Russia puts squeeze on Europe over Nord Stream 2

Russia is sending a clear message to Europe: Allow the completion of Nord Stream 2 or gas prices will remain high and supplies dangerously low.

Following a cold winter in Europe, gas storages in several European countries are at less than 50% capacity.

Russian gas giant Gazprom, unwilling to increase gas supplies, has driven gas prices to new highs and sent gas brokers scrambling to seek alternative supply.

Russia’s actions are placing pressure on Europe’s leaders to allow the completion of the Nord Stream 2 pipeline, which project head Matthias Warnig says will be completed by the end of the summer.

With the completion of Nord Stream 2 looming, Ukraine finds itself on the verge of a catastrophe: In bypassing Ukraine, Russia will be able to economically isolate it and increase the EU’s energy dependence on Russia.

Moreover, it gives Russia the leverage to block Ukraine’s accession to NATO and the European Union.

Warning signs

Current gas deliveries from Gazprom suggest Russia is weaponizing gas deliveries to force its agenda in Europe.

In the first quarter of 2021, the transit of natural gas from Russia to European countries through Ukraine’s Gas Transmission System (GTS) amounted to 10.4 billion cubic meters. In 2019, the amount for the same period was 21 billion cubic meters.

And for the third month in a row in June, Gazprom has not purchased intermittent capacity for natural gas transit through Ukraine’s GTS, according to Expro Consulting, a firm that focuses on the development of Ukraine’s oil and gas and energy industries.

Meanwhile, gas prices for August have reached a historic high of 36.3 euros per megawatt hour. Depleted gas supplies due to a cold winter have led to the higher demand.

Russia’s refusal to purchase gas transit through Ukraine amid high demand raises eyebrows.

Anastasia Sinitsa, a resident security expert at Ukrainian energy think-tank Dixi Group, says that “if Gazprom built its strategy for economic feasibility, then the company would try to sell its product profitably to European customers.”

Instead, she says, Russia is manipulating the market by creating an artificial deficit and the illusion of the need for Nord Stream 2.

This strategy seems to be confirmed by the head of Gazprom’s exporting division Elena Burmistrova, who said in May that Gazprom would be “able to cover additional demand with the commissioning of Nord Stream 2.”

Burmistrova’s message to Europe is crystal clear. Gas supplies will remain low until the EU caves to their demands to finish Nord Stream 2, wherein gas supplies will start again.

Olena Pavlenko, president of Ukrainian Energy think-tank Dixi Group, told the Kyiv Post that Gazprom’s behavior is evidence of Russia’s attempt at blackmailing Europe.

“These threats were once exclusively used on Russia gas-dependent nations, now they are used against EU countries as well,” Pavlenko said. “It is a serious signal of what Russia’s strategy will be with further gas dependence.”

This is especially true for Germany, for which the share of Russian gas will be higher than the recommended 30% once Nord Stream 2 is completed, according to Pavlenko.

Cornering Europe

Russia’s squeeze on Europe has been years in the making. Europe, particularly Western Europe, has become increasingly dependent on gas from Russia. Gazprom supplies nearly 40% of Europe’s gas, 81% of that to Western European countries.

At the same time, domestic gas production has all but sealed the EU’s fate as dependent on Russian gas. EU natural gas production fell by 11.0 % in 2019 compared with 2018, according to Eurostat.

The Netherlands, the EU’s main natural gas producer, registered a drop in production by 13.5%.

According to the latest long-term European gas outlook from S&P Global Platts Analytics, Russia’s market share in Europe is expected to remain about 30%, rising close to 40% by 2040, as domestic European gas production and supplies from Norway dwindle.

Ukraine in trouble

Pavlenko says the economic consequences of reduced gas volumes are scheduled to be catastrophic to the Ukrainian market.

“For Ukraine, this means not only a loss of funds from gas transportation, but also means that gas transmission operators must adapt to reduced volumes, lay off several thousands of employees, and revise tariffs for the domestic market,” Pavlenko said.

Russia and Ukraine signed a five-year agreement through 2024 that guarantees Russia will transport no less than 40 billion cubic meters through Ukraine each year and must pay Ukraine at least $7.2 billion over the course of the contract.

If Nord Stream 2 is completed, it will allow Russia to start bypassing Ukraine after 2024 — or even earlier, if Gazprom breaks the contract, dragging Ukraine into arbitration.

Pavlenko also says that the EU’s reliance on Russian gas will dissuade any intervention in the region in the event of further military aggression by Russia.

“Without the Ukrainian pipeline, the level of EU concern will be significantly lower than now,” she said.

At the St. Petersburg International Economic Forum on June 4, Russian President Vladimir Putin warned that “Ukraine must show good will if it wants Russian gas transit to Europe and related fees to remain.”

And of Russia’s and Germany’s claims that they will leave guaranteed transit volumes in Ukraine, Pavlenko says these are “empty promises.”

All but settled

With Nord Stream 2 completion on the horizon, Ukraine’s position as a gas transit nation has become increasingly compromised.

Ukraine, already reeling from greatly diminished gas volumes, is sounding the alarm on any compromise deal regarding the pipeline. On June 25, Naftogaz CEO Yuriy Vitrenko called for “restraint” in various proposal assessments that offer a compromise, calling for suppliers other than Gazprom to be allowed to access Ukraine’s gas transit network.

The Biden administration’s decision to waive sanctions on Nord Stream 2 has all but ensured the project’s completion, despite U.S. lawmakers’ calls for the administration to act against the pipeline.

With the Nord Stream 2 fate being almost settled, Ukraine’s future seems increasingly uncertain.