US-Russian Relations, Nord Stream, Germany, and Ukraine

by Margarita M. Balmaceda, Seton Hall University

Editor's Note: this article originally appeared in the August 2021 issue of NewsNet. That version includes footnotes and citations to additional resources. 

Much has been written about the recent Geneva summit between Presidents Biden and Putin. What does it tell us about how relations with Russia have shifted since the change of administration in Washington? How does looking at that relationship from the broader perspective of US-European-Ukrainian relations help us gain a more nuanced understanding of the situation and the challenges moving forward?

Compared to the Trump era, much has changed in the mechanics of US policymaking towards Russia. At an institutional level, the Trump administration’s policies vis-à-vis Russia were marked by the weakening and sidelining of the US State Department and of experienced Russia career diplomats, as well as by the dissonance involved in Mr. Trump pursuing a parallel, private foreign policy regarding at least one key country in US-Russian relations: Ukraine. Here it suffices to recall Mr. Trump’s July 2019 order that military aid to Ukraine be frozen in advance of what would become a fateful conversation with President Zelensky. All of this at a time when Mr. Trump’s personal lawyer, Rudolph Giuliani, was conducting a de facto parallel, unauthorized, policy in Ukraine on behalf of Mr. Trump’s personal interests, to the point of forcing the resignation of the US career Ambassador to Ukraine, Marie Yovanovitch.

The second key difference has to do with each president’s own personal attitude towards Vladimir Putin. Donald Trump’s openly deferential attitude towards Putin (as manifested most graphically by his comments and body language at the press conference at the conclusion of the July 2018 Helsinki summit, and by his comments to the effect that he trusted Mr. Putin more than the US’s own intelligence community) led many to raise the issue of a possible Putin blackmail of Trump. In contrast, President Biden has been much more forthcoming. The message sent by Biden – particularly in his answer to a journalist to the effect that he (still) considered Putin a “killer” – was: “I know who you are, I have no illusions about you.” (Those of you familiar with Russia will smile at the connotation of the term killer as used colloquially in Russian.) Biden is saying: “Yes, I am willing to contribute to stabilize relations, but on the basis of realistic, sober assumptions, and of US national interests.”

Enter Nord Stream 2
But, as questions around the geopolitics of energy supplies to EU states have made clear, speaking of straightforward national interests is a complex issue in our interconnected world. I am referring to the issue of the Nord Stream 2 natural gas pipeline, the second part of a pipeline transporting natural gas from Russia to Germany under the Baltic Sea, allowing for direct large-scale gas exports to Western Europe; while its first line (Nord Stream 1) had been in use since 2011, by 2019 its second set of lines doubling its capacity, originally set to come online in 2020, was becoming the center of an international controversy eliciting strong reactions in Russia, Germany, Ukraine, and the US. At issue was the impact of the new pipelines on Ukraine, which as recently as ten years ago transited nearly 80% of Russia’s natural gas exports, accounting for over 50% of Gazprom’s profits.

The writing had been on the wall for more than a decade – Nord Stream is part of a longer trend of Russia seeking to circumvent Ukraine and the Baltic states as natural gas and oil export routes, noted in Russia’s Energy Strategy to 2020 and Russia’s Energy Strategy to 2030.

Even if Nord Stream 2 itself may not have been a main topic of discussion during the summit, it was, arguably, the main issue against which domestic proponents of softer and harder policies toward Russia were weighting their forces. The issue of sanctions – or, rather, backpedaling on sanctions, as many observers would put it – became a major point of criticism of Mr. Biden’s policies vis-à-vis Russia. Let us take a step back and look at the main issues related to US decisions on the pipeline, the impact on Ukraine, and at Ukraine’s options moving forward.

Nord Stream 2: Impact on Ukraine
There are two key arguments of those calling for stronger sanctions against the pipeline and companies collaborating in its construction: that it would increase the EU state’s dependency on Russia, and that it would have a serious negative impact on Ukraine, primarily through loss of transit revenue. Indeed, direct or indirect transit fees received by Ukraine for the transit of Russian gas have been key for Ukraine’s energy system since independence. Until 2006 such transit services, although not paid for separately, allowed Ukraine to import Russian natural gas at preferential prices. Since then, they have been a source of foreign-currency earnings averaging about $2 billion per year. At the same time, the impact of diverting natural gas transit away from Ukraine goes much further.

First, reduced transit volumes have an impact going well beyond transit fees. If revenue-wise a 50% decline in contracted transit volumes may mean a 50% decline in transit fee income, in terms of the actual functioning of the pipeline (not only as an export pipeline but for domestic supplies), a 50% decrease in volumes means much more than a 50% decline in functioning quality. As I discuss at length in my new book, Russian Energy Chains, the reason for this goes back to the shape of Ukraine’s gas pipeline system (which simultaneously handles transit functions as well as domestic supply loads) and natural gas’s material characteristics. Natural gas, being lighter than air, will not move at all in the pipeline without pressure. If the volume of natural gas in Ukraine’s trunk pipeline system goes below a certain percentage of its capacity, it becomes harder not only for the natural gas to move forward in the pipeline, but also for the country’s domestic natural gas supply system to work properly.

