Nord Stream 2 Sanctions Present an Early Test for the Biden Administration

Just before leaving office, the Trump administration imposed sanctions on two Russian targets for their involvement in building the Nord Stream 2 (NS2) natural gas pipeline, which will bring Russian exports to Germany. The sanctions were part of a last-ditch effort to block NS2’s completion and have put the U.S. and Germany on a collision course over the issue.

On January 19, the Trump administration designated both the Fortuna, a Russian pipe-laying ship helping to complete NS2’s final stretch, as well KVT-RUS, the Russia-based shell company that owns the vessel. The two are now subject to sanctions under Section 232 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which targets those supporting the construction of Russian energy pipelines. Waiving or reversing these sanctions would likely require congressional approval, per CAATSA Section 216.

Russia had clearly been preparing for the Fortuna’s designation, having reportedly changed the vessel’s ownership multiple times in an apparent effort to conceal its true owner. Despite the sanctions, the Fortuna resumed work in Danish waters on Sunday. Another Russian pipe-lay vessel, the Akademik Cherskiy, currently stationed nearby, may also help finish the project.

If completed, NS2 will carry gas from Russia to Germany, bypassing Ukraine. Together with TurkStream, a Russian gas pipeline supplying Turkey and Southern Europe, NS2 would undermine European energy security while depriving Kyiv of strategic leverage over Russia as well as vital transit revenues. In so doing, NS2 would hamstring Ukraine’s ability to boost domestic production and reform its energy sector – key U.S. and European goals for Ukraine. Worse still, NS2 may only deepen Moscow’s already strong influence within Germany’s business community.

The threat of sanctions under CAATSA as well as the bipartisan Protecting Europe’s Energy Security Act (PEESA), which passed in December 2019 and was expanded earlier this month, have prompted many Western firms to abandon the project. Pipe-layer Allseas exited in late 2019, delaying construction by almost a year. The International Group of P&I Clubs, the world’s largest group of shipping insurers, warned in September that it would not cover NS2-related activity. Zurich Insurance, engineering consultancy Rambøll, construction and engineering group Bilfinger, and certification firm DNV GL jumped ship earlier this month. The departure of DNV GL is particularly critical, since that company was supposed to certify NS2 before it goes online, and may be impossible to replace.

U.S. sanctions, however, have exacerbated friction between Washington and Berlin, which has denounced the sanctions as an infringement on Germany’s sovereignty. Both German Chancellor Angela Merkel and her likely successor, Armin Laschet, remain committed to completing NS2 despite overwhelming EU opposition to the project.

Acting on this sentiment, earlier this month the German state of Mecklenburg-Vorpommern established the MV Climate and Environmental Protection Foundation. Funded mostly by Nord Stream 2 AG, the Gazprom subsidiary that wholly owns NS2, this foundation is designed to shield NS2 contractors by quickly acquiring products needed for construction, on the bet that Washington will not sanction a German state entity.

The Biden administration has affirmed America’s continued opposition to NS2 but is still “reviewing” whether to waive U.S. sanctions to help repair ties with Germany. Before entering office, one of Biden’s advisors floated a compromise: “suspend” sanctions and freeze construction, giving the administration and Berlin time “to confidentially and calmly” talk things over. Newly confirmed Secretary of State Antony Blinken discussed NS2 with his German counterpart on Tuesday, but Berlin’s position so far remains unchanged.

The Biden administration now faces a major test of sanctions diplomacy. While repairing U.S.-German relations is important, Biden should not reconcile with Berlin by sacrificing his strategic priorities of supporting Ukraine, advancing European energy security, and “impos[ing] real costs on Russia for its violation of international norms.”

U.S. sanctions have provided breathing room for the Biden administration to encourage Germany to find an off-ramp or identify an acceptable compromise. Even if Biden issues no further designations, existing sanctions may be enough to prevent NS2’s completion, meaning Biden could pursue reconciliation with Germany while pointing to congressional opposition to NS2 to argue that his hands are tied. Congress can facilitate this strategy by publicly voicing opposition to sanctions relief under both CAATSA and PEESA.

Matthew Zweig is a senior fellow at the Foundation for Defense of Democracies (FDD), where John Hardie is research manager and Russia research associate. Both contribute to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Matthew, John, and CEFP, please subscribe HERE. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.