HOMANS: Nord Stream II sanctions is a question of Ukraine's freedom

HOMANS: Nord Stream II sanctions is a question of Ukraine's freedom
The White House has said it won't sanction the key Russian company that is building the controversial Nord Stream II gas pipeline that runs directly from Russia's Yamal gas fields directly to Germany, as repairing its relations with German are more important than punishing Russia.
By Robert Homans in Washington DC May 20, 2021


Over the last few weeks Ukraine has, once again, whether it likes it or not, inserted itself into the American conversation, both as the object of a Russian military build-up along Ukraine’s eastern border as well as in occupied Crimea, and because of the recent FBI raid on Rudy Giuliani’s New York City apartment resulting from a warrant from a federal judge, obtained in connection Giuliani’s possible violation of the Foreign Agents Registration Act (FARA). On May 18 came the decision by the Biden Administration to drop sanctions against the company overseeing constructing the Nord Stream II gas pipeline that will, if completed, allow Gazprom to bypass Ukraine’s pipeline network. Gazprom currently pays Ukraine $2bn in annual transit fees.  

The United States now faces the decision of whether and how to come to the aid of two democratic countries, Taiwan and Ukraine, both of which are objects of serious threats by powerful neighbours, the People’s Republic of China and the Russian Federation respectively.

Both China and Russia believe Taiwan and Ukraine aren’t actual countries and instead they should rightly be a province of China, in the case of Taiwan, and a region of Russia, in the case of Ukraine. The question of coming to the aid of these two democracies is one of the most profound decisions the United States has faced since the end of World War II. It ranks alongside the decision made by President Truman in 1950 to send a carrier battle group through the Taiwan Straits to discourage Mao Zedong from invading the island of Taiwan, alongside intervening in the Korean War, President Kennedy’s decision in 1962 to quarantine Cuba in response to the Soviet Union’s installation of ballistic missiles there, and President Nixon’s decision to supply emergency military aid to Israel during the 1973 Yom Kippur War.  In each case, actions by the United States could have precipitated a wider war.

The United States is making this decision at a time of substantial divisiveness in our society, where foreign policy may not be the primary focus of most Americans. With respect to Ukraine, it is worth looking back at the roles the United States has played in Ukraine since the country’s independence in 1991.  

There can be no question that Ukrainians want to live in a free country, with free enterprise and the Rule of Law, something that Ukrainians have fought for mostly on their own, independent of the United States. Many Ukrainian reformers have put aside promising careers to help the country build democratic institutions; some have died.

However, for much of its existence as a democratic country, the focus of US policy towards Ukraine was not supporting its transformation from a Soviet Republic to a democratic nation by assisting Ukraine in promoting civil society, economic development and the Rule of Law. Instead, the primary focus of US policy was on what to do about Ukraine’s stockpile of nuclear weapons and alleged arms sales to enemies of the United States in violation of UN sanctions. The direct engagement of the United States in combating corruption in Ukraine only dates to 2014, the end of the Revolution of Dignity, when the US began actively supporting the establishment of anti-corruption institutions, including the Anti-Corruption Court, the National Anti-Corruption Bureau of Ukraine (NABU) and the reform of others, including the Office of the General Prosecutor.

When Ukraine became independent, it immediately became the world’s third-largest nuclear power. In 1994, Ukraine, the United Kingdom, the United States and the Russian Federation signed the Budapest Memorandum, where Ukraine agreed to give up its nuclear weapons in return for assurances, but no guarantees, of Ukraine’s territorial integrity from the other three signatories. During this period, there were bi-lateral interventions by the US based on a treaty signed in 1992, covering civil society, economic development and democracy and governance.  Regardless, the primary focus remained on nuclear weapons.