Second, the easing out of Ukraine from its transit role also affects Ukraine’s international situation and the credibility of any security guarantees it may receive from EU states. With EU states no longer having a vested interest in the smooth functioning of Ukraine’s gas transit system, they may lose interest in Ukraine as well. Finally, there is the impact on Ukraine’s domestic politics. With many referring to President Zelensky’s inability to stop the completion of Nord Stream 2 as his first major geopolitical defeat and evidence of lack of real support for Ukraine in the EU and the US, this provides new arguments for political groups in Ukraine eager to make political capital out of any disillusionment with the West and opens the door to increased uncertainty in its foreign policy.

Given these multiple negative effects on Ukraine, the joint US-German Declaration of July 21, 2021, giving the green light to Nord Stream 2’s completion came as a rude awakening. That Germany and other EU states would support the project came as no surprise given Gazprom’s long-standing ties with EU companies (Nord Stream 2 AG financial investors such as OMV, Shell, and Wintershall, in particular) and special conditions offered them, even when the pipeline itself has not been proven to make business sense as compared with transit through Ukraine. In fact, as analysis by Russia’s investment bank Sberbank CIB made clear, it was well-connected building contractors—on the example of Boris and Arkadyi Rotemberg, and Genadii Timchenko—that were most clearly benefitting from the project, at the expense of Gazprom shareholders. But why would the US backpedal and finally agree to the project? I see this as a combination of two factors: on the one hand, the weight of the fait accompli of the project nearing completion, and, on the other, the weight of the relationship with the US’s European allies.

In dealing with Russia, President Biden is negotiating a delicate balancing act. US-Western and European-Russian energy relations have long been a contentious issue, even from the early 1980s, when the US opposed (and ultimately failed to stop) the building of a natural gas pipeline out of security concerns. However, walking into the presidency in 2021, President Biden faces an additional challenge: after four years of neglect and active damaging of the US’s most important strategic, political, and democratic-culture relationships, rebuilding relations with European allies is a clear priority, as made clear by the fact that before the summit with Putin, Biden made a point of meeting the US’s EU and NATO partners at length.

Options for Ukraine
The Joint Declaration offers Ukraine a number of “consolation prizes,” but without any fully enforceable commitments. The short, 1,047-word document does not constitute and does not carry the legal weight of an international agreement. It includes, however, several initiatives to support Ukraine’s energy security and sovereignty after Nord Stream 2 comes into operation. In particular, it “commits to utilize all available leverage to facilitate” an extension of the current Ukrainian-Gazprom gas transit agreement (set to expire at the end of 2024) “for up to ten years.” It also discusses possible sanctions in case Russia would seek to exert economic or military pressure on Ukraine. Yet, sobered by the experience of the weak real security guarantees provided by the 1994 Budapest Memorandum on Security Assurances, Kyiv is also right to look skeptically at this declarative statement. All the more so because EU-level sanctions (for example targeting oil imports from Russia) would also require the agreement of other EU states, including those with closer ties with Putin, such as Italy and Hungary. On the positive side, the Declaration also discusses support for Ukraine’s continued access to “reverse” gas supplies, and notes support for Ukraine’s integration into the EU’s ENTSO-N electricity network; relevant as electricity export is a very promising business for Ukraine, but one in where other Eastern European states have sought to limit competition from Ukraine and, thus, an area where German and US support is especially important.

Most importantly, the Joint Declaration launches a $1 billion Green Fund for the Ukraine investment fund to support the modernization of Ukraine’s energy system and its transition to a low-carbon economy, explicitly singling out the need to speed up the movement away from coal. The US and Germany each committed an initial $175 million to this fund. This is the most credible and significant of the commitments mentioned in the Joint Declaration, with the caveat that the amounts involved need to be boosted up to make a real impact given the legacy of more than a century of heavily coal-based development. If truly implemented, the Green Fund would have a generational change effect on Ukraine, not only because of its impact on the country’s energy resilience, but because failure to reform the coal sector has had myriad negative effects, from its deteriorating ecological situation to the systemic misuse of subsidies that helped prop-up the power of coal-steel oligarchs such as Rinat Akhmetov, eventually creating favorable conditions for Russian intervention in the area.
Given the limitation and opportunities opened by the new situation around Nord Stream 2, the best option for Ukraine is to use this moment as an opportunity to press more forcefully for NATO membership, and for concrete, enforceable security guarantees. Much has been written about Ukraine becoming a natural gas trade hub for the EU, but given the EU’s commitment to a low-carbon future, Ukraine would do best to embrace the future rather than holding on to a fossil-fuel past. One concrete opportunity concerns using its existing pipelines to transport green-produced hydrogen rather than natural gas. This would be a win-win situation for Ukraine, the US, and its European partners.

Margarita M. Balmaceda is Professor of Diplomacy and International Relations at Seton Hall University and an Associate at the Harvard Ukrainian Research Institute. She is the author of Russian Energy Chains: the Remaking of  Technopolitics from Siberia to Ukraine to the European Union (Columbia University Press, 2021), Living the High Life in Minsk: Russian Energy Rents, Domestic Populism and Belarus’ Impending Crisis (CEU Press, 2014), The Politics of Energy Dependency: Ukraine, Belarus and Lithuania Between Domestic Oligarchs and Russian Pressure (University of Toronto Press, 2013), and Energy Dependency, Politics and Corruption in the Former Soviet Union (Routledge, 2008).