As a primary actor in the development of the Nord Stream 2 pipeline, Russia plays a key role. Gazprom, the primary company behind the project, has a legal monopoly on Russia’s gas pipeline exports, and close ties to the Russian government. Gazprom emphasizes the Nord Stream 2 project will be mutually beneficial for Russia and Europe by supplying Europe with a consistent supply of Russian gas, thereby diversifying European supply and ensuring energy security. Additional incentives for the project are clear; beyond simple economics, there are also geopolitical factors (particularly concerning Ukraine) that may contribute to the Russian motivation to complete the project.
Russia is the world’s largest gas exporter, with large untapped gas reserves. As of 2013, gas accounted for roughly one-seventh of the country’s exports, and will likely remain an important economic source for some time. As such, it is in Russian interests to maintain high quantities of gas exports at a high price. Russia’s main export market is to the EU, at quantities almost as high as domestically within the country, making the relationship of critical importance for Russian gas interests. If Gazprom and other Russian suppliers adopt a competitive pricing strategy, which is possible due to the low gas production costs in Russia, Russia can strengthen its position as the EU’s number one gas supply country, given that gas production within the EU and in Norway is projected to decline.
Indeed, a competitive pricing strategy has been shown to be important when considering whether Nord Stream 2 will be economical, as several simulations and studies have shown that the project may fail to make a profit after construction regardless. For example, in May 2018 Russia’s largest bank, Sberbank, published a report on several of Gazprom’s pipeline projects (including Nord Stream 2), which concluded that the projects make little economic sense beyond serving the interests of the contractors involved.
Geopolitics & Ukraine
The dubiousness as to whether Nord Stream 2 will result in consistent profits for Gazprom and Russia has led analysts and observers to note that there are other motivating factors: namely the increased geopolitical influence that may come as the result of Europe’s increased reliance on Russian gas, and the ability to circumvent Ukraine as a transit country.
Generally speaking, Gazprom and Russia will be able to yield greater influence over the whole of the EU through price discrimination: as a large-scale supplier, altering the price or availability of gas can be a useful political tool for incentivizing and punishing those dependent on such supply. According to Agata Łoskot-Strachota and Georg Zachmann, “the discount for the Yanukovych administration in Ukraine after it did not sign the EU association agreement in 2013 is one of many examples” (2014). Additionally, Gazprom “appears to calculate that intensified Russian-German gas cooperation will increase the effectiveness of its lobbying in EU institutions; improve its chances for exemptions from the EU’s Third Energy Package; and decrease interest in Berlin and Brussels for trilateral cooperation between Russia, Ukraine, and the EU for the modernization of the Ukrainian gas infrastructure”.
The argument against the modernization of Ukrainian gas infrastructure is relevant, because many argue that Nord Stream 2 is unnecessary, and upgrading existing capacities in Ukraine would be a more economical choice. Moscow argues that Kiev is an unreliable partner, and that its transit fees are too high for the route to be economical. It is true that this reliance on transit countries reduces Gazprom’s profits. Additionally, such transit exposes Russian exports to technical, legal, and political risks. The desire to avoid Ukraine in particular has been expressly indicated as an incentive for Russia to build Nord Stream 2. Circumventing Ukraine would allow Russia an avenue to pressure the country both in terms of economics, and in its relations with the EU (by undermining the importance of integrating the Ukrainian and EU gas infrastructures).