In 2002 there was concern on whether Ukraine had sold Iraq the Russian S-300 anti-aircraft system when US and British aircraft were patrolling the no-fly zone over Northern Iraq. An article by Jeffrey Donovan in “Radio Free Europe – Radio Liberty” (RFE/RL) stated that Scott Ritter, a UN weapons inspector working in Iraq, believes “[Ritter] and his fellow inspectors found ample evidence during the 1990s that Russia, Ukraine and Belarus violated UN sanctions by selling a wide range of conventional arms, such as the S-300 system, to Iraq.”

There is also the question of who benefited from the proceeds of the arms sales. The RFE/RL article states that there are audiotapes of conversations taken from the office of former Ukrainian President Kuchma alleging that the selling price for the S-300 system was $100mn.

It wasn’t until after the Revolution of Dignity, in 2013 and 2014, that the building of democratic institutions in Ukraine and addressing corruption became a primary focus of US policy. Between 2000 and 2014, several events took place that influenced the shift in US policy from nuclear weapons to supporting democratic institutions in Ukraine, including:

·        On December 15, 2000, the “Ukraine Without Kuchma” protests began in Kyiv. Prompted by the murder of investigative journalist and founder of Ukrainska Pravda Heorhiy Gongadze the previous September, Ukraine Without Kuchma was the first mass demonstration since independence. Based on a tape recording released by Alexander Moroz, the leader of the Socialist Party, that President Leonid Kuchma may have ordered Gongadze’s murder; the objective of the demonstrators was the removal of the President of Ukraine. The revelations contained in the tapes came to be known as “Kuchmagate.” On December 15, tents went up on Independence Square. Four days later, marches began toward government buildings.

·        In 2002, the revelation of Ukraine’s sale of the S-300 anti-aircraft missile system to Saddam Hussein’s Iraq.

·        Substantial gains by the political opposition to President Kuchma in the 2002 Parliamentary Elections.

·        In 2004, the prospect of the election of a pro-Russian Presidential candidate, Victor Yanukovych.

·        In November 2004, Yanukovych won the Presidential election due to massive election fraud, resulting in the Orange Revolution.

·        Victor Yanukovych became prime minister in 2006, mainly due to inducing several Members of Parliament to switch parties, in violation of Parliamentary Rules.

·        The election of Yanukovych as President of Ukraine in 2010 and the subsequent creation of a system that one long-time resident of Kyiv described as “beyond corruption.”

·        The prosecution of Yulia Tymoshenko in 2011, and her imprisonment, became a barrier to signing an association and free trade agreement with the EU.

Despite the shift in the US’ interests toward more involvement in reforms during this period, at the same time Ukrainians were taking their own actions. Ukraine Without Kuchma was a movement instigated and sustained by Ukrainians, as was the Orange Revolution in 2004 and Euromaidan in 2013 and 2014.  None of the ex-pats with whom I spoke, who were in Kyiv at the beginning of the Orange Revolution, expected Ukrainians to have the courage to go out into the streets to contest Yanukovych’s “victory.” Euromaidan was instigated and sustained by Ukrainians, with no Western involvement.

Starting in 1992, the US initiated several technical assistance projects in Ukraine, focused on judicial and legal reform, democracy and governance, and economic development. The US also helped to establish several civil society organisations focused on reforms.  However, many more civil society organisations were started by Ukrainians themselves.

The value of US assistance to Ukraine hasn’t been the technical assistance projects themselves. The value of these projects resulted from Ukrainians working on those projects and civil society organisations, many of who played critical roles in Ukraine Without Kuchma, the Orange Revolution and Euromaidan. Today, they continue to play significant roles in Parliament, government ministries, private enterprise, law, accounting and academic institutions. In 2012, Russia ordered the termination of most Western-sponsored technical assistance projects and non-governmental organisations. The likely reason: the success of similar interventions in Ukraine, mainly by the practical training these interventions gave to reform-minded Ukrainians.

Since 2000 the trajectory of reforms in Ukraine has primarily been upward, but with significant dips. Often, Western governments are frustrated by the lack of progress and the dismissals of reformers. At other times