Merkel must stay in the batter’s box to strike Baltic Sea pipeline deal

Two weeks ago, Chancellor Angela Merkel, standing next to Ukrainian President Petro Poroshenko, stepped up to the plate and stated that Nord Stream 2, a planned gas pipeline that would stretch from Russia to Germany through the Baltic Sea, was not possible without clarity on Ukrainian gas transit.

Reactions have ranged from Merkel’s statement being a game changer to the statement being meaningless window dressing because, even if there were a guarantee of additional transit, Russia and the Russian-owned gas giant Gazprom could not be trusted to comply.

{mosads}It is now important that Chancellor Merkel stay in the batter’s box and, together with the European Commission and member states, insist on a meaningful binding guarantee of Ukrainian transit, together with continued reform of the Ukrainian energy system and necessary improvements to the transit system.

Critics could say that such an agreement is impossible to achieve. They would be right that it will be difficult, but the advantages to all sides, including the United States, make it imperative to use every political and legal lever to reach this goal. Chancellor Merkel’s visit to the United States — which has been overshadowed by the current visit of President Macron — is the ideal opportunity to encourage her to spearhead efforts to reach such an agreement.

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— The Hill (@thehill) April 18, 2018

Who would benefit from this agreement? All of the stakeholders.

European companies participating in the project would benefit. In talking with the companies, their leaders have said that even with Nord Stream 2, Ukrainian transit will continue to be necessary for the foreseeable future. An agreement guaranteeing Ukrainian transit would remove the companies from political crosshairs and ensure a continuing supply of gas through Ukraine, which they believe is necessary.

From the EU’s standpoint, the right agreement can ameliorate the East-West divide within Europe on energy and allow for a greater security of supply. It would also help to eliminate the unhelpful optics of rewarding Russia and Gazprom after Russia’s actions in Crimea and Eastern Ukraine. Ukraine would be protected by having guarantees of continued transit. Europe would be able to focus on other issues with Russia, while maintaining the importance of Russian gas to European consumers.

Russia and Gazprom would have the benefit of Nords Stream 2, without the threat of ongoing controversy and litigation with the European Commission, including continuation of the competition case between the Commission and Gazprom.

The United States could avoid a potential sanctions fight over Nord Stream 2 while at the same time protecting Ukraine economically and politically. The greatest uncertainty surrounding Nord Stream 2 is the potential of U.S. sanctions. Sanctions legislation passed last year provided that sanctions on pipelines were discretionary and could only be enacted after coordination with allies and partners. This made sanctions, particularly from this administration, unlikely, but this could change.

Thirty-nine senators wrote to the Trump administration arguing for sanctions on Nord Stream 2. Continuing adverse Russian behavior, outcomes of the Mueller investigation and mid-term elections could result in Congress making sanctions mandatory. It is even possible that the always-unpredictable administration could decide on its own to apply sanctions.

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— The Hill (@thehill) April 22, 2018

U.S. sanctions are unlikely, in part because unilateral sanctions would cause one more major rift with Europe, but it is not impossible. A good agreement could eliminate the possibility.

Having said all of this, an agreement is easier said than done. It will require Chancellor Merkel, the Commission and member states to use all of their levers to reach an acceptable agreement. Many say it would be impossible and that Russia and Gazprom could not be trusted to comply with an agreement.

A possible lever is the competition case between the Commission and Gazprom. The case still has not been settled, despite rumors to the contrary for the past year. Strict conditions on Nord Stream 2, including Ukrainian transit, could be conditions to the settlement. Given Gazprom’s behavior, as set out in the Commission’s 2015 Statement of Objections, restrictions on Nord Stream 2 could help to avoid continuation of the activities outlined in the Statement of Objections. This would also avoid the embarrassment of allowing Nord Stream 2 to be constructed while the competition case is not resolved.

The EU also has considerable political leverage in that a successful agreement and resolution of the competition case, together with enforcement of the Third Energy Package, which aims to create a single EU gas and electricity market, could once and for all insulate Russian energy supply from the political arena.

Every effort should be made during the chancellor’s visit to the United States to encourage her to stay in the batter’s box and make every effort to reach a meaningful agreement.

Ambassador Richard Morningstar is the founding chairman of the Atlantic Council’s Global Energy Center. He also served as the U.S. ambassador to Azerbaijan, U.S. ambassador to the European Union, special adviser to the president and secretary of State for Caspian Basin energy diplomacy, and special envoy for Eurasian Energy.