From The Wall Street Journal

Angela Merkel and her advisers, before a visit to the White House last spring, agreed on a priority: Avoid talk of Nord Stream 2. The German-Russian pipeline project had been a bone of contention between Berlin and Washington, which fears it will make Europe’s largest economy excessively reliant on Russian energy.

When the German chancellor took her seat at the Oval Office table, though, President Trump left her nowhere to hide. “Angela,” he said, according to people in the room, “you got to stop buying gas from Putin.”

A year later, work continues on the gas link under the Baltic Sea financed by several Western firms and PAO Gazprom , the Russian state-controlled energy company.

The dispute is coming to a head, in a graphic example of how Russia’s estrangement from the West, far from bringing its members closer, is driving a wedge between the closest of allies.

The Trump administration contends the pipeline would prop up Moscow, still under Western sanctions for its 2014 Ukraine invasion. “Allowing Nord Stream 2 to be built now will simply increase European dependency on Russia,” said Richard A. Grenell, U.S. ambassador to Germany and a Trump confidant. Instead of creating closer ties with Russia, Mr. Trump told Ms. Merkel at the meeting that Germany should buy American gas.

Berlin says the pipeline would improve the continent’s energy security. Gazprom already operates gas links to Europe that traverse Ukraine. “A Russian gas molecule remains a Russian gas molecule,” Ms. Merkel said last month at a Munich conference attended by Vice President Mike Pence, “irrespective whether it comes from Ukraine or from underneath the Baltic Sea.”

After years of diplomatic efforts to persuade consecutive German governments to bury the project, Washington is preparing to enact sanctions against the pipeline. A U.S. security official who briefed Mr. Trump on the issue said the president saw Nord Stream 2 as incompatible with the military shield America maintains over Europe. The president’s thinking, the official said: “If you want us to protect you from the beast, why are you feeding it?”

Berlin officials say Germany would perceive sanctions as aggression on a fellow North Atlantic Treaty Organization member. It would likely widen the U.S.-German rift created by Washington’s push for improved trade terms with the continent, its abandonment of the Iran nuclear deal, Mr. Trump’s tariff threats and demands Germany raise its military spending.

“Sanctions against the pipeline would mean a confrontation not just with Germany, but with Europe,” said a German official familiar with the project. “We will do anything it takes to complete this pipeline.”

Several U.S. officials said Nord Stream 2 sanctions would follow an amendment to existing measures against Russia, the Countering America’s Adversaries Through Sanctions Act. These would target investors and companies contracted to lay pipes, they said.

Russian officials have told Ms. Merkel’s aides U.S. sanctions would prompt Gazprom to buy off the Western companies and complete the pipeline on its own, said German and EU officials and Gazprom representatives.

Gazprom officials said the project’s most complex part had been completed. Should specialized pipe layers be forced out, the project would be delayed and costs would rise, but Gazprom would be able to complete the work, they said. Without Western investors, Russian state-controlled banks would take over, possibly with some Chinese financing, a Gazprom spokesman said.

A U.S. diplomat said the administration was aware of the plan. If Nord Stream 2 became a pure Kremlin endeavor, the diplomat said, Ms. Merkel would face the political balancing act of having to fight for Mr. Putin’s flagship project.

Ms. Merkel’s support for the pipeline has long perplexed Washington and European governments critical of the pipeline.

Nord Stream, the pipeline’s precursor, was championed by Gerhard Schröder, Ms. Merkel’s predecessor and political rival. Unlike Mr. Schröder, a personal friend of the Russian president’s, Ms. Merkel is considered a foe of Russian President Vladimir Putin.

Shortly after taking office in 2005, she told visitors Mr. Putin was so greedy for foreign currencies that if his country’s gas reserves dwindled, he would let Russians freeze before he stopped selling to Europe. A former citizen of the Soviet puppet regime of East Germany, she spearheaded Europe’s effort to sanction Russia after its annexation of Ukraine’s Crimea.

Yet Ms. Merkel sees the pipeline as in Germany’s long-term interests because it is hooked on gas, said a Merkel aide. In 2011, following Japan’s Fukushima-reactor meltdown, she accelerated Germany’s phasing-out of nuclear power. Her government has also set a 2038 target to shut remaining coal-fired power plants.

Germany’s industry-heavy economy can’t rely on renewables alone, so gas will play an increasingly central role in its energy mix. Germany is the world’s biggest natural-gas importer, government figures show. BASF SE , the German chemicals group and co-investor in Nord Stream 2, consumes more gas than Denmark.

‘We need more gas’

Ms. Merkel acknowledged the dilemma in Japan last month, saying: “We want to be out of coal in 2038. We need more gas.”

For Germany, with Europe’s highest non-household electricity prices, Russian gas offers a price advantage, currently around 20% lower than American liquefied natural gas, according to the German government.

Nord Stream 2 will follow the Nord Stream pipeline, a 750-mile link that channels Siberian gas under the Baltic Sea. It would double the annual capacity to 110 billion cubic meters. Gazprom covers around 50% of the €9.5 billion costs, and the rest is split between European companies Engie SA, OMV AG , Royal Dutch Shell PLC, Uniper SE and Wintershall AG.

