expert Nora Topor Kalinskij, analyst at Geopolitical Futures, whose work focuses on European and Russian geopolitics.

Economically, Germany is a catch-22 situation: both outcomes will be detrimental. In the first scenario, Germany cancels the Nord Stream 2 pipeline. With gas production declining in Europe, Germany will be forced to look for alternative suppliers from which it can import Liquefied Natural Gas (LNG). The US could be one – indeed this is what US energy companies are hoping for. President Trump promised to raise US natural gas exports in Europe in a speech in Poland last year. Russian gas companies have a strong hand in competition with US LNG exports because transferring gas through pipelines is much cheaper than freezing it, transporting it by tanker and then regasifying it. Having to supplant Russian gas with LNG imports would be a blow to the competitiveness of German exports. Trump has stated that the US would start talks with the EU on a new trade deal if Nord Stream 2 were cancelled, but Europe has no guarantees that first, these talks will lead to any deal and second that even if a deal is reached it will not be revoked soon afterwards. For Germany, the Iran nuclear deal is a glaring example of the unreliability of the US.

In the second scenario, Germany pushes on with Nord Stream 2 and the US imposes tariffs on European goods. 9% of German exports in 2016 went to the US: the US market does not dominate Germany’s export landscape but a sharp decline in exports to the US would certainly have an adverse impact on Germany’s economy and on that of the EU as a whole.

Germany’s choice, ultimately, will be geopolitical. Trump’s ultimatum is the latest move by his administration to weaken the competitiveness of exports from Germany and the rest of the EU. The US is aiming to kill several birds with one stone. Trump is making efforts to appeal to his base in the US and those that supported his “America First” campaign. One way for him to draw investment and businesses into the US is to destabilise the political and economic environment in other parts of the world. First and foremost, the US can gain at the expense of European competitors and by attracting capital away from the relatively prosperous European continent to the US. Trump scored in this dimension from his withdrawal from the Iran nuclear deal, and will be scoring again regardless of what Germany decides. His threats to Nord Stream 2 could easily drive one more wedge between the EU and Russia, and a deep one for that matter.

Cancelling Nord Stream 2 would be a colossal blow to Russian-German cooperation in energy supplies and to German credibility in any future negotiations with Russia, both on the state and the business levels. The end of Nord Stream 2 would be an economic blow for Germany, as explained above but also for Russia for which Europe is a valuable energy export market. In addition, it would undoubtedly translate into a further degradation of political relations between Germany and Russia that both states have an interest to avoid. Both are hurt by the current sanctions regime and would prefer to see a decrease in perceived bilateral security threats.

The end of Nord Stream 2 would thus be a double win for the US. In addition, if the US succeeds in imposing its conditions on Germany at the negotiating table (i.e. if Germany picks the first scenario), Germany’s reliability as a partner for future business will be further compromised, not only when it comes to dealing with Russia, but also with other business and investment partners like China that has lately expanded its economic presence on the continent.

Although Germany is an export-based economy and the US is an important partner, it is the second option that the Germany and the EU will pick. It is one of the rare instances in which European elites will join in a united front, for Europe’s global position is at stake.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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