Opinion

Nord Stream 2: a bad deal for Germany and Eastern Europe

Georg Zachmann argues that the Nord Stream 2 project is a danger to the European consensus on relations with Russia. What is more, it could undermine efforts to diversify Europe's gas supply and might risk higher prices for Eastern Europe.

By: and Date: July 18, 2016 Topic: Energy & Climate

This op-ed was originally published in Energy PostDienas Bizness, Hospodárske Noviny, Kauppalehti, Süddeutsche Zeitung and l’Opinion.

logo-energy-post-resized

Dienas Bizness logo

HOSPODARSKE_NOVINY_logo

Kauppalehti

Suddeutsche Zeitunglopinion

At the end of last year, Gazprom reached a deal with five Western European companies (BASF, E.ON, ENGIE, OMV and Shell). They agreed to add two additional lines to the Nord Stream gas pipeline across the Baltic Sea, increasing the capacity of the pipeline from 55 billion cubic metres per year to 110 billion from 2019. The project has provoked controversy, as it sharpens divisions among EU members about energy and foreign policy.

In terms of energy policy, the EU has two goals. It is trying to make itself more independent from individual suppliers, and also aims to do without fossil fuels in the medium term. In recent years the market position of the EU has improved markedly. Thanks to low global energy prices and unexpected falls in gas demand – which in 2015 was around 40% lower than expected according to 2005 predictions – European users have been able to push for significantly lower gas import prices. Prices have halved in the past 2 years, to about $170 per thousand mᶟ.

Due to enduring stagnation in demand for gas in Europe, overcapacity in the global gas market, and continuing underuse of European gas import infrastructure, another expensive pipeline from Russia is not needed to supply the EU in the near future. It would work against current efforts to diversify supply, as Gazprom is already the largest supplier in the EU. And in the medium term there is the question of whether -because of climate change commitments – gas demand in the EU will actually fall faster than domestic and Norwegian production. The time frame in which the Nord Stream 2 project could pay for itself is thus relatively short at best.

Against these concerns are stacked the interests of the Western European companies taking part. They expect Nord Stream 2 to guarantee them a preferential supply of Russian gas, and hope to strengthen their existing business interests in Russia.

With Nord Stream 2, Germany would also become a gas hub for all of continental Europe. It would therefore benefit not only from the business related to Nord Stream 2, but also from lower gas prices than its neighbours. But this would be a zero-sum game– Germany would only profit at the expense of its neighbours, who would find themselves paying more at the end of the transport route through Germany.

Most alarmingly, Gazprom would gain another tool to discriminate between countries. Gazprom could then credibly threaten to cut off gas supplies in Eastern Europe without threatening its markets in Western Europe. In this way Gazprom could achieve higher prices in Central and Eastern Europe, without having to use illegal “destination clauses” (which allow buyers of Gazprom’s gas to only sell it to domestic consumers).

In terms of foreign policy, the EU supports Ukraine in its efforts to defend its sovereignty and territorial integrity against Russian interference. Nord Stream 2 would undoubtedly make this task more difficult. On the one hand, Ukraine would lose revenues from gas transit of up to 2 billion US dollars a year, equal to about 2% of Ukrainian output. On the other hand, a large scale cutback in gas transit would make it harder to supply Ukraine with gas.

Because of lower Ukrainian demand for gas and a large increase in gas imports from Slovakia, at this moment Ukraine can do without direct gas imports from Russia. As a result, it has sourced no gas from Gazprom since November 2015. This has offered Ukraine significantly increased political leeway, for example regarding much-needed radical reforms of the corrupt gas sector.

If Nord Stream 2 gets built, Central and Eastern Europe (especially Slovakia and Hungary) might be supplied with Russian gas from this pipeline, bypassing Ukraine altogether. In this situation Moscow could, at worst, press for reduced western gas exports to Ukraine, and could certainly demand higher prices for any gas sent on such an indirect journey. That would increase readiness in Kiev to once again accept ‘mates rates’ for gas supplied directly from Russia, which would be tied to political concessions.

Even within the EU, Gazprom is still a tool of Russian foreign policy. This was shown in autumn 2014, when Gazprom unilaterally cut supplies by up to 50% to countries (Poland, Slovakia, Austria and Hungary) which sold gas on to Ukraine. Strengthening the market position of such an actor therefore has costs for foreign policy.

What is more, Nord Stream 2 threatens one of the few European foreign policy successes of recent years. Despite the economic concerns of many member states, Europe and Germany in particular managed to find an unexpectedly clear united answer to the annexation of Crimea and Russian involvement in eastern Ukraine.

However, the European compromise to implement economic sanctions in response to Russia’s legal violations remains fragile. If Germany positions itself as a friend of Russia and supports such a large project, without concessions from Russia on foreign policy disputes, it risks breaking the fragile European consensus on Russia — which has only been laboriously held together until now. The resulting loss of trust among European partners would hardly be offset by the improved relationship with Russia.

