Nord Stream 2 is key in energy chess game between Russia and the West

German Chancellor Olaf Scholz announced on Tuesday that Germany would suspend the certification process for the Nord Stream 2 gas pipeline following Russian President Vladimir Putin’s decision to recognise the two Russia-backed separatist-held regions of Donetsk and Luhansk as independent states. It was shortly followed by a decision to send Russian troops to the two regions on “peacekeeping duties”, marking a decisive escalation in the conflict between the West and Russia over Ukraine.

A halt to the undersea natural gas pipeline built to bring Russian gas to Europe directly via Germany’s Baltic coast is likely to be among the most significant of the sanctions Europe, the US and the United Kingdom are expected to impose on Russia after Putin’s one-hour televised speech on Monday evening.

Several observers had warned there was a risk that the pipeline, which is complete but not yet in operation, could become a major source of leverage for Russia over Europe. The continent already relies on Russia for more than 40 percent of its gas supply.

The 1,230-kilometre pipeline worth $11 billion had been filled with gas, and was waiting for a final go-ahead by Germany and the European Commission. Its majority shareholder is a subsidiary of the Russian state-owned gas company, Gazprom – which makes a large contribution to the Russian state’s coffers.

Ukraine had been worried the German pipeline could put the country in a vulnerable position by allowing Russian gas to bypass it by doubling the capacity of the existing Nord Stream I. Currently, Ukraine and Poland earn a gas transit fee on supplies to Europe. 

“It was somewhat unexpected that Germany would be the first one [to impose] pretty serious sanctions,” Peter Zalmayev, the executive director of the Eurasian Democracy Initiative (EDI) tells TRT World. “The Germans had been considered a weak link in the western resolve to respond to Vladimir Putin. Up until now, Scholz had been reluctant to even mention Nord Stream 2 by name,” he adds.

Nord Stream 2 had been approved under Merkel, when current Chancellor Olaf Scholz was finance minister.

Scholz said the move was aimed at sending “a clear signal to Moscow that such actions won’t remain without consequences.”

Ukrainians had been calling for tougher sanctions on Russia to deter an invasion. Since Putin’s decision, both the EU and the US have unveiled further sanctions targeting Russian oligarchs and financial institutions.

Gas as a weapon

In July last year, a joint statement by the US and Germany promised a coordinated response to any “Russian efforts to use energy as a weapon.”

Analysts have argued the pipeline made the EU look divided, with its members in pursuit of their own narrow interests, while simultaneously creating friction in the Transatlantic alliance.

“Nord Stream 2 has to be assessed in light of the security of energy supply for the whole European Union,” said European Commission president Ursula Von Der Leyen after the EU unveiled its sanctions on Tuesday.

“This crisis shows us that we are still too dependent on Russian gas.”

Oil and gas prices have been rising amid the escalation of the crisis in Ukraine.

Brent crude prices surged to $99.50 early on Tuesday, while the European benchmark gas price, currently the Dutch March contract, was up 10 percent to 79.28 euros per megawatt hour (MWh). 

Russia’s deputy chair of the Security Council Dmitry Medvedev warned later in the day that gas prices would rise further as a result of Germany’s decision. 

"Welcome to the brave new world where Europeans are very soon going to pay €2.000 for 1.000 cubic meters of natural gas!" Medvedev said in a tweet. 

A spike in gas prices due to shortages this winter forced consumers and governments all over Europe to foot higher energy bills. Many analysts saw the crisis as “manufactured” by Russia, which fulfilled long-term contracts with European customers, but failed to fill its underground storage in the continent. 

The EU, which is transitioning away from decommissioned coal to clean energy like solar and wind, is now relying on gas for its “green transition” to clean energy such as solar and wind. Environmentalists say that gas, a fossil fuel, is part of the problem rather than part of the solution to climate change.

While the continent relies on Russian gas for its energy transition, the opposite is also true and Russia relies on Europe as a key market. 

“Russia has already been bleeding some funds,” Zalmayev says, “Putin is banking on increasing pressure against western governments from consumers. He is betting that Russians have a thicker skin.”