Russians used to be good at chess. Alas, seems not anymore. The pipeline “gambit” called the ‘Nord Stream 2’ project that has made headlines, most recently designed to shape Europe’s gas future, is drastically languishing along with Russian gas exports. Elina Morhunova investigates.

For a long time, Russia has counted gas and oil outbound as a primary geopolitical and economic pursuit. Disruption on a surprising scale today is presented by the fact that selling gas to foreign customers has become loss-making. Gas prices are in the free fall.

European gas demand took a hit in March as industry reduced its output and other measures came into force to slow the spread of the COVID-19 pandemic. There was also a lot of gas in store as the feared winter gas tenses between Russia and Ukraine, against which injections had been very high last summer, failed to materialise. Gazprom has also ceded some market share this year to new suppliers of LNG, notably from the US.

In fact, Gazprom downplayed the significance of the domestic market with respect to gas exports resulting in a net loss of rubles 108 ($1.52 bn) on its trade in the first quarter, versus a net income of rubles 559.5 bn in the same period last year, pursuant to Gazprom accounts under International Financial Reporting Standards. Meaning such a strategy has come to face serious problems.

Diplomatic zugzwang

The discussion at the Brussels table and in the halls of Washington D.C. as well as of some other European capitals about the planned Nord Stream 2 gas gambit is taking a surprisingly new set of twists.

AFollowing on from the Ukrainian conflict in 2014, Moscow’s relationship with the West was bruised. And not only with the US but also the European direction has also become less budding. Nord Stream 2 was about at its “successful” endgame when it ran into the US “do not dip that pipe” sanctions. On 5 August 2020, three senators served a formal legal notice stating that “the administration and Congress, and both parties, are united in their commitment to ensure that the pipeline remains uncompleted and those threats are never realised.” They believe that the project in question presents a grave threat to European energy security and American national security in light of the daunting risks to the hygiene of the U.S. financial system and reputational risks to all companies involved in related transactions.

The Devil hides in details, and the truth of the matter is that Germany does need the new Russian-German natural gas pipeline because grandiose climate targets make gas “an even more important energy source” and reserves in Germany in line with the Netherlands are declining. Proponents of the project, including the Russian government and some German politicians, argue that the pipeline will simultaneously improve security of supply by connecting western Europe to the world’s largest gas reserves and support sustainable development goals by replacing coal as a lower-emission source.

Giving due respect to the German plans on phasing out the use of coal to meet its carbon reduction and climate-neutrality targets, which will put even more strain on its power system, the project supporters also argue that Nord Stream 2 can provide electricity that is currently supplied by nuclear power plants that are scheduled to be shut down by 2022.

The endgame

It would probably make more sense to use existing Ukraine capacity, rather than build Nord Stream 2, but there are several problems with this stance. It assumes that there will be sufficient and reliable Ukrainian transit capacity in the coming decades to meet Europe’s increased needs. The Ukraine system is being partially refurbished thanks to $300 million loans from the European Bank of Reconstruction and Development and the European Investment Bank. Albeit, the expenditures such as the emergency and the maintenance of a greater part of pipelines are yet pending slots for investments requiring some diversified resources to flow in.

The worse the Russian gas posturing might get, the bigger power show-offs one might presume. Some games of power are about events that made headlines; others are about the grandiose political posturing that will continue to define our world for future generations.

Elina Morhunova
Ukrainian-born and global-minded, Elina Morhunova is a European & International Business Lawyer and Business Developer who dedicates a great part of her work to report on the world’s business and legal, political and economic affairs for the global business community.

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