The first Nord Stream was born in 2005, when Mr. Schröder shook hands with Mr. Putin before they signed the $7 billion project. That December, after losing his chancellorship, Mr. Schröder became chairman of the shareholder committee of the North European Gas Pipeline Company, the project’s operating company then. Last year, Mr. Schröder, who declined to be interviewed, was pictured at Mr. Putin’s inauguration in the first row next to Prime Minister Dmitry Medvedev. Behind Mr. Schröder stood the CEO of Nord Stream 2 AG, Matthias Warnig, an erstwhile onetime East German Stasi secret-police officer.

For most of her 13 years in office, Ms. Merkel was evasive about why she supported the pipeline, her arguments ranging from having to accommodate her coalition partners to responding to pressure from the industry, a former aide to President Obama said. “Every time Obama challenged her about it,” the former aide said, “she would give a different answer depending on the time of day.”

But in February at the Munich Security Conference, a gathering of government and security officials, she defended the project, arguing that Germany had bought Russian gas since the Cold War and that the Kremlin would remain a partner.

A few months earlier, Ms. Merkel’s government had approved funding for at least one LNG terminal in Germany that could import U.S. gas. Although many experts doubt American LNG can find much demand due to its higher price, German officials said they hoped the move would soften U.S. opposition to the pipeline.

U.S. officials said the administration is keen for Europe to buy American gas, although they emphasize it is mainly concerned about an increasingly belligerent Russia’s influence on the continent. The EU receives nearly 40% of its energy imports from Russia, according to the bloc’s 2016 statistics, and Nord Stream 2 is likely to increase that volume. Russia is also working on TurkStream, a pipeline that would pump more gas into Europe via Turkey.

Another concern is that Nord Stream 2 would deprive Ukraine of fees on Russian gas crossing its territory, representing over 2% of Ukraine’s GDP in 2017.

“We do not think, fundamentally, that there is a need for the pipeline,” said U.S. Deputy Energy Secretary Dan Brouillette. “Russia will use this as leverage over Europe.”

Maros Sefcovic, vice president of the European Commission and a critic of the project, said he couldn’t discern a commercial rationale for doubling the capacity of the first Nord Stream.

Many European capitals share Washington’s concerns. Poland opposes the project because of concerns it would make the country more vulnerable to Russia’s political pressure. Warsaw politicians including the liberal former foreign minister Radoslaw Sikorski have compared the pipeline to the Molotov-Ribbentrop pact between Hitler’s Germany and Stalin’s Soviet Union to dismember Poland.

In July 2016, German-Polish relations had become so fraught that Ms. Merkel secretly invited Polish ruling-party Chairman Jaroslaw Kaczynski to the German government’s guesthouse near Berlin for a conciliatory dinner, said a participant. Mr. Kaczynski arrived by car at the Meseberg Castle, where the chancellor warmly welcomed him. Ms. Merkel first told him she couldn’t stop Nord Stream 2 because it was a private project.

Later in the conversation, she appeared to change tack, moving to China’s growing influence in Eastern Europe in what the Polish delegation interpreted as a suggestion she would reconsider her pipeline support if Poland could marshal consensus to curb China’s foray in the region. Ms. Merkel asked Mr. Kaczynski to cajole Viktor Orban, the Hungarian leader who champions a close relationship with China and Russia, the participant said.

A Merkel spokesman who attended the meeting denied the chancellor made any transactional offer, saying she simply expressed concern about some countries’ China policies that went against the EU’s common interest.

Merkel offensive

France’s Emmanuel Macron in February contemplated backing proposed European legislation to give the EU oversight of the project, effectively wresting control from Germany, until the chancellor dissuaded him in a telephone call, said French officials.

Ms. Merkel called other EU leaders critical of the pipeline, trying to torpedo the legislation, said officials from some countries receiving the calls. The Romanian premier felt so pressured by one such call her deputy contacted U.S. Secretary of Energy Rick Perry to complain about Ms. Merkel, said Romanian and U.S. officials. A spokesman for Ms. Merkel confirmed the call but declined to comment on the content.

Ms. Merkel’s offensive worked. EU governments approved a watered-down version of the legislation leaving pipeline oversight to Germany.

On Feb. 21, Mr. Trump told Austrian Chancellor Sebastian Kurz in an Oval Office meeting he would sanction the pipeline if Germany proceeded, said an attendee.

Lawmakers from both U.S. parties fear Nord Stream 2 would strengthen Russia’s hand, said Sen. Chris Coons (D., Del.). “Nord Stream 2 is a strain on the U.S.-German relationship,” he said. “Democrats—myself included—who have raised concerns are not principally thinking about LNG exports, they are principally worried about strengthening Russia’s hand.”

John E. Smith, until last year director of the Office of Foreign Assets Control, the most senior U.S. official dealing with sanctions, said the pipeline faced a Congress wanting to confront what some perceived as Mr. Trump’s leniency on Russia and the president’s desire to show he was tough on Mr. Putin.

“Virtually everyone in the U.S. government believes that this deal strengthens Russia at a time when the EU should not be strengthening Russia,” said Mr. Smith, now partner at law firm Morrison & Foerster LLP.

“Election interference, Russian provocations, U.S. anger over the Trump Administrations’ Russia policy—and that could be a perfect storm that could hit Nord Stream 2.”

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