How to turn Nord Stream 2 into a win for Ukraine
It seems like every president’s dream come true: a bipartisan consensus supporting a policy that promises both to undermine a rival and to protect a strategic partner. This is the situation that President Biden appears to face as he decides whether to bow to congressional pressure and levy new sanctions against Nord Stream 2, the all-but-complete natural gas pipeline to connect Russian exporters to Germany through the Baltic Sea. So far he has resisted the temptation — just yesterday the administration waived sanctions on some entities involved in the project. He should continue to do so.
Pipeline opponents press two arguments: It will increase Europe’s dependence on Russian natural gas and it will further expose Ukraine to Russian malevolence. The first is simply false. The pipeline will not impact European demand for Russian gas, only the routes by which the gas reaches its customers. Moreover, EU reforms to liberalize and integrate its gas markets have made the bloc more resilient to a Russian cut-off. The second argument mistakenly believes that the continued transit of Russian gas through Ukraine is good for that country.
To be sure, Ukraine is precariously dependent on the transit fees collected from the Russian gas that flows through it to European markets. According to the current five-year contract between Moscow and Kyiv, Ukraine is slated to receive an average of roughly $1.4 billion per year between 2020 and 2024, constituting about 3.6 percent of the state budget.
This is where Nord Stream 2 comes in. Once complete, it will be able to transport up to 55 billion cubic meters (bcm) of natural gas to Europe, theoretically providing an alternative route for the 40 bcm contractually set to transit Ukraine annually through 2024. That option will provide Moscow with further leverage to renegotiate terms and minimize its obligations to Kyiv once the current contract expires. Stopping work on the pipeline is thus presented as a way to protect Ukraine against a predatory neighbor.
Indeed, it is in the U.S. national interest to support Ukraine. The country’s development into a truly independent, modern, liberal state can provide a bulwark against malign Russian actions directed against Europe. However, the ongoing campaign in Washington to derail Nord Stream 2 is an unwise, counterproductive way to go about this — because the status quo represents a perilous and unsustainable situation for Ukraine.
It would be a strange sort of victory to stop Nord Stream 2, only to maintain an arrangement that keeps Ukraine beholden to revenues from a belligerent neighbor determined to undermine its sovereignty. Moreover, the status quo leaves Ukraine reliant on Europe’s long-term demand for Russian natural gas. This puts Kyiv’s interests in direct tension with the EU’s desire to diversify its energy supply and reduce its dependence on Russian gas. Indeed, as Europe builds the necessary infrastructure to import more liquified natural gas, new competitors such as American shale firms will be increasingly viable in the market. Russia’s market share, and therefore Ukraine’s transit revenues, inevitably will decline.
Ukraine’s position will only grow more precarious as Europe accelerates its transition away from fossil fuels altogether. The International Energy Agency projects that between 2019 and 2030, European demand for natural gas will fall by roughly 8 percent, and that decline will only continue as new green infrastructure is developed and installed. If Kyiv remains reliant on gas transit fees for revenue, this green transition will leave Ukraine facing a bleak future.
Instead of expending diplomatic capital on a campaign to stop Nord Stream 2, the Biden administration should work with its European partners to prepare Ukraine to withstand the pipeline’s completion. The deadline for action is 2024, when Kyiv’s current gas contract and President Biden’s term effectively end. By that time, Washington and Brussels should formulate and implement an economic package that, first and foremost, covers Ukraine’s inevitable budget shortfall from the loss of transit fees to keep the Ukrainian state running. This package should, however, also invest in the country’s sustainable growth. That would entail material and technical support for Kyiv’s ongoing anti-corruption campaign, whose success is a prerequisite for attracting long-term investment. One idea worth considering is a loan to cover revenue shortfalls, whose repayment would be incrementally forgiven in exchange for concrete progress on reforms by Kyiv.
Beyond that, Washington and Brussels should encourage investment in the country’s green energy sector. Ukraine has the potential to become a major producer of renewable energy, but it must first develop the infrastructure to harness its vast natural wealth of resources, including biomass, wind and hydrogen. Rather than leaving the country out to dry amidst Europe’s green transition, such a project would make Ukraine an integral part of a cleaner, more sustainable European future. Compared to short-term efforts to stop Nord Stream 2, this approach would go a long way in actually supporting Ukrainian prosperity and resilience.
Thomas Graham, a distinguished fellow at the Council on Foreign Relations, was senior director for Russia on the National Security Council staff from 2004-2007.
Joseph Haberman is a research associate for Russia studies at the Council on Foreign Relations.