Introduction

“The pipeline will be built and the British, the French, the Germans, and other Europeans will stick to the agreement which their firms have been making with the Soviets.”
—Helmut Schmidt, Chancellor, West Germany, July 1982

“I am deeply concerned at the growing use of sanctions, or the threat of sanctions, by the United States against European companies and interests. We have witnessed this developing trend in the cases of Iran, Cuba, the International Criminal Court, and most recently the Nord Stream 2 and TurkStream projects.”
—Josep Borrell, High Representative and Vice President, EU, July 17, 2020

In a case of déjà vu, 2020 looks quite a bit like 1982—at least insofar as the U.S. and major European partners find themselves in yet another high-stakes diplomatic standoff over a natural gas import project from Russia. This time, the star of the show is the nearly completed Nord Stream 2 (NS-2) gas pipeline running from Russia to Germany under the Baltic Sea. Only 160 km of pipe remain to be laid, but the project’s political risk has exploded in recent weeks.

On July 15, 2020, the U.S. State Department updated its public guidance on the NS-2 and TurkStream gas pipeline projects. It deleted five words, five digits, and a comma (“… initiated on or after August 2, 2017…”), and with that pen stroke, made the $11 billion project thereafter broadly subject to sanctions under Section 232 of the Countering America’s Adversaries With Sanctions Act (CAATSA). Since December 2019 there had been a narrower sanctions risk, as Section 7503 of the U.S. National Defense Authorization Act for Fiscal Year 2020 authorized sanctions against pipelaying vessels involved in the NS-2 and TurkStream gas export pipeline projects.

The EU reaction to the July 2020 guidance has been strong, with the Union’s chief diplomat, Josep Borrell, saying, “As a matter of principle the European Union opposes the use of sanctions by third countries on European companies carrying out legitimate business” and that furthermore, the EU “… considers the extraterritorial application of sanctions to be contrary to international law.” The abruptness of recent U.S. actions against NS-2 likely intensifies EU frustrations. In August 2017, the Countering America’s Adversaries Through Sanctions Act put the corporate world and U.S. partners on notice that they could face sanctions for facilitating the construction of energy export pipelines from Russia. But the State Department then promptly attenuated the risk perception by issuing guidance that “… limited the focus of implementation of Section 232 to Russian energy export pipeline projects for which a contract was signed on or after August 2, 2017.”

The NS-2 project was thus originally exempted from sanctions because foundational contracts had been signed almost two years prior to CAATSA becoming law, even though the imperatives now cited as rationales for removing the exemption certainly existed when the exemption was issued in 2017. Indeed, they existed for many years prior to that (in particular, the idea that “Russia uses its energy export pipelines to create national and regional dependencies on Russian energy supplies and leverages these dependencies to expand its political, economic, and military influence and undermine U.S. national security and foreign policy interests”). The substantial delay between original exemption and subsequent dialing up of risk means that European interlocutors can fairly raise the question, “Russia is as malign in 2020 as it was in 2017, so why didn’t the U.S. swing the sanctions hammer before we paid in our money and emplaced 1,900 km of subsea pipeline?”

With the Nord Stream 2 fight fully in view, this report will critically analyze the impact of energy-related sanctions directed toward Russia as a way to curb Russian geopolitical influence and blunt Moscow’s ability to coerce European gas consumers. We compare such sanctions to instances where geopolitical problems are instead primarily confronted through a strategy of market-based resilience rooted in the practice of geoeconomics.

While the report focuses on energy sanctions in a largely European context, its analytical conclusions impact a much broader issue that is vital to the foreign policy of multiple U.S. allies, as well as broader stability and risk management across global commodity and financial markets. The report does not focus on oil markets because oil is among the most fungible of all commodities and its relative ease of transport and diverse slate of global suppliers curtail the ability of any single supplier to unduly coerce specific consumers.