Nord Stream 2 will not change the geopolitics of the Russia-Europe relationship. It will alter the logistics of Russian gas in Europe. Some will marginally win, and some (Italy and Central Europe) will marginally lose. Ukraine will lose more than anybody else economically. In April 2021, we advocated a German-Ukraine deal, sponsored by the United States, to help Ukraine adapt to Nord Stream 2. Little of what we proposed can be found in the U.S.-German Joint Statement on Nord Stream 2 and Ukraine. We are concerned, therefore, that Ukraine will not receive the support it needs.
With Nord Stream 2 coming online, an additional 45bcm of Russian natural gas will be redirected away from the Ukrainian transit infrastructure. The Joint Statement seems to imply that the main task for Germany and the United States is to deter Russia from using Nord Stream 2 in a coercive way. Their task was to compensate Ukraine for the economic consequences of Nord Stream 2 and help it adapt structurally. Their deal largely misses the mark.
On the positive side, Germany commits to appointing a special envoy immediately to assist Kyiv in negotiating a new transit contract. Moreover, a small amount of money is earmarked for gas security infrastructure, including reinforcing the ‘reverse flow’ capacity at Ukraine’s western borders.
However, the shrinking and modernization of Ukraine’s gas transmission system are barely mentioned in the Joint Statement, which only states that Germany will help ‘identify options’. As we explained in Foreign Policy, it is the single most important dimension of Ukraine’s structural adaptation to the end of large-scale transit. It is also a condition for Ukraine to offer Russia a good deal on residual transit. Furthermore, no money is offered to directly compensate Ukraine, temporarily, for the loss of transit earnings.
Most of the money promised by Germany is about decarbonization. This is not the problem at hand. Adapting to Nord Stream 2 will not compromise decarbonization and investment in green infrastructure will not address the specific, pressing issues Ukraine must deal with to minimize the economic cost of Nord Stream 2.
Most likely, the limitations of the Joint Statement reflect the fact that Ukraine did not fully participate in a process, the premises of which it rejects. From the Ukrainian leadership’s perspective, the only acceptable compensation for Nord Stream 2 would probably have been formal, hard security commitments from the United States, which were out of the question.
The U.S. foreign policy vis-à-vis Nord Stream 2 has consistently ignored important aspects of reality. Technically, it ignored the European energy security rationale for circumventing Ukrainian transit and was influenced by wildly exaggerated characterizations of the pipeline’s implications. Politically, Washington allowed itself to become an instrument in the hands of a handful of new-cold-warrior countries in their dispute with Germany. The hardening of the U.S. sanctions regime in 2020 cemented unrealistic expectations on the Ukrainian side and a cold, proud resolution on the German one. The Biden administration inherited an impossibly bad situation, having to choose between triggering a crisis with its indispensable European ally or risking the impression that it was throwing Ukraine under the bus. It chose the latter.
Kyiv certainly feels betrayed by the Biden administration. Perhaps it will soon get over it. It could manage to quietly channel enough German financial assistance to pay for the shrinking and optimization of its gas transmission system and launch good-faith negotiations with Gazprom about a new transit contract.
A more pessimistic scenario is possible, whereby Ukraine would provoke Russia into security incidents meant to force the United States back into a staunchly pro-Ukrainian position.