These disadvantages of Nord Stream 2 could largely be cushioned through extra investment in the domestic European gas network, more financial support for Ukraine, and German guarantees on security of gas supply for Central and Eastern Europe. But the cost of this would be paid by German gas consumers and taxpayers. On the other hand, the indirect foreign policy costs are difficult to measure. To sum up, building Nord Stream 2 would be a bad deal for both Germany and its Eastern European partners.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Opinion

Eastern Germany’s New Growth Engine

Eastern Germany has suffered from three decades of deindustrialization since the collapse of communism, largely because of poor policy decisions. But by becoming an electric-vehicle powerhouse, the region can help to drive Europe's green transition and secure its own future prosperity.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: October 7, 2020
Read article More by this author
 

Blog Post

An appropriate European Union response to tensions in the Eastern Mediterranean

If the European Union can mediate effectively to resolve current Greek-Turkish tensions over energy in the Eastern Mediterranean, it could also provide an opportunity to tackle more deep-rooted problems.

By: Michael Leigh Topic: Energy & Climate, Global Economics & Governance Date: August 28, 2020
Read article More on this topic
 

Blog Post

Ukraine: trade reorientation from Russia to the EU

Over the past five years conflict has led to a deterioration of Russo-Ukrainian economic relations while ties with the EU have been deepened. This shift is evident in trade flows: the European Union has become Ukraine’s biggest trading partner, while China is poised to overtake Russia as its second. Natural gas imports from Russia, Ukraine’s prior Achilles heel, have been partially replaced by reverse deliveries from the EU and reduced as result of reform of the gas sector.

By: Marek Dabrowski, Marta Domínguez-Jiménez and Georg Zachmann Topic: European Macroeconomics & Governance Date: July 13, 2020
Read article More on this topic More by this author
 

Blog Post

The Wirecard debacle calls for a rethink of EU, not just German, financial reporting supervision

The spectacular collapse of Wirecard AG should serve as a wake-up call for the European Union on the need to pool the relevant supervisory mandates at EU level.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: June 30, 2020
Read article More on this topic More by this author
 

Opinion

The message in the ruling

The German Constitutional Court's ruling on the ECB's asset purchase programme is open to much criticism but it can hardly be blamed for raising an important question.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 12, 2020
Read article More on this topic More by this author
 

Blog Post

Banking regulation in the Euro Area: Germany is different

Despite progress in recent years towards a single banking policy framework in the euro area – a banking union – much of the German banking system has remained partly sheltered from uniform rules and disciplines that now apply to nearly all the area’s other banks. The resulting differences in regulatory regimes could generate vulnerabilities in the still-incomplete banking union, which is being tested in the context of the COVID-19 pandemic.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: May 7, 2020
Read article More on this topic
 

Blog Post

COVID-19 and broken Collusion: the oil price collapse is one more warning for Russia

In the midst of the COVID-19 epidemic, the sharp collapse in the oil price has received little attention. Brent fell by 30% on 9 March, the largest fall since the 1991 Gulf War. The Russian ruble followed suit and its tumble highlights Russia’s continued dependence on resource extraction. The episode should be taken as a sign of things to come in a world where Russia’s main customers are going green.

By: Niclas Poitiers and Marta Domínguez-Jiménez Topic: Global Economics & Governance Date: March 19, 2020
Read about event More on this topic
 

Past Event

Past Event

European Industrial Policy in times of coronavirus with Thierry Breton

At this livestream event by Bruegel and the FT Brussels Briefing we were joined by Thierry Breton to discuss the the challenges posed to Europe's Industrial Policy by COVID-19. This event is ONLINE ONLY

Speakers: Thierry Breton, Sam Fleming and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 19, 2020
Read article More on this topic
 

Podcast

Podcast

From Brussels with love? Russia's economic dependence on the EU

Despite the political antagonism, the EU and Russia are not only geographically, but also economically, reliant on each other: European houses are heated using Russian natural gas and Russia is highly dependent on European investment. Therefore, should the EU develop closer political ties with Russia? How much leverage does the EU have when dealing with the Kremlin? This week, Nicholas Barrett is joined by Niclas Poitiers and Marta Domínguez-Jímenez to discuss European foreign direct investment in Russia.

By: The Sound of Economics and Bruegel Topic: Global Economics & Governance Date: February 19, 2020
Read article Download PDF More on this topic
 

Policy Contribution

FDI another day: Russian reliance on European investment

Most foreign direct investment into Russia originates in the European Union: European investors own between 55 percent and 75 percent of Russian FDI stock. This points to a Russian dependence on European investment, making the EU paramount for Russian medium-term growth. Even if we consider ‘phantom’ FDI that transits through Europe, the EU remains the primary investor in Russia. Most phantom FDI into Russia is believed to originate from Russia itself and thus is by construction not foreign.

By: Marta Domínguez-Jiménez and Niclas Poitiers Topic: Global Economics & Governance Date: February 17, 2020
Read article Download PDF More on this topic More by this author
 

Policy Contribution

The European Union-Russia-China energy triangle

Concern is growing in the European Union that a rapprochement between Russia and China could have negative implications for the EU.

By: Georg Zachmann Topic: Energy & Climate Date: December 9, 2019
Read article Download PDF More on this topic
 

Working Paper

How does China fare on the Russian market? Implications for the European Union

China’s economic ties with Russia are deepening. Meanwhile, Europe remains Russia’s largest trading partner, lender and investor. An analysis of China’s ties with Russia, indicate that China seems to have become more of a competitor to the European Union on Russia’s market. Competition over investment and lending is more limited, but the situation could change rapidly with China and Russia giving clear signs of a stronger than ever strategic partnership.

By: Alicia García-Herrero, Jianwei Xu and Bruegel Topic: Global Economics & Governance Date: November 18, 2019
Load more posts