By Benoit Beaulieu, ACSS Reporter
December 18, 2021
As Nordstream 2 nears completion in preparation for transporting billions of cubic feet of natural gas, the Office of Foreign Assets Control (OFAC) announced in November new designations against Russian-linked Transadria Ltd and one of its vessels in line with the Protecting Europe’s Energy Security Act (PEESA). The company is linked to the construction of the controversial Nord Stream 2 pipeline.
This isn’t the first time OFAC has targeted companies associated with the construction of Nord Stream 2. The pipeline has been viewed as a longstanding compliance risk since 2016, having become increasingly complex for operators to navigate owing to its volatile geopolitical landscape.
Nordstream is the world’s longest sub-sea pipeline, linking Russia and Germany via the Baltic Sea. Its purpose is to help secure Europe’s energy needs while diversifying delivery in consideration of growing demand over the past decade.
The cost of the pipeline has been estimated at 9.5 billion euros, and can potentially double the Nord Stream system by 55 billion cubic meters. In 2015, Gazprom, Royal Dutch Shell, Wintershall Dea and other western companies agreed to build the pipeline. In April 2017, financing agreements were signed, marking the start of the Nord Stream 2 project. Germany issued construction permits soon afterward in January 2018.
“Destabilizing Geopolitical Consequences”
In 2016, eight Central and Eastern Europe EU members signed a letter addressed to the European Commission highlighting objections to Nord Stream 2. The letter cited the “potentially destabilizing geopolitical consequences” that the pipeline could have, specifically referencing energy security for Central and Eastern Europe.
“It would strongly influence gas market development and gas transit patterns in the region, most notably the transit route via Ukraine,” the letter says, where nearly half of Gazprom’s exports pass through. While the gas flows under the Baltic, Ukraine’s revenue stream from the transit royalties for delivering Russian energy to the rest of Europe will dry up.
From the alleged poisoning of Putin critic Alexei Navalny, his subsequent arrest, to the annexation of Crimea and the recent Russian troop build-up on the Ukrainian border, EU states – NATO members, in particular – have expressed concerns that Russia might seek to “weaponize” Nord Stream 2. Some observers say that, by increasing Europe’s energy dependency on Russia, the Kremlin could put EU members and allied countries such as Ukraine in compromising positions.
In January 2021, the European Parliament passed a resolution calling for a complete and immediate stop to the construction of Nord Stream 2. The resolution was adopted with 581 votes in favor, 50 against and 44 abstentions.
Transformation in Energy Supply
Following the 2011 Fukushima disaster, the then German Chancellor Angela Merkel vowed that Germany would close all of its power plants by 2022, accounting for a loss of one-fifth of Germany’s energy supply. In response to criticism, Merkel was reported to have said that Germany “cannot — as some have demanded — get out of nuclear power and coal and then withdraw from natural gas as fast as possible…That’s not going to be possible.”
Merkel’s decision to move forward with the project in the face of EU and US criticism strained German-US relations. Merkel had already criticized US “extraterritorial sanctions,” and some argue that her view and Nord Stream 2 had posed the greatest diplomatic crisis to the transatlantic alliance since the invasion of Iraq in 2003.
Contributing factors have included the US troop withdrawal from several German states and material disagreements concerning the value of NATO and the Paris Climate Accord. The Biden administration is treading lightly to preserve US-German relations in the wake of OFAC’s sanctions regime.
Chronology of Risk
In 2019, the US ambassador to Germany warned that companies involved in the construction and operation of Nord Stream 2 could face sanctions. This was quickly followed through by the Trump administration, including Nord Stream 2-related sanctions as part of a $738 billion defense policy bill passed in December of that year.
The National Defense Authorization Act, passed in December 2020, led to even tougher sanctions rules surrounding Nord Stream 2, posing risks for an estimated 120 companies operating from 12 EU countries. Accordingly, the International Group of P&I Clubs, the world’s largest group of maritime shipping insurers, announced that it would not provide insurance coverage for “any activity involving or related to” Nord Stream 2.
Further sanctions risks materialized in 2021, with the Trump administration designating pipe-laying vessel Fortuna, and Russia-based entity KVT-RUS, under the Countering America’s Adversaries Through Sanctions Act. In April, the US Senate Foreign Relations Committee advanced the Ukraine Security Partnership Act, which sought to provide military aid to Ukraine, as well as a raft of financial and security measures, and a call to the President to report to Congress “a determination as to whether certain vessels and entities, including the project company behind the Nord Stream 2 pipeline, meet the criteria to be subject to sanctions.”
But the US waived sanctions to demonstrate the Biden administration’s “commitment to energy security in Europe, consistent with the president’s pledge to rebuild relationships” with European partners and allies. In July, the US and Germany unveiled an accord where both partners affirmed their “determination to hold Russia to account for its aggression and malign activities by imposing costs via sanctions and other tools,” should Russia weaponize Nord Stream 2 against Ukraine or other European countries.
Following the accord, OFAC levied sanctions in August, designating two Russian entities and vessels involved in Nord Stream 2 under Executive Order (EO) Blocking Property with Respect to Certain Energy Russian Pipelines. The EO is far more limited in effect than were the sanctions under PEESA but is likely purposeful, given the accord with Germany. A total of 20 entities have been designated by OFAC for involvement in Nord Stream 2.
Germany’s energy regulator has caused another setback by suspending the approval process of the company’s operating license, requiring it to first form a German subsidiary before it can begin delivering gas. It is unclear how long this will take. The pipeline’s regulatory certification could face even more hurdles during the EU commission review stage.
A Messy Conflict that has Divided Opinion
What can we learn from Nord Stream 2? It has been a messy conflict, particularly considering the relationship between the US and EU. It has divided opinion within the EU, too, particularly between Germany and Central and Eastern Europe.
Sanctions specialists have had to be on the alert to changes that seem to have come at the proverbial drop of a hat. A new US administration and inconsistent enforcement actions by OFAC show that sanctions continue to be used as not only legal measures but also political tools to advance interests. Before US warnings in 2019, and OFAC’s subsequent enforcement actions, Washington had explicitly said that sanctions would not be issued under CAATSA for any Russian pipelines initiated prior to August 2017.
Nord Stream 2 also calls into question the effectiveness of the EU blocking statute. Companies have not relied on it as a defense to OFAC’s sector-based and secondary sanctions. Nord Stream 2 has shown that the mere threat of US sanctions alone poses a compliance risk.
Meanwhile, the EU is reviewing the blocking statute. Feedback gathered during a recent public consultation has pointed to the need for a statute with more strength, a broader scope, and the agility for contending with the modern geopolitical landscape.
The Power of Sanctions
“The evolution of sanctions around Nord Stream 2 is a great example of how complex and fast-changing sanctions restrictions can be and how powerful the threat of sanctions is,” says Amir Fadavi, a sanctions lawyer and former adviser to a European bank. “Having stakeholders ranging from governments in the US, Germany, others in the EU and Ukraine with sometimes conflicting interests has made the project risky for many businesses, especially those in banking and insurance, to the point many decided not to engage in it or withdraw from it.”
Despite the politics, as Robert L Williams III, a sanctions and anti-money laundering specialist says: “The fact of the matter is that Germany needs the gas from Russia to sustain itself. President Biden wants to remain in good standing with Germany on one hand over the pipeline, while trying to match his actions and tough rhetoric towards Russia.”
With the newly elected Chancellor Olaf Scholz taking control, Nord Stream 2’s operating license in limbo and the unease on the Ukrainian border, you can expect more developments as the year progresses.