The United States and Russia seem to have reached a wider geopolitical deal on Ukraine, one with the future direction of energy flows at its heart.
The two powers used the Eastern European country as a bargaining chip in their disputes over the Nord Stream 2 pipeline that is reportedly 98% complete and will provide Russian natural gas to Germany and the rest of Europe.
Although Nord Stream 2 is widely seen as a Russian energy project, in reality, it is a product of an agreement between Russia’s state-owned energy giant Gazprom and several European oil and gas corporations, namely Royal Dutch Shell, German utility company E.ON, French electric utility Engie, and Austrian integrated oil and gas company OMV.
They signed the deal in 2015 despite sanctions that the European Union and the United States imposed on Russia in 2014 over the Kremlin’s provocative actions in Crimea and the Donbass. For the West, the necessity of a nearby and stable energy supply prevailed over its disagreements with Moscow.
The United States threatened several times to block the construction of the pipeline, and even sanctioned some companies involved in the project.
However, weeks before the “historic” summit between US President Joe Biden and his Russian counterpart Vladimir Putin, the White House gave a de facto green light for Nord Stream 2 to be finished.
US officials, including Biden, openly said that imposing new sanctions would be “counter-productive in terms of American relations with Europe.” There are reports suggesting that America and Germany also reached a deal on Nord Stream 2.
According to the said agreement, if Russia tries to use energy as a weapon or commit aggression against Ukraine, Germany would be the one to take punitive action to limit Russia’s energy exports.
By any measure, Nord Stream 2 will undermine Ukraine’s role as a regional gas hub. At the same time, it is unlikely that the Kremlin will try to invade the Eastern European nation that lacks any significant natural resources.
Russia has already reduced the volume of gas transiting through Ukraine, and Nord Stream 2 is expected to deprive Kyiv of up to US$3 billion in annual revenue by allowing Moscow to circumvent the former Soviet republic when sending gas to Europe.
That is why Ukraine’s President Vladimir Zelensky recently voiced fear that the US and Russia could strike a deal behind his country’s back.
Indeed, Putin and Biden said that they discussed Ukraine during their summit in Geneva on June 16. It is worth noting that the US president refused to host the Ukrainian leader before the meeting.
Putin, on the other hand, was also not particularly interested in meeting Zelensky, which suggests to some analysts that the US and Russia see Ukraine as a “political object” in their “new Cold War” rivalry.
Zelensky recently met German Chancellor Angela Merkel who reportedly assured him that Berlin would “do everything to help Ukraine continue to pursue the path of development.”
According to the deal between Germany and the US, both sides would invest $50 million in Ukrainian green-tech infrastructure encompassing renewable energy and related industries.
That amount will, however, not compensate for the billions that Ukraine will lose if gas no longer transits through its territory. Thus, Kyiv could pay the heaviest price for the lucrative energy deals reached by the US, Germany and Russia.
Still, there are hopes that the US and Germany will invest as much as $1 billion in a so-called Green Fund to help Ukraine’s transition to cleaner sources of energy.
But how will Nord Stream 2 affect relations between Moscow and the West?
There is no doubt that, at least in the short to mid-term, Europe will remain heavily dependent on Russian natural gas. Theoretically, in case relations between Moscow and Kyiv deteriorate and threaten to lead to a full-scale war – which does not seem probable at this point – Germany could seek to limit gas imports from Russia.
However, unless Berlin finds a sustainable alternative to Russian energy, such a move would be shooting itself in the foot.
Germany will thus likely tend to maintain good relations with Russia, though it will not be easy. According to the Merkel-Biden agreement, Berlin should support energy talks in the US-backed Three Seas Initiative, which consists of 12 Central and Eastern European countries that aim to cut European dependency on Russian energy.
For the foreseeable future, Germany will likely try to balance its own economic interests – which include cooperation with Russia – and US geopolitical projects in Europe.
It is too early to say if Russia is the main winner in this energy game. Ukraine’s gas transit agreement with Russia expires in 2024, and if Berlin and Washington manage to force the Kremlin to extend the deal, it will be Moscow, rather than the West, that will prevent the Ukrainian economy from losing billions of dollars.
Russia, for its part, can always say that pipelines running through Ukraine are too old and in poor condition, which means that someone would have to pay for their reconstruction.
Ukraine could get loans from the West, or even from China, to rejuvenate its pipelines. But in that case, it will likely be foreign powers, rather than the Ukrainian state, that will own the nation’s energy infrastructure.