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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Nord Stream 2 Sanctions Are A Win-Win For Putin

The construction of Nord Stream 2 (NS2) has been a rollercoaster of a project with many ups and downs for both its proponents and opponents. On Friday, Trump approved sanctions on companies involved in the construction of the project. The move by Washington has been strongly condemned by both Germany and Russia, who see the sanctions as evidence of the Trump administration interfering with their internal affairs.

The sanctions mean that the visas of employees can be revoked and assets can be frozen. Allseas, a Dutch-Swiss private company, is going to be significantly affected because it owns considerable assets in the U.S. and the specialized nature of its operations makes it essential for the project.

Washington’s risky game

The NS2 sanctions are one of the few topics about which both Democrats and Republicans can agree on. President Trump’s quick response regarding the signing into law of the sanctions bill shows his intention to be tough with Russia. That toughness is partly to do with the Democrats’ accusation of Moscow’s rigging of the 2016 Presidential Election with the collusion of Trump’s campaign team.

The current administration's 'America First' policy and tough stance regarding alleged trade disadvantages has put the U.S. on a collision course with trading partners. But Washington's newest sanctions on NS2 are arguably the most risky yet with the potential of upending its relationship with a crucial ally.

The losers

Allseas announced, shortly after the imposition of sanctions, that it is suspending construction activities and wait for further information on the U.S.' intentions. Although the administration has 60 days to identify the companies working on the pipeline before it imposes punitive restrictions, the Dutch-Swiss company decided to act preventively. This means that it is uncertain when NS2 will be completed. It is companies like Allseas who are currently set to suffer most from Friday’s sanctions. Related: The War For Ultimate Control Over Libya’s Oil

According to Gazprom, costs have already ballooned due to Denmark’s foot-dragging concerning approval for activities in its territorial waters. The current suspension could increase the financial burden even more. To the detriment of Gazprom and customers in northwestern Europe who will now need to find alternative sources of natural gas on the international market to replace expected supply from Russia.

Another important loser, paradoxically, is the U.S. itself. Relations between the U.S. and the EU are at a historic low and a trade war between the two may soon be upon us. Washington’s aggressive policy towards Europe under the current regime has already led to a more assertive European foreign policy and even talks of a European army. Although unlikely in the short to medium term, the fact that it is being discussed at all shows how U.S.-European relations have deteriorated.

Even Brussels, which at the start of 2019 was trying to obstruct NS2’s construction, has joined the chorus of criticism being leveled at Washington. According to EU Trade Commissioner Phil Hogan, "Brussels opposes the imposition of sanctions against any EU companies conducting legitimate business."

The unexpected winner

Besides Ukraine, who risked being circumvented by NS2 and Turk Stream, an unlikely country stands to benefit from the sanctions. While it may sound confusing, Russia is a beneficiary of the suspended activities on the construction of Gazprom's most important project. While it costs Moscow hundreds of millions in lost income and additional investments, the country is benefitting on a geostrategic and political level. Related: A Record Number Of Oil CEOs Dethroned In 2019

For a mere $9.5 billion, NS2’s price tag, Moscow has unintentionally managed to drive another wedge between key Western allies. Berlin is furious about the sanctions and its already fraught relations with Washington are set to escalate even further. According to German Foreign Minister Heiko Maas, the American sanctions amount to “interference in autonomous decisions taken in Europe.”

How the Nord Stream 2 saga will end

What is certain is that NS2 will be completed eventually. Most of the work on the 1,230 kilometer or 765 mile long pipeline has already been finished. Also, the vast majority of the $9.5 billion in investments have already been spent. The biggest problem is that Allseas is one of the few companies in the world with the specialized vessels to weld, test, and drop the pipes to the bottom of the Baltic Sea.

Technically, there are three possibilities for how this saga could develop. The first scenario would see construction activities delayed for an unspecified amount of time, before a breakthrough allows NS2 to be finished. The deadlock could be breached by political means or technical assistance from different suppliers.

In the second scenario, NS2's completion is made impossible after which construction is abandoned entirely. This is the most unlikely scenario.

The final scenario would see Trump start a trade war with the EU and use NS2 as a bargaining chip. Washington may offer a potential sanctions waiver to Allseas to extract more concessions from the EU and Germany. In this scenario, NS2’s competition would only come after the EU-U.S. trade war is brought to an end.

Uncertainty ahead

The next step in this saga is for Brussels and Berlin to send a diplomatic mission to Washington to find ways out of the current crisis. Whoever wins in the ongoing battle concerning NS2, the situation is a win-win for Moscow.

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh Salameh on December 23 2019 said:
    Nord Stream 2 is unstoppable. The new sanctions on companies involved in the construction of the gas pipeline will not fare better than those that the United States imposed on Russia in 2014.

    While the sanctions may delay the completion of Nord Stream 2 by a few months, this will not affect Russian natural gas supplies to the European Union (EU). Russia could continue its gas shipments to the EU through Ukraine particularly after the recent agreement between between them regarding the amount of Russian gas that will pass through Ukraine on its way to the EU and the transit fees that Ukraine will earn.

    The rush by Allseas, a Dutch-Swiss private company involved in the construction of Nord Stream 2 to suspend its activities in fear of US sanctions may delay the project for a few months but will never scupper it.

    Still the United States’ projected LNG exports to the EU could be seriously affected. Germany was building LNG terminals to receive LNG including US LNG shipments as part of its energy shift from coal and nuclear energy to gas. However, Germany along with Russia and the EU trade commissioner condemned the new sanctions with German Foreign Minister Heiko Maas, accusing the Trump administration of interference in European affairs.

    Russia’s balance sheet vis-à-vis Nord Stream 2 and US sanctions is positive. The construction of the gas pipeline will be completed whether the United States likes it or not. Meanwhile, Russia will reap geostrategic and political benefits from driving a wedge between the EU particularly Germany and the United States.

    The United States should have learnt a hard lesson from its defeat in the trade war it waged against China. It will not fare better in another trade war with the EU.

    Moreover, previous US sanctions against Russia have proven a failure. Russia’s GDP has achieved a 2.2% growth during the third quarter of this year and Russia's foreign-exchange and gold reserves have climbed by nearly one-fifth over the past year to almost $550 billion. Furthermore, the Rouble was also the world’s best-performing currency against the US dollar in November.

    The new sanctions will not fare better and the United States will end up being the loser as it failed against both Iran and Venezuela.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Hugh Williams on December 24 2019 said:
    The article left out the reason why the firm Allies immediately quit work. The letter of threats from US Senators:
    Earlier this month, the company received a strongly worded letter penned by a group of GOP lawmakers led by Senator Ted Cruz, threatening the firm with hell on earth and effectively browbeating it into abandoning the project.
    The letter said that if Allseas continues to do the work “for even a single day” after Trump signs the bill, it would be exposed “to crushing and potentially fatal legal and economic sanctions.
  • Roy Tyrell on December 24 2019 said:
    While Allseas is undoubtedly the biggest and best of the pipe laying firms, the project has been staged in such a way that pipe-lay remaining is mostly shallow can be completely by Gazprom and it’s Russian consultants. No help from foreign firms required.

    But you are right about Russia being the biggest winner in this outcome.

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