Why the West Hopes Halting a Russian Gas Pipeline Will Prevent War in Ukraine

MOSCOW – For weeks, new German Chancellor Olaf Scholz has been “switched to mute” on the threat of a Russian invasion of Ukraine, according to social media memes, disappearing into a hedgerow like Homer Simpson as other Western allies threatened harsh sanctions. The US ambassador called him an “unreliable partner” in a leaked memo.

But the day after Vladimir Putin recognised the independence of the breakaway statelets in eastern Ukraine and ordered Russian “peacekeeping” troops to head in, it was Scholz who struck back with the most impactful response from the West so far.

As Russia took control of the Donetsk and Luhansk people's republics it has long supported, effectively killing off the peace process agreed to in Minsk in 2015, the United States placed financial sanctions on the separatist republics. US President Joe Biden later announced sanctions on two Russian banks and sovereign debt. The UK sanctioned five small banks as well as three Putin allies who were already under US sanctions. None of these measures are game-changers.

Shcolz, on the other hand, withdrew a government document necessary for the certification of Nord Stream 2, a gas pipeline running 760 miles from Russia to Germany under the Baltic Sea. The pipeline has been laid and even filled with gas, but it can't go into operation without regulatory approval, which has now been stopped.

“We must re-evaluate this situation, in view of the latest developments. By the way, that includes Nord Stream 2,” Scholz said with characteristic understatement.

That means Russian state gas champion Gazprom is down the $11 billion (about £8 billion) it spent on building the project, plus additional money that it spent redirecting existing pipelines to join up with it. It will lose an estimated $1 billion a year in cost savings. Biden later promised to work with Germany on keeping Nord Stream 2 offline.

Halting the pipeline was an unexpectedly bold move from Scholz, who had refused to even name the project when asked at a press conference with Putin in Moscow what measures Germany would take if Russia sent forward the 100,000-plus troops built up near Ukraine. His predecessor, Angela Merkel, had submitted the documents for the pipeline's approval, and former German Chancellor Gerhard Schroeder even heads the shareholders' committee of the first Nord Stream pipeline and has been nominated to Gazprom's board. Last year, Biden waived the sanctions that Donald Trump had previously placed on Nord Stream 2.

“Most people thought that would get resolved this year, and the pipeline would be online,” said Trevor Sikorski, an analyst at Energy Aspects in London. “That (decision) makes it really unlikely, it makes it hard to see the Germans relenting on that. There will be multiple years of delays probably.”

Russia supplies more than a third of Europe's natural gas, and more than half of Germany's. So Scholz's halting of Nord Stream 2 may have caught Putin by surprise.

“It's a serious part of [Putin’s] defeat in the war with the West,” said Andrei Kolesnikov, an analyst at the Carnegie Moscow Centre. “It's a big mistake what he did, that he didn't consider this scenario.”

Moscow will be forced to depend more on its existing pipelines to Europe, one of which runs through Ukraine, providing Russia's geopolitical foe as much as $2 billion in transit fees a year. That's why Gazprom built a second pipeline alongside the first Nord Stream, planning to double the amount of gas it could supply to the lucrative Western European market without going through third countries.

Ukraine stands to benefit if Nord Stream 2 remains offline through 2024, when Kyiv is expected to negotiate a new gas transit agreement with Moscow. US producers of liquified natural gas, which can be shipped anywhere in the world, will probably continue to enjoy record-high prices and volumes.

Meanwhile, European consumers could be the biggest losers. The continent has already been suffering an energy crisis this winter that has forced Germans to pay more for heating and electricity in a month than they normally do in a year. Gas prices jumped 10 percent after the pipeline was paused on Tuesday.

“Welcome to the brave new world where Europeans are very soon going to pay 2,000 euros for 1,000 cubic meters of natural gas!” tweeted Dmitry Medvedev, deputy chairman of Russia's security council who was Russia’s president between 2008 and 2012 while Putin served as prime minister to avoid a limit on presidential terms.

Medvedev’s calculations are probably an exaggeration, as the current gas price is only about 830 euros (about £690) per 1,000 cubic meters. The Biden administration promised to divert liquified natural gas shipments to Europe in case of a shortage.

But the European energy crunch only looks to get worse. Germany closed half its nuclear power plants last year and will close the remaining ones this year, leaving it reliant on wind, coal and gas for electricity and heating. Analysts expect prices to remain above 60 to 70 euros per megawatt hour for the next several years, only slightly down from the current 80 euros per megawatt hour, Sikorski, the energy analyst, said.

“These types of issues with Russians will drive continued narrative in Brussels about the importance of an energy transition, about getting away from the fossil fuels we have to import from the likes of Russia,” he said.

The halting of Nord Stream 2 may complicate the expensive development of the massive gas reserves Russia had hoped to send through the pipeline. But few expect it will influence Putin's actions in Ukraine, which are based on his exaggerated claims of historical injustices against Russia rather than immediate economic or political concerns.

Europe remains dependent on Russian energy, leaving harsher Western sanctions the bigger threat, said Ron Smith, an analyst at BCS Global Markets in Moscow.

“Europe has to tread very carefully here. They cannot do without Russian gas, I don't care what the White House says,” Smith said. “There's not enough LNG in the world to plug the gap that losing Russian gas would leave.”

And if Europe runs out of gas reserves at some point in the future, Nord Stream 2 could be back on the table, according to Smith.

“It's a matter of time,” he said, “especially if we get to a cold winter and there's not enough gas.”