On March 1st, just five days after Russia’s surprise invasion of Ukraine, Switzerland-based energy company Nord Stream 2 AG filed for bankruptcy. The company’s future had already been imperiled the previous week by the German government’s decision to withdraw certification of the Nord Stream 2 pipeline, all but ensuring that the 1230 km (764 mile) of pipe already laid under the Baltic Sea would never be used. The final blow came from President Biden’s decision to impose sanctions directly on Nord Stream 2 AG for the majority ownership share held by Russian state oil company Gazprom. With the US Department of Treasury blocking any entity exchanging money with the pipeline from transacting with the United States, Nord Stream 2 AG was effectively barred from conducting any business at all, leaving little choice but to file for insolvency.

In the chaos of the war, it would be easy to ignore the bankruptcy of a small company hundreds of miles away from the conflict. Yet despite having only about 100 full time employees, the company’s Board of Directors boasted an almanac of European power, including former Chancellor of Germany Gerhard Schröder, former President of Russia and current Chair of Gazprom Dmitry Medvedev, and Johannes Teyssen, a German executive on the boards of BP and Deutsche Bank. The Nord Stream 2 project represented a culmination of nearly two decades of German energy policy and diplomacy with Russia. Its unceremonious demise from an executive order represents the power of American sanctions and the fragility of the global energy system.

Understanding the Nord Stream project requires first understanding how Russian and German interests aligned around the gas market. At the beginning of the 21st century, Germany was the world’s 4th largest producer of nuclear power, and nuclear accounted for nearly 30% of German energy production. Yet for decades, the German anti-nuclear movement had been growing stronger. In 1980, The Green (Die Grünen) party formed in pre-unification West Germany against the backdrop of rising concerns with the energy industry and protests of new nuclear plants, with a phaseout of German nuclear power as one of its founding policies. These fears were amplified by the Chernobyl nuclear disaster in 1986, which caused substantial radiation leakage into Germany, the health effects of which are still felt to this day. In 1998, Gerhard Schröder was elected Chancellor as a member of the center-left Social Democrats, with the Greens as junior members of the ruling coalition. The Green Party was thus able to appoint its member Jürgen Trittin as Germany’s Minister of the Environment, who then began an official policy of refusing to certify new nuclear plants. In 2000, Schröder reached a “nuclear consensus” with German electrical utilities, agreeing to limit the lifespan of existing nuclear plants and to gradually phase them out. The later center-right government of Angela Merkel first signaled opposition to these policies, but later changed course when the 2011 Fukushima nuclear accident in Japan further shifted German public opinion against nuclear power

While Germany is one of the world’s largest producers of renewable energy, energy consumption grew faster than new renewable power, leaving Germany still highly dependent on fossil fuels. With the share of power produced by nuclear falling and energy demands rising as domestic coal and lignite production failed to keep pace, Germany had little choice but to begin importing natural gas. Germany’s sudden demand for gas coincided with a rise in Russian supply. The fall of the Soviet Union in 1991 led to a chaotic period of privatization and foreign investment, in which oil and gas emerged as the central plank of the Russian economy. By the mid 2010s, oil and gas production accounted for nearly 40% of Russia’s GDP, and close to 10% of the entire global supply of oil. Almost three quarters of Russia’s entire gas sector is controlled by Gazprom, positioning it as the German state’s ideal seller. The stage was thus set for the Nord Stream project.

The basic idea of the Nord Stream pipelines would be to connect Germany directly to Gazprom-produced gasoline by constructing the pipeline under the Baltic Sea. The pipeline would be controlled by the Switzerland-based holding company Nord Stream AG with a majority share in the company held by Gazprom, which is itself majority owned by the Russian state.  Unlike other existing gas pipelines, Nord Stream would bypass Poland and Ukraine, which collected passive revenue as transit countries. Both Russia and Germany were concerned with losing money to Polish and Ukraine middlemen. However, Russia was also concerned about the political leverage Ukraine could exert if it retained infrastructural control over such a large portion of the Russian economy. As of 2006 when the first Nord Stream pipeline began construction, nearly 80% of all Russian gas exports passed through Ukraine. The first pipeline project was approved for construction with a joint declaration of intent from the German and Russian governments in 2005, and inaugurated for use by a joint government ceremony in 2012. Despite misgivings, leaders of European Union states such as the Netherlands and France applauded the pipeline, which was set to provide for 10% of all European Union gas supply at the time. 

The first Nord Stream pipeline appeared such a success that plans were quickly developed for a second, parallel pipeline known as Nord Stream 2. However, the project quickly ran into political resistance and logistical problems. European Union leaders expressed misgivings about the diplomatic implications of giving Russia greater control over Europe’s energy sector. Meanwhile, Russia’s 2014 annexation of Crimea led the United States and the European Union jointly to place an embargo on the sale of oil exploration and production equipment to Russia. The sanctions also significantly restricted Russian state-owned enterprises from American and European financial services, complicating Nord Stream AG’s financing. 

Nevertheless, the demand for more gas pushed the project forward. After showing initial hesitance, the German government, invoking decades old ideas of liberalization through trade, argued that continued construction of the pipeline might serve to preserve peace in the region by making Russia’s economy economically interdependent with the European Union. The election of Donald Trump also gave Nord Stream 2 an unexpected boost. Russia’s interference in the 2016 election led the US government to impose a new round of harsh sanctions on Russia in 2017, potentially imperiling the project. However, instead of isolating Russia, the sanctions created a momentary rift in German relations with the United States, leading Angela Merkel to threaten retaliation against the US if further sanctions were imposed. Instead of isolating Russia, the sanctions only boosted German political will for continuing the project.

From 2017 to 2021, construction of Nord Stream 2 continued despite considerable uncertainty about how it could be used. With the completion deadline approaching in September 2021, the United States spent summer 2021 by hedging its bets. The United States waived some sanctions on Gazprom,  claiming that doing so was necessary to repair America’s relationship with European allies. Secretary of State Blinken began to privately describe the completion of the pipeline as inevitable and urged the government of Ukraine not to complicate matters by criticizing the pipeline. At the same time, the US reached a private agreement with the German government to trigger sanctions if Russia used Nord Stream 2 as a “political weapon” that would allow it to further escalate in Ukraine. This strategy ran into issues as recent tensions between Russia and Ukraine came to a boil. By November 2021, reports that Russia had amassed troops on its borders with Ukraine prompted Secretary of State Anthony Blinken to announce sanctions on ships that had helped construct the pipeline.

At present time, the Nord Stream 2 pipeline is lying unused at the bottom of the Baltic Sea, but the Nord Stream 1 pipe parallel to it is fully operational and unlikely to be shut off any time soon. The European Union stands at an impossible impasse. Germany cannot bear to shut off the first Nord Stream pipeline without losing a substantial amount of its energy capacity or worsening current shocks to the global oil market. At the same time, Nord Stream 2 is unusable, both because sanctions have eliminated its management company, and because the political costs of importing from Russia have risen to unbearable levels. Meanwhile, any decision Germany might make to resolve this standoff requires the buy-in of the United States, whose sanctions could impede any policy it could implement. There is no painless way of resolving the stalemate in the short term. The only solution may be to accelerate Germany’s stated goal of achieving 100% renewable energy by 2035 while bracing for high prices and cold winters. 

Author Biography: Jonathan Haskin is a Moderator of the International Law Society’s International Law and Policy Brief (ILPB) and a J.D. candidate at the George Washington University Law School. He has a Bachelor of Arts in political science from the University of Pennsylvania.