It looked as if Putin had won his battle for Nord Stream 2, the undersea gas pipeline that would replace gas transit through Ukraine and give Russia a stranglehold over Europe’s gas market.
The game seemed over when President Joe BidenJoe BidenDeputy AG: DOJ investigating fake Trump electors On The Money — Vaccine-or-test mandate for businesses nixed Warner tests positive for breakthrough COVID-19 case MORE waived sanctions on Nord Stream 2 — supposedly to repair relations with a Germany, whose Chancellor, Angela Merkel, supported the deal. With U.S. sanctions swept aside, the final stretch of pipe was set to be laid by year’s end, and only the approval of the German Network Agency (and review by the European Commission) was required before Nord Stream 2 could go into operation.
Yes, there remained some regulatory hurdles. Under the EU’s Gas Directive, production must be separated from delivery, tariffs should be transparent, and capacity set aside for competitors. These conditions seemed solvable. It was widely expected that regulators would accept a shell company controlled by the Kremlin to meet — on paper — the EU’s decoupling requirement.
That was before the new German Red, Yellow, and Green “traffic light” coalition government was sworn in with a Green foreign minister, Analena Baerbock.
In their electoral campaign, the Greens opposed Nord Stream 2. The disagreement over Nord Stream 2 was not formally addressed in the three-way coalition negotiations, so this Sunday’s television interviews gave the three coalition parties the chance to spell out how they would run their ministerial portfolios.
Now the bombshell: In her Sunday appearances on national TV, Baerbock declared that Nord Stream 2 could not become operational because, according to coalition agreements, the undersea pipeline was not consistent with European energy law. Hence, per Baerbock, Nord Stream 2 cannot be approved because it does not meet the decoupling, transparency, and capacity-sharing required by the EU’s Gas Directive.
The new German chancellor, Olaf Scholz, of the Social Democrats, meanwhile warned that there would be “consequences” if national borders were breached, a remark clearly directed at Russian troops amassing on the border with Ukraine and threatening to take additional Ukrainian territory.
The new German coalition has another ace up its sleeve. The European pipeline approval process, which requires first German approval and then review by the European Commission, will not be completed until June of 2022 at the earliest. Military experts note that any Russian invasion of Ukraine would take place in winter weather, which is suitable for tank operations. Thus, Putin can either invade Ukraine or stay on track for Nord Stream 2 regulatory approval. With the stance of the new German coalition, he can’t have both.
One more point: The coalition partners agree that the transport of Russian gas must continue through Ukraine. Currently, despite soaring gas prices in Europe, Russian gas authorities have limited deliveries through Ukraine to those agreed to in long term contracts.
Who would have thought that the Social Democrats and Greens would be Ukraine’s savior?
It is difficult to catch Putin wrong footed, but I believe the German “traffic light” coalition has done so.
Let’s see how he reacts.
If Putin follows past practice, he will up the pressure on Germany by driving gas prices even higher, while dangling increased gas sales if Berlin caves. We do not know how the new coalition will react to Putin’s threats and bluster. Perhaps Putin’s usual bullying will have the opposite effect.
Paul Roderick Gregory is a professor emeritus of economics at the University of Houston, a research fellow at the Hoover Institution at Stanford University and a research fellow at the German Institute for Economic Research. Follow him on Twitter @PaulR_Gregory.