Nord Stream 2: A study in sanctions complexity

Written by Jake Plenderleith on Monday September 13, 2021

Nord Stream 2 is an offshore gas pipeline that runs from Russia under the Baltic Sea to Germany. Near completion, it has the potential to transform how Europe’s strongest economy obtains its energy.  

From Germany’s perspective, the pipeline will allow energy to reach the country more easily – an imperative following Chancellor Merkel’s decision to decommission nuclear power plants in the country after the 2011 Fukushima disaster. For Russia, it’s an excellent opportunity to not only profit from its enormous gas reserves, but to also further European dependence on its natural resources for political purposes.    

The US, meanwhile, would really rather Germany didn’t engage in such a direct partnership with Russia, an historic adversary whose influence in Europe the US seeks to dilute. Other European countries such as Poland and Ukraine have voiced objections. The European Parliament – which voted to stop the pipeline following the arrest of Russian democracy activist Alexei Navalny – shares the US’s concerns.    

The political fallout has been described as ‘the biggest diplomatic crisis in transatlantic relations since the Iraq War’, [1] but in terms of geopolitical wrangling, it’s relatively standard fare. Yet it is Nord Stream’s sanctions dimension that fascinates, as it very clearly illustrates how hard it can be for compliance to respond to evolving sanctions risks. 

Compliance and sanctions  

Nord Stream 2 began construction in 2018. The following year, the US ambassador to Germany wrote to the firms involved in its construction threatening sanctions unless they ceased work on the project. This was followed up by a warning from Senator Ted Cruz, who, during the impeachment of President Trump over Russian interference in the 2016 US elections, warned Allseas, the firm involved in laying Nord Stream 2, of possible sanctions. Allseas quickly pulled out of the pipeline’s construction.   

With the spectre of US sanctions looming via the US Protecting Europe’s Energy Security Act (2020), Zurich Insurance relinquished ties to Nord Stream. [2] In Europe, MEPs released a stern statement warning the pipeline was ‘non-European’, [3] and in Congress, Republicans vowed to block Biden appointees to the Treasury should sanctions not be imposed blocking the pipeline. [4] Though the pipeline will go ahead, uncertainty, dispute, stubbornness and subterfuge cloud the whole project, from Moscow to Berlin to Brussels to Washington.  

The key question is how businesses and compliance officers within them operate legally within such a complex web. This is the crux of not just Nord Stream but all current sanctions regimes: how, when the ground shifts so suddenly, can businesses ensure they are on the right side of the law? And how do they position themselves so that the business doesn’t miss out when those threatened sanctions don’t in fact end up being imposed?  

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Sanctions risks: trends and training  

Fundamental to protecting the business from sanctions risk are a few simple but important steps. Undertaking a standalone sanctions risk assessment is invaluable. A robust sanctions programme will also furnish a firm with a good understanding of changing sanctions lists, as well as which countries represent a higher risk. A business must also understand its risk exposure. Combined, these will stand firms in good stead, and should provide a solid foundation on which to make decisions, as well as providing some confidence and reassurance.   

And yet, there remains a structural problem. Sanctions are a powerful political tool, and, when applied well to malevolent state actors, can produce very effective results. But when they are used to threaten companies conducting perfectly legitimate business, they are a not only a hindrance but an active risk, with the potential for severe financial and reputational harm. In this instance, Senator Cruz’s intervention only undermines sanctions as a diplomatic weapon, blunting their impact by wielding sanctions only as a means of scaring businesses. 

Sanctions are inherently political, in that they aim to bring about a desired change in behaviour without resorting to force (Nord Stream 2 AG is a subsidiary of Gazprom, the Russian energy giant majority owned by the Russian government). Overreliance on them, however – or a propensity to threaten them as a means of international diplomacy – usually only serves to punish firms.  

Develop ​your knowledge in managing sanctions risk:

• ICA Certificate in Managing Sanctions Risk
• ICA Advanced Certificate in Managing Sanctions Risk
• Sanctions Awareness (Short course) 
  

In July, the US announced that it had struck a deal with Germany that would prevent Russia from using Nord Stream as leverage for political purposes over Europe. [5] This may have calmed the waters for now. But the vacillation and threats of the last two years will live longer in the memory. Politically, it has exposed a massive rift between European governments. For compliance, it has exposed just how tricky navigating an evolving sanctions landscape is in reality.  

Nord Stream won’t affect every business, but almost every business is or will face situations similar in nature or impact. The solution is to stay abreast of developments, and prepare contingency plans for potential sudden changes. Training, too, is vital; operating an effective sanctions risk framework is possible, but those unaware of best practice or trends in to managing sanctions risk are at a grave disadvantage. 

References:

[1] Wolfgang Münchau, ‘Biden vs Merkel: the battle over Russian gas is heating up’, The Spectator, 13 February 2021: https://www.spectator.co.uk/article/biden-vs-merkel-the-battle-over-russian-gas-is-heating-up – accessed August 2021 

[2] Wolfgang Münchau, ‘Biden vs Merkel: the battle over Russian gas is heating up’

[3] Ukrinfrom, ‘European Parliament releases tough statement on US-Germany agreement on Nord Stream 2’, 27 July 2021: https://www.ukrinform.net/rubric-polytics/3287657-european-parliament-releases-tough-statement-on-usgermany-agreement-on-nord-stream-2.html – accessed August 2021    

[4] Patrick Donahue, ‘Germany Sees No Commitment to Shut Off Russian Gas in Biden Deal’, Bloomberg, 2 August 2021: https://www.bloomberg.com/news/articles/2021-08-02/germany-sees-no-commitment-to-shut-off-russian-gas-in-biden-deal – accessed August 2021     

[5] BBC News, ‘Nord Stream 2: US and Germany reach deal on controversial Russian gas pipeline’, 21 July 2021: https://www.bbc.co.uk/news/world-europe-57923655 – accessed August 2021