The Nord Stream 2 pipeline was inaugurated on 8 October 2012, with a gas transmission route running from Vyborg, Russia to Lubmin, Germany. As the pipeline runs through the Baltic Sea, a series of diplomatic rifts have arisen between long-time allies the United States and the EU.
The United States maintains that Nord Stream 2 will give Russia too much energy leverage over the EU; namely that, as a result of Nord Stream 2, the EU will be dangerously dependent on Russia, who would be in a position to potentially cut off the EU’s gas supply in the event of a military or diplomatic conflict.
The EU view, on the other hand, has focused on economic considerations rather than national security concerns. According to the EU (and principally Germany), ‘safer’ alternatives to supplying the EU with gas are not viable. For example, Norway does not have sufficient gas production to supply the EU, and purchasing gas from the United States would be too costly.
There are currently numerous U.S. sanctions concerning Nord Stream 2. The Countering America’s Adversaries Through Sanctions Act (CAATSA) was signed into law by the Trump administration on 2 August 2017. Relevant to Nord Stream 2 is section 232 of CAATSA, entitled “Sanctions with respect to the development of pipelines in the Russian Federation”.
In accordance with section 232, those who engage in investments that:
(i) directly and significantly contribute to the enhancement of the ability of Russia to construct energy export pipelines; or
(ii) sell, lease or provide goods, services, technology, information or support to the Russian Federation for the construction of Russian energy export pipelines,
may be subject to sanctions, as described in section 235 of CAATSA under the following designations: (1) Export-Import Bank assistance for exports to sanctioned persons; (2) export sanctions; (3) loans from U.S. financial institutions; (4) loans from international financial institutions; (5) prohibitions on financial institutions; (6) procurement sanctions; (7) foreign exchange; (8) banking transactions; (9) property transactions; (10) ban on investment in equity or debt of sanctioned persons; (11) exclusion of corporate officers; and (12) sanctions on principal executive officers.
Section 232 of CAATSA applies to investments that have a fair market value of at least US$1 million or, during a period of 12 months, an aggregate fair market value of at least US$5 million.
In a guidance document released on 15 July 2020, the U.S. State Department clarified that persons – U.S. or non-U.S. – can potentially be exposed to sanctions as long as the qualifying investment is made “knowingly” in Russian energy export pipelines, or goods, technology or services are provided knowingly for such pipelines. In fact, on 19 January 2021 the Russian entity KVT-RUS and Russian-flagged vessel FORTUNA were sanctioned pursuant to section 232.
CAATSA, however, is not the only piece of applicable legislation concerning Nord Stream 2. In addition, the Protecting Europe’s Energy Security Act (PEESA) and its successor, the Protecting Europe’s Energy Security Clarification Act (PEESCA) also apply.
PEESA and PEESCA became law in December 2019 and January 2021 respectively. PEESA mandates the U.S. government to impose sanctions on foreign vessels engaged in deep water pipe-laying for Nord Stream 2. It requires the sanctioning of non-U.S. persons who knowingly sell, lease or provide such vessels or facilitate the same.
Due to a lack of usage of (i.e., imposition of sanctions under) PEESA, the U.S. Congress felt the need to introduce the more expansive PEESCA. Whereas the earlier PEESA was limited to “pipe-laying”, PEESCA captures the much broader “pipe-laying activities” – comprehensively defined as “activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe”.
PEESCA also targets other services “necessary or essential” for completing the projects – including underwriting, insurance, or reinsurance, and services relating to upgrading, retrofitting, or tethering pipe-laying vessels.
Given its wide scope, PEESCA has caused entities involved in Nord Stream 2 the most concern among the three aforementioned acts.
The main stakeholders in Nord Stream 2 are the United States, the EU (in particular, Germany), and Russia (including the state-owned entity Gazprom). In addition, Ukraine is an equally geopolitically sensitive actor in the project because Naftogaz (Ukraine’s largest state-owned oil and gas entity) is a major exporter of gas to the EU.
The completion of Nord Stream 2 will likely reduce Naftogaz’s export of gas to the EU in a potentially significant blow to the Ukrainian economy. This, in turn, may leave Ukraine even more exposed to Russian aggression towards the territorial integrity of the country, which has already been ridden with instability since the 2014 annexation of Crimea.
Specifically, the concern is that once Nord Stream 2 is up and running, Russia will not renew existing gas contracts that currently run through Ukrainian pipelines, further pushing the country into a black hole of economic turmoil and political uncertainty.