Morrison & Foerster LLP

The legal and political skirmishing continued on both sides of the Atlantic in recent weeks over Nord Stream 2, the nearly finished Russian natural gas pipeline that continues to serve as a flash point within Europe and between the Biden Administration and Congressional Republicans. On May 19, 2021, U.S. Secretary of State Antony Blinken announced that the Department of State (“State Department”) submitted a report to Congress as required by the Protecting Europe’s Energy Security Act (“PEESA”) identifying four vessels, five entities, and one individual involved in construction of the Nord Stream 2 pipeline, which would carry natural gas from Russia to Germany and bypass the existing pipeline through Ukraine. Pursuant to PEESA, the individual, entities, and vessels identified in the report are subject to menu-based economic sanctions. However, Secretary Blinken determined that it is in the national interest of the United States to waive the application of sanctions to the most significant entities and individuals named in the report, namely: Nord Stream 2 AG (the company overseeing the Nord Stream 2 project), its CEO Matthias Warnig, and Nord Stream 2 AG’s other corporate officers. This “national interest” determination drew immediate rebukes from Members of Congress on both sides of the aisle, prompted Senate Republicans to introduce a bill mandating Nord Stream 2 sanctions, and resulted in praise from Germany and criticism across Eastern Europe.

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) followed up the State report on May 21, 2021, by adding 16 Russia-related entities and vessels to its sanctions lists, pursuant to PEESA, along with a new general license and additional guidance. The OFAC action appears designed to continue Biden Administration pressure on the Russian actors involved in the Nord Stream 2 pipeline without targeting their German counterparts.

Key takeaways:

  • As a result of the State and OFAC actions, and the Congressional response, it remains clear that activity involving Nord Stream 2 continues to carry significant legal and reputational risk.
  • At first glance, the State decision appears to be an effort from the Biden Administration to repair relations with Germany, after a tense relationship during the Trump Administration. However, it may increase the pressure on Germany over the appropriateness of the pipeline and on whether to align with U.S. government positions on other transatlantic or global policy issues.
  • The Nord Stream 2 pipeline will remain a contentious issue in Europe primarily because of human rights concerns over continued Russian malign activity and because critics fear that Russia will be able to utilize the pipeline to increase EU dependency on Russian gas and, at the same time, weaken Ukraine by skirting the existing Russian pipeline through that country—thus rendering it even more vulnerable to Russian aggression.
  • More sanctions targeting Nord Stream 2 may be forthcoming. A group of 14 Senate Republicans have introduced a bill that if passed would expand the scope of entities subject to PEESA and require the Biden Administration to impose the waived sanctions, although it remains unclear whether Congressional Democrats will be willing to bring the bill to a vote or whether it can pass by the veto-proof majorities that may be necessary.
Background on Nord Stream 2 Sanctions

As detailed in previous client alerts, the Trump Administration initially issued guidance exempting Nord Stream 2 from sanctions authorized by the Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”). President Trump gradually increased his criticism of the pipeline over the last year of his Administration, however, including by signing PEESA into law as part of the National Defense Authorization Act for Fiscal Year 2020 (“NDAA”) on December 20, 2019. PEESA requires the Secretary of State to issue reports identifying (1) vessels that engaged in pipe‑laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline, the TurkStream pipeline, or any successor project; and (2) foreign persons determined to have knowingly (i) sold, leased, or provided those vessels for the construction of any such pipeline; or (ii) facilitated deceptive or structured transactions to provide those vessels for such a project. Identified individuals and entities are then subject to mandatory sanctions, unless waived.

Additionally, the Trump Administration announced in July 2020 that it was removing the previous exemption it had issued that spared the pipeline from CAATSA sanctions. As we discussed in a client alert following the announcement, the State Department deleted the portions of its public guidance in effect prior to July 15, 2020, that limited the focus of implementation of Section 232 of CAATSA to Russian energy export pipeline projects for which a contract was signed on or after August 2, 2017 (the date CAATSA took effect). As a result, the Nord Stream 2 pipeline was then subject to sanctions under both PEESA and CAATSA.

In October 2020, the Trump Administration again broadened the scope of sanctions applicable to the Nord Stream 2 project by publishing guidance expanding the existing sanctions imposed by PEESA. As we covered in a previous client alert, the new guidance indicated that sanctions would apply to companies providing services, facilities, or funding for “upgrades or installation of equipment” for vessels working on the projects. Previously, the focus of sanctions had been on the vessels themselves and individuals selling or leasing them to the projects. 

On January 19, 2021, the last day of the Trump Administration, State and Treasury sanctioned a Russian entity and vessel for work on Nord Stream 2. Thus, while President Trump criticized the Nord Stream 2 project for much of the final year of the Administration, his rhetoric was not followed with actual sanctions until his final day in office, likely because of the expected fierce backlash from Germany, a dilemma that the Biden Administration is now grappling with.

The State Department’s May 19 Report and OFAC’s May 21 Follow-on Guidance

Against this backdrop, the May 19 State announcement undercuts years of efforts by Congress to halt the pipeline’s construction. Specifically, Secretary Blinken opted to waive sanctions against the Russian-owned company behind the pipeline, Nord Stream 2 AG; its German CEO, Matthias Warnig; and other corporate officers because sanctions “would negatively impact U.S. relations with Germany, the EU and other European allies and partners.” The State Department said “close cooperation” with European partners, especially Germany, is critical for the success of U.S. efforts to tackle a host of pressing international challenges: the COVID-19 pandemic, global economic recovery, and climate change.

During a press statement announcing the waivers, Secretary Blinken also indicated that OFAC would be issuing guidance to allow for the “continuation of various transactions and activities involving the Marine Rescue Service that are unrelated to Nord Stream 2 construction — including on a range of search and rescue, environmental, and other missions.” Following this statement, on May 21, 2021, OFAC sanctioned the Federal State Budgetary Institution Marine Rescue Service (“MRS”) for its work on Nord Stream 2 but also issued a General License (“GL”) authorizing transactions and activities otherwise prohibited by PEESA that involve MRS or any entity that MRS owns a 50 percent or greater interest in, so long as the activities in question do not relate to the construction of the Nord Stream 2 project, the TurkStream project, or their successor projects. OFAC also issued two accompanying FAQs providing detail on, and context for, the new GL.

The German and European Perspectives

In Germany, the sanctions waiver is seen as a confirmation that the Biden Administration wants to strengthen transatlantic cooperation following tough times under the Trump Administration. For the pipeline itself, the waiver offers significant relief, at least for the period of the current waiver. However, taking the threat of additional U.S. sanctions aside, the Nord Stream 2 project remains a controversial issue in Germany and broader Europe. Ukraine reacted strongly, of course. President Zelensky stressed that the completion of the pipeline would be a victory for Russia, and the Ukrainian parliament issued a resolutions calling on U.S. lawmakers to override the sanctions waiver. In addition, the Polish government also issued an immediate statement that re-emphasized its position that the project is a threat to energy security. The European divide over the project thus remains.

The pipeline does not enjoy unanimous support even within Germany. The current Federal Government in Germany formed by the coalition of the Christian Democrats (“CDU”) and the Social Democrats (“SPD”) has defended the project over the past months and years despite concerns regarding Russian malign activity, particularly the Alexei Navalny poisoning and imprisonment. In view of the upcoming Federal elections in September 2021, the German government position cannot be taken for granted. In particular, the Green Party, with strong results in recent polls, raises climate protection concerns and maintains that the project should be stopped. The Free Democrats (“FDP”) also seek suspension of the construction in view of ongoing human rights violations and the unresolved Crimea conflict.

In any event, the Biden Administration’s sanctions waiver certainly comes with a set of expectations. It may put pressure on Germany to confirm its willingness to improve transatlantic relationships, for example, when it comes to financial contributions to NATO or its approach toward China.

Congress Responds

As noted above, the response to the Biden Administration’s move to waive sanctions on key Nord Stream 2 players has been met with resistance in Congress. The President’s Republican critics have accused the Biden Administration of handing Russian President Vladimir Putin a major win and even Democratic party leaders have spoken out against the decision.

Meanwhile, the Kremlin itself called the news a “positive signal.” However, if Senate Republicans have their way, the Biden Administration’s waiver will soon be superseded by legislation that requires the President to impose the sanctions that were waived. A new bill, titled the Protecting Our Well-being by Expanding Russian Sanctions (“POWERS”) Act, was introduced by a group of 14 Republican Senators the same day that the Biden Administration announced the waiver. The POWERS Act also would expand U.S. sanctions to subcontractors of any entity working on the Nord Stream 2 pipeline. It remains unclear whether Democratic leaders in the House and Senate will bring the POWERS bill to the floor and, if they do, whether the bill can pass by a veto-proof majority.

As Congress proceeds with its deliberations on a range of bills addressing other key national security concerns, including an omnibus bill intended to address the geopolitical and economic challenges posed by China’s rise, MoFo’s National Security team will continue to monitor the developing status of U.S. sanctions, including those targeting Nord Stream 2.

Raymond Rif, a Legislative and Policy Specialist in the Morrison & Foerster LLP National Security practice, contributed to this alert. 

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