Russia shrugs off Germany’s Nord Stream 2 sanctions

Russia is confident it can shrug off Germany’s decision to halt certification of the Nord Stream 2 gas pipeline and believes EU efforts to diversify the bloc’s energy sources will fail, according to three people close to the Kremlin and its state-run gas monopoly Gazprom.

Germany’s chancellor Olaf Scholz surprised political observers on Tuesday when he froze the approval process for the $11bn pipeline, which runs beneath the Baltic Sea and would double the volume of gas sent directly from Russia to Germany. Scholz also vowed to wean his country off gas.

The move was part of a European response to Moscow’s decision on Monday to recognise two breakaway regions of Ukraine as independent republics, before it launched a full-blown invasion of its neighbour on Thursday morning.

But Moscow believes Germany cannot replace Russian gas in the short term and will fail to find sufficient substitutes for it even in the next 5-10 years, the people said.

“The best strategy is to just not do anything, wait for three to five years, and then send gas through it once the Germans realise nothing else works,” said a person close to Gazprom.

Scholz’s decision won widespread praise from Russia’s critics — particularly in Kyiv. Nord Stream 2 — which has been completed but has not yet been approved — and the existing first Nord Stream pipeline both bypass Ukraine to supply gas directly to western Europe and depriving Kyiv of lucrative transit fees.

US president Joe Biden said on Wednesday his administration would impose sanctions on Nord Stream 2 AG, the Swiss-based operator fully owned by Gazprom, and its corporate executives, as part of Washington’s response to the Ukraine crisis.

The international sanctions will not necessarily prevent the pipeline from eventually going ahead, analysts say. But the increasing opposition to the pipeline means the stand-off could last for decades.

Moscow is in effect betting that the short-term pain from losing Russian gas supplies will break Germany’s resolve to radically change its energy mix, the people close to the Kremlin and Gazprom said.

However, the Kremlin might be underestimating Germany’s determination both to achieve carbon neutrality by 2045 and lessen its dependence on Russian gas, analysts say. Robert Habeck, the country’s Green economy minister, has made it clear Germany must seek alternatives. “If we don’t do that, we’ll become a plaything [of others],” he said earlier this month.

Berlin’s decision dismayed the German gas industry. “The companies that financed NS2 had very clear ideas about why it made sense, and this fundamental perspective hasn’t changed,” said Timm Kehler, head of Zukunft Gas, a trade body. The route across the Baltic Sea was “shorter, cheaper and less prone to breakdown” than the “old, long route” across Ukraine, he said.

With Germany phasing out nuclear and coal power and gas seen as a useful bridge to renewable energy sources, he said, “Europe is probably going to be consuming more, not less, gas in the next 10-15 years.” But gas production in Europe was declining. “We will see a growing import gap in Europe and Nord Stream 2 would help to close that gap,” he said.

Kehler also criticised the German government for failing to diversify energy imports, for example by building a terminal to handle imports of liquefied natural gas from countries such as Qatar. “It did not create the right conditions for investments in LNG terminals to pay off,” he said. “It’s now going to have to do much more to improve Germany’s attractiveness compared with other EU member states.”

Claudia Kemfert of the German Institute for Economic Research (DIW) said Germany was paying the price for its delay in shifting to renewable energy from fossil fuels over the past 10 years.

“Renewables could have accounted for 80 per cent of our energy supply by now,” she said. “But instead we had a targeted policy in favour of fossil fuels, particularly gas.”

In recent years Gazprom has shifted its development focus to the new Bovanenkovo deposit that feeds Nord Stream 2, another senior figure in Russian energy circles said. Other pipeline routes are not connected to the deposit and rely on older, diminishing sources.

“Bovanenkovo is really the source of future production and growth, and it can only supply significant gas via Nord Stream 2,” the person said. “It will get harder and harder to supply the needed volumes via [other routes].”

For now, however, Gazprom could easily ride out the dispute without supplying gas via Nord Stream 2 and instead export via other pipelines, said Maria Belova of Vygon, a Moscow energy consultancy.

“Russia will continue receiving export duties as the export volume will not change,” Belova said. If costs for Gazprom rose, she added, “European companies will receive more expensive gas.”

Meanwhile, by next winter, Germany would have to replenish its storage facilities and face the reality of the higher costs of LNG, according to George Voloshin of consultancy Aperio.

“For now, the trump cards are in the hands of Russia,” he said. “Europe will need to compromise because Europe needs these supplies.”