Nord Stream 2 is an offshore gas pipeline that runs from Russia under the Baltic Sea to Germany. Completed this month, it has the potential to transform how Europe’s strongest economy obtains its energy.
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From Germany’s perspective, the pipeline will allow energy to reach the country more easily – an imperative following Chancellor Angela Merkel’s decision to decommission nuclear power plants after the 2011 Fukushima disaster. For Russia, it’s an excellent opportunity to not only profit from its enormous gas reserves, but to also further European dependence on its natural resources for political purposes.
The United States would rather Germany didn’t engage in such a direct partnership with Russia, an historic adversary whose influence in Europe the United States seeks to dilute. Other European countries such as Poland and Ukraine have voiced objections. European Parliament, which voted to stop the pipeline following the arrest of Russian democracy activist Alexei Navalny, shares U.S. concerns.
The political fallout has been described as “the biggest diplomatic crisis in transatlantic relations since the Iraq War,” but in terms of geopolitical wrangling, it’s relatively standard fare. Yet, it is Nord Stream 2’s sanctions dimension that fascinates, as it illustrates how hard it can be for compliance to respond to evolving sanctions risks.
Sanctions as a weapon
Nord Stream 2 began construction in 2018. The following year, the U.S. ambassador to Germany wrote to the firms involved threatening sanctions unless they ceased work on the project. This was followed up by a letter from U.S. Sens. Ted Cruz (R-Texas) and Ron Johnson (R-Wis.) to the CEO of Allseas, the firm involved in laying Nord Stream 2, warning of possible sanctions. Allseas quickly pulled out of the pipeline’s construction.
Recently, U.S. Senate Republicans have vowed to block President Joe Biden’s appointees to the Treasury Department should sanctions not be imposed on the firm managing the pipeline. Though Nord Stream 2 moves forward, uncertainty, dispute, stubbornness, and subterfuge continue to cloud the project.
The key question is how businesses and their compliance officers operate legally within such a complex web. This is the crux of not just Nord Stream 2 but all current sanctions regimes: How, when the ground shifts so suddenly, can businesses ensure they are on the right side of the law? And how do they position themselves so the business doesn’t miss out when those threatened sanctions don’t end up being imposed?
Sanctions risks: Trends and training
Fundamental to protecting the business from sanctions risk are a few simple but important steps.
Undertaking a standalone sanctions risk assessment is invaluable. A robust sanctions program will also furnish a firm with a good understanding of changing sanctions lists, as well as which countries represent a higher risk. Combined, these will stand firms in good stead and should provide a solid foundation on which to make decisions, as well as offering some confidence and reassurance.
And yet, there remains a structural problem. Sanctions are a powerful political tool and, when applied well to malevolent state actors, can produce very effective results. But when they are used to threaten companies conducting perfectly legitimate business, they are a not only a hindrance but an active risk. In that regard, Sen. Cruz’s intervention undermined sanctions as a diplomatic weapon, blunting their impact by wielding them as a means of scaring a business.
Sanctions are inherently political, in that they aim to bring about a desired change in behavior without resorting to force. Overreliance on them, however, usually only serves to punish firms.
In July, the United States announced it had struck a deal with Germany that would prevent Russia from using Nord Stream 2 as leverage for political purposes over Europe. This may have calmed the waters for now. But the vacillation and threats of the last two years will live longer in the memory. For compliance, the saga has exposed just how tricky navigating an evolving sanctions landscape can be.
Nord Stream 2 won’t affect every business, but almost every business has or will face situations similar in nature or impact. The solution is to stay abreast of developments and prepare contingency plans for potential sudden changes. Training, too, is vital—those unaware of best practices or trends are at a grave disadvantage.
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