Whatever your feelings about outgoing Secretary of State Rex Tillerson, he knows a thing or two about energy, and he strongly opposes Russia building a second gas pipeline, Nord Stream 2, through the Baltic Sea from St. Petersburg to Germany.
The only reason for Nord Stream 2 is that it is usually better to have more pipeline capacity and that the Russian government will pay for it. But why does the Russian government want to pay? The arguments against this pipeline are both more numerous and carry more weight.
Nord Stream 2 would transport 80 percent of Russia’s current gas exports to Europe through one single pipeline system, which would run counter to the European Union (EU) energy policy of energy security and diversification of supply.
The European Union has 28 members. Of these, only three clearly favor Nord Stream 2: Germany, the Netherlands, and Austria. The big energy companies of these countries have concluded a consortium with Gazprom, and these companies have managed to persuade their governments to support them.
Wintershall and Uniper have considerable weight in Germany, OMV in Austria, and Royal Dutch Shell in the Netherlands.
Gazprom will secure their near monopolistic positions on their home markets, as well as keep new startups at bay. Most EU governments understand this. Twenty out of the 28 EU countries appear to oppose Nord Stream 2, with a few being hesitant, though only the East Europeans express their opposition loudly and clearly.
As outgoing Secretary Tillerson so rightly stated, the key Russian aim with Nord Stream 2 is political. The Kremlin sees this project as a part of its economic warfare against Ukraine. Through a multitude of severe trade sanctions, Russia has slashed its trade with Ukraine by 80 percent from 2012-16.
Now it wants to deprive Ukraine of transit revenues corresponding to 2-3 percent of Ukraine’s GDP. Are we on the side of the Russian aggressor or do we defend the Ukrainian victims?
Gazprom praises itself for being reliable. Its Western customers accept that, but none of its Eastern partners do. Gazprom has been notorious for cutting supplies, usually in the midst of the winter, to its Eastern customers.
A study by the Swedish Defense Research Agency established that Russia used “coercive energy policy” 55 times from 1991 until 2006. Gazprom was the dominant culprit in 16 of these cases.
The two most famous cases were when Gazprom cut its gas supply to Ukraine for four days in January 2006 and for two weeks in January 2009, which hit 16 other European countries.
Gazprom is equally unreliable when it comes to prices. Once again, Ukraine offers a telling example. In the first quarter of 2014, when the Kremlin hoped to help President Viktor Yanukovych stay in power, it cut the gas price to Ukraine to $268.50 per 1,000 cubic meters (mcm) to his benefit.
But on Feb. 22, 2014, Yanukovych fled Ukraine. Thus, on April 1, Gazprom raised its price to Ukraine to $385 per mcm. Two days later, it increased its price further to $485 per mcm, claiming that since Russia had annexed Crimea, it no longer needed to give a discount for the lease of the naval base in Sevastopol agreed with Yanukovych in April 2010. This was not commerce but warfare.
The Kremlin controls Gazprom, and it has treated all former communist countries in a similar politicized fashion. In August 2012, the European Commission started an investigation of Gazprom’s anti-competitive behavior.
It had three major concerns, namely that Gazprom prohibited the free trade of gas, that its gas prices in monopolized markets were too high and that Gazprom exploited its pipeline monopolies to dominate markets. Bulgaria, Estonia, Finland, Latvia, Lithuania and Slovakia had only one supplier: Gazprom.
Fortunately, it is no longer Gazprom but spot market LNG sales that set the price in Eastern Europe, which has led to a substantial decline.
On Feb. 28, Gazprom lost a major arbitration case with Naftogaz in Stockholm. Characteristically, Gazprom showed bad faith and cut off its just-granted supplies to Ukraine for two days without warning, causing a Ukraine gas shortage and severe additional costs. Few suppliers have proven themselves more patently unreliable and politicized than Gazprom.
The U.S. has a significant share in this positive development. Outgoing Secretary Tillerson is perfectly right that Nord Stream 2 is undesirable and runs counter to U.S. policy in Europe. The question is not whether the United States should oppose it, but how strongly it should make its point.
Anders Åslund is a senior fellow at the Atlantic Council and a specialist on economic policy in Eastern Europe.
Image: © Getty Images
Written by Anders Åslund