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The Nord Stream 2 Dilemma: Why a Transatlantic Dispute is likely to keep getting worse

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A worker walks past snow-covered pipelines in the courtyard of the Gazprom PJSC Slavyanskaya compressor station on Thursday, January 28, 2021.

Andrey Rudakov | Bloomberg | Getty Images

LONDON – The simmering geopolitical dispute over an underwater pipeline that would bring gas from Russia to Germany is widely expected to intensify in the coming weeks, with increasing pressure on President Joe Biden to do more to help the almost completed Stop project.

Upon completion, the 1,230-kilometer Nord Stream 2 pipeline will become one of the longest offshore gas pipelines in the world. It is supposed to deliver Russian gas directly to Germany under the Baltic Sea, bypassing Ukraine.

Along with several European countries, the US is rejecting the pipeline, calling it a “bad deal” for European energy security.

Critics also argue that the pipeline is inconsistent with European climate goals and will most likely increase the economic and political influence of Russian President Vladimir Putin on the region.

Under the leadership of Russia’s Gazprom, the state gas giant has claimed that Nord Stream 2 is “particularly important” at a time when domestic gas production is declining in Europe. Proponents of the pipeline also condemn attempts to “influence or stop the project for political reasons”.

A bumpy road for the project is the risk of further targeted sanctions under the leadership of the USA, the German federal election at the end of September and a sustained backlash against the poisoning and arrest of Russian opposition politician Alexei Navalny.

What’s at stake?

“The reason it’s so geopolitically controversial isn’t necessarily because of the pipeline or the molecules themselves. It all has to do with timing and what it says about Europe’s relations with Russia, Germany’s relations with Russia, and transatlantic relations “said Kristine Berzina, a senior fellow with the Alliance for Securing Democracy, a national security group.

“The pipeline will either be built or not. Germany has a role in the potential killing. Russia is looking for alternatives to circumvent sanctions so it can be completed, but not much of that pipeline remains,” Berzina told CNBC.

The project is 94% complete, with more than 1,000 kilometers of pipeline and less than 150 kilometers before Gazprom can turn on the taps.

Chancellor Angela Merkel attends the 215th session of the Bundestag. Topics include the epidemic situation of national scope and the impact of the lockdown on the economy.

Kay Nietfeld | Image Alliance | Getty Images

A possible stumbling block, analysts say, could be the prospect of a German government opposed to the pipeline. The next parliamentary elections, due to take place on September 26th, will determine who will succeed Angela Merkel as Chancellor of the country.

The problem, however, is that the project is so close to completion that September may be too late to scrap the pipeline.

“We could be done with the pipeline by September and when the pipeline is done the gas will flow, and I think it will be especially difficult to turn off the gas when you actually finish the pipeline. So we’re on one very good way to critically determine whether or not to continue this product for a few months, even weeks, “said Berzina.

Is Nord Stream 2 Inevitable?

Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, told CNBC that the potential for further interventionist action could prevent Russian gas from being delivered to Europe via Nord Stream 2.

When asked if completion of the pipeline is inevitable, Ash replied, “It appears that although, given the impending sanctions against insurance contracts, I am asking whether gas can actually flow through the pipeline.”

A worker adjusts a pipeline valve at the Gazprom PJSC Slavyanskaya compressor station, the starting point of the Nord Stream 2 gas pipeline, in Ust-Luga, Russia, on Thursday, January 28, 2021. Nord Stream 2 is 1,230 kilometers (764 miles) long gas pipeline that will double the capacity of the existing underwater route from Russian fields to Europe – the original Nord Stream – which opened in 2011.

Andrey Rudakov | Bloomberg | Getty Images

The nature of the dispute, Ash said, related in part to gas supplies to Europe as the US “clearly” wants to supply the continent with liquefied natural gas, but there are more general geopolitical concerns.

“It is also the US feeling that Europe is failing to meet its security obligations. It asks the US for security guarantees, but sells itself to Russia at the first opportunity,” he added.

What do we do now?

James Waddell, Senior Global Gas Analyst at Energy Aspects, told CNBC that US sanctions will be “one of the main obstacles” to the completion of Nord Stream 2.

Waddell cited measures taken last month when the US announced targeted sanctions against the Russian pipe-laying ship Fortuna in order to delay the project. In particular, the measures have stopped punishing German or European companies that support the construction of the pipeline.

Even so, Russia tried to “russland-fy” the project, Waddell said, effectively trying to isolate companies that do not do business with the US, have US employees, and do not need access to dollar-based credit.

In practice, it means Russia is finding its own ships to do the real physical work of laying the pipeline and transferring the assets and pipeline ships to Russian-owned companies.

Passers-by take photos of the Russian pipe-laying ship “Fortuna” on the pier, which is being towed from the port to the Baltic Sea by tugs. The special ship will be used for construction work on the German-Russian gas pipeline Nord Stream 2 in the Baltic Sea.

Jens Büttner | Image Alliance | Getty Images

Waddell said he had doubts about whether Moscow could isolate the project “in its entirety” as many European companies are already affiliated with the project and other international companies would likely think twice about getting involved in order not to be on a US sanctions list stand .

In addition, Energy Aspects analysts said the project’s main certification firm’s withdrawal in December was another “big” problem.

Norway-based DNV was supposed to review the safety and technical integrity of the pipeline system once it was completed, but the risk management and quality assurance company stopped working on the project late last year for fear of US sanctions

“This project was all built to the standards of this certification company and it may be difficult to find another internationally recognized certification company to certify this project as finished,” said Waddell. “And we believe that without this type of certification it can be difficult for any European regulator to actually allow flows through this pipeline.”

– CNBC’s Tom Chitty contributed to this article.

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Katherine Clark