No, Germany, You Don’t Have to Pay Billions for Blocking North Stream 2

Predictably enough, some Gazprom lobbyists are busy issuing ominous warnings against sanctioning North Stream 2.

Gazprom lobbyists at work

The German government, they warn, will be faced with a “snowball of litigation” if sanctions are imposed.

The lobbyists also argue there will be terrible costs imposed on the Western energy company partners if the North Stream 2 project is sanctioned.

Germany and EU on solid legal grounds

In reality, both the German government and the European Union (as sanctions are most likely to be adopted at EU level) have very compelling legal defenses against any damages claim.

If damages claims were indeed brought as a result of sanctions being imposed, then it is most likely that such claims would be directed against the European Union.

For a host of practical reasons, which include the multi-state financing, the multi-state territorial and Exclusive Economic Zone footprint of the pipeline, sanctions are most likely to be applied at EU level.

Gazprom’s dim chances suing the EU

North Stream 2 would likely seek to bring a direct action challenging the sanctions as unlawful under European Union law and seeking damages. Or it could pursue a damages claim under the Energy Charter Treaty (ECT) — the multilateral energy investment treaty.

A direct challenge by Gazprom before the EU General Court and ultimately the Court of Justice of the European Union (CJEU) would be extremely difficult to mount successfully.

The lawyers of the European Commission’s and the EU Council’s Legal Services would be able to compellingly argue that the sanctions had a legitimate aim to push back at Moscow for poisoning the leader of the Russian opposition, Alexei Navalny.

They already have substantial evidence from the Berlin hospital, the Charité, of the use of Novichok on Mr. Navalny. Evidence from a host of research centers and from the Skripal case in the UK support the proposition that Novichok is a weapons grade poison. As such, it required state resources to produce and was in fact only produced by the Russian state.

The EU’s foreign policy reasoning matters

From the perspective of the EU’s external policy, it simply cannot accept having the principal leader of the opposition of Russia — after all, a Council of Europe Contracting State — being poisoned by his own government.

Nor can the EU accept Russian support for the suppression of the legitimate democratic wishes of the Belarusian people, by the installation of Russian police and military actors into the Belarusian state to assist in organizing that suppression.

Both these acts run counter to the European Union’s fundamental values, the right to life, the right to democratic free expression and the fundamental right of European peoples to make their own choice as to their future.

All of which makes North Stream 2 a worthy target for EU sanctions.

Gazprom’s problem? It is a 100% owner of North Stream 2

As to damage claims by Western companies involved in the project, it matters greatly that North Stream 2 is 100% owned by Gazprom. Moreover, Gazprom itself is directly 51% owned by the Russian state over which it maintains complete direction and control.

That raises the question against whom Wintershall, Uniper, Engie and Shell will direct their damage claims. It stands to reason that the “poor Western energy companies” involved in the project weren’t naïve.

After all, they have very expensive external lawyers on retainer. They should have insured, one way or another, if the pipeline is sanctioned, that those companies do not lose out.

In particular, one expects that these energy companies were smart enough to secure claims against Gazprom if the pipeline project is stopped due to actions or events related to the conduct of Russian authorities.

That would take the German government off the hook, even though this is the damage dimension Gazprom lawyers now seek to direct attention to. One wonders why…

Tough luck for Gazprom

The Legal Services of the Union will therefore be able to identify both:

1. A legitimate objective stemming from the Navalny poisoning and Russian interference in the Belarusian state and

2. A legitimate target for sanctions — in this case a Russian state-owned and state-controlled entity — and one which threatens EU interests both inside and out of the Union.

As a consequence, it would be very challenging at best for North Stream 2 to move successfully against sanctions imposed by the EU and argue they would be set aside, never mind successfully pursue any claims to obtain damages.

Could Gazprom rely on the Energy Charter Treaty?

The alternative for North Stream 2 would be to seek instead to bring a damages claim against the European Union via the Energy Charter Treaty (ECT).

The German Chancellery should not be greatly worried about any potential ECT claim by Gazprom either.

Already, North Stream 2 has brought an ECT claim against the European Union for daring to apply EU law to the pipeline.

That claim is risible and will be thrown out by the ECT tribunal. What North Stream 2 argues is that the EU had no right to extend EU energy liberalization law to all new pipelines.

The EU defined all new pipelines as those completed by May 23, 2019. At that date only 40% of the pipeline had been constructed, furthermore North Stream 2 did not even have all the route permits in place.

The Danish permit was not granted until October 2019 and even then work could not start in Danish waters until November 2019, five months after the 23 May cut-off date.

Russia’s wishful thinking

Two reasons stand out in this regard. First, the issue of what constitutes a cut-off date under EU regulations is a sovereign EU matter.

It may be customary in Russia to play with, or disregard entirely, rules and regulations. Not so in the EU, which operates under the rule of law.

And second, no responsible investor would make a final investment decision before all the route permits were in place. As a consequence, the capacity of North Stream 2 to successfully sustain an ECT damages claim against the European Union is extremely limited.

More Russian self-defeatism

It is also worth noting that Russia withdrew from the Energy Charter Treaty in 2009. In addition, it is in the process of making numerous complaints about the application of the ECT on its territory.

It can only use the ECT now because of artful tangential circumstances. North Stream 2, although it is 100% owned by Gazprom, is in law a Swiss company. Switzerland is a Contracting Party to the ECT. Currently, the ECT is undergoing a process of modernization heavily supported by the European Union.

One obvious way for the ECT to be modernized for the future would be to limit the capacity of state-owned and controlled companies of non-ECT states from obtaining benefit of the Treaty.

Long a dubious project

In addition, any claims on the part of Gazprom and/or the participating companies of being surprised by the turn of events ring hollow.

In this context, it is worth remembering that from its very launch in June 2015, North Stream 2 was very controversial.

Thus, Gazprom and its Western energy partners have long been on full notice regarding the controversial nature of the project. They knew by the summer of 2016 that the project was controversial, had been subject to legal challenge and was likely to be subject to further legal challenges.

How to structure the public debate

In such a context and under such circumstances, it is almost inconceivable that the Western energy companies would not have sought significant financial guarantees from Gazprom for their participation in the financing of the project.

In order to direct the public debate in Europe away from the way in which Gazprom lobbyists seek to direct it with their scare-mongering, the German Chancellery should seek public answers to the following questions from the Western energy company partners involved in the project:

1. Did you receive any form of guarantee of indemnification should the project have to be cancelled, including as a result of sanctions being imposed?

2. Were the fees you were paid for the financing above normal market rates, not least to reflect the political risk involved in the project?

3. Did you receive favorable business deals from Gazprom or other state-controlled or influenced companies at around the same time as the North Stream 2 financing, e.g., access to Russian oil and gas acreage — as a form of “pre-compensation”?

No self-protection, no dice

Should it turn out that Western energy companies did not obtain some form of indemnification or financial comfort from Gazprom to cover the risks of their participation in North Stream 2, it should not be for German — or EU — taxpayers to be asked to pay for their corporate incompetence.

In that case, it is surely the responsibility of the shareholders of those Western energy companies who should then demand the resignation of the executives who executed such a risky deal without proper legal protections.