Russia will lose tens of billions of dollars if a pipeline project to transport gas to Germany is abandoned — and that threat is something that Europe can use to pressure Moscow, according to a former German ambassador to the U.S.

Nord Stream 2 could be major leverage against Russia — but using it is complicated- oil and gas 360

Source: CNBC

“I think the pipeline represents a major item of leverage for us, if we handle it smartly,” said Wolfgang Ischinger, who is now chairman of the Munich Security Conference.

Nord Stream 2 is a gas pipeline from Russia to Germany that will carry 55 billion cubic meters of natural gas to Europe every year if approved by regulators. The project, estimated to cost $11 billion, is contentious because it bypasses countries like Ukraine and Poland who vocally oppose it, and it’s been caught up in geopolitical debate.

Meanwhile, the U.S. and its European allies have been alarmed by a buildup of Russian troops at the border of Ukraine, with many experts afraid that Moscow will invade its neighbor.

Some European leaders have suggested that the pipeline should be added to a potential sanctions list against Russia.

Could it backfire?

There’s no way that Russia wants its traditional revenue source to be hit, Ischinger told CNBC’s Hadley Gamble on Tuesday.

“If we have to shut down this pipeline project, Russia will definitely lose, you know, tens of billions of dollars or euros going forward,” he said. “That cannot be in the interest of Russia at all.”

Still, blocking the pipeline can just as easily backfire on the EU.

Around 43% of Europe’s total gas imports come from Russia, according to Eurostat. Europe has been gripped by an energy crisis since last year, facing record high gas prices amid the lifting of Covid-19 restrictions, which put pressure on depleted natural gas stocks. Governments’ goals to transition to cleaner energy has triggered higher demand for gas, as it’s considered cleaner than some other fossil fuels.

Benchmark natural gas prices have soared more than five-fold in the last year, and the outlook remains grim for consumers and businesses — threatening regional economic recovery — due in no small part to a drop in gas flows from Russia.

It will be “painful” for Europe to limit gas from Russia and there may be more energy shortages, but Moscow should expect Europe to retaliate if military activities escalate, Ischinger said.

“It is an item of leverage. I think Russia definitely has an interest to continue its income sources from providing gas and oil … to its western European partners,” Ischinger also told CNBC. “We need to handle it carefully, but smartly.“

Western officials have accused Russia President Vladimir Putin of using energy as a political weapon, something Moscow denies. Russia also denies U.S. allegations that is is planning an invasion of Ukraine.

Bolder words from Germany

Key to watch is the shift in political tone coming from Germany, the Nord Stream 2 pipeline’s final destination. Former Chancellor Angela Merkel, who stepped down in December after 16 years in power and had a warmer relationship with Putin than many of her Western counterparts, supported the pipeline and in early 2021 described U.S. sanctions on it as “not OK.”

Germany’s new leadership has taken a significantly different position. The country’s new Foreign Minister Annalena Baerbock has said Germany cannot approve the pipeline in its current form, saying in December that “as things stand, this pipeline cannot be approved as it is.”

“Asserting rather than implying its foreign policy leverage on the issue is a sea change from the approach we saw taken under Merkel, and Baerbock is perceived as keen to shake up Germany foreign policy making,” said Maximilian Hess, fellow at Foreign Policy Research Institute. Baerbock has also cited concerns over Ukraine and EU energy law that Hess says “will appeal to the pipeline’s critics in Washington and the EU’s east.”

The position isn’t finalized, though, as it’s not yet clear where the rest of the German government stands on the matter. “Uncertainty remains over potential pushback from German industry and the coalition’s unity on the issue,” Hess added, “which they avoided directly mentioning in the coalition program.”

Jamie Shea, senior fellow at Brussels-based think tank Friends of Europe and a former NATO deputy assistant secretary general, believes Europe’s ability to deter Russia shouldn’t be underestimated.

“Nord Stream 2 is going to help the [European gas crisis] situation obviously, in terms of pumping extra Russian gas,” he told CNBC on Wednesday. “But on the other hand, Europe has storage facilities, and is accessing liquified natural gas on international markets and other sources of supply, particularly if the winter so far continues to remain relatively mild … So I would not exclude in any sense the possibility of a considerable delay in the activation of NS2 a part of a package of economic sanctions.”

“If Europe needs to buy, Russia needs to sell as well; it’s highly dependent for its economy on gas,” Shea said. “And the sense is that this greater package of sanctions, announced in advance so it’s clear to Putin what price he has to pay, is probably at the moment the best form of deterrence. The next couple of days as we see how we get out of this crisis is going to be the test of that strategy.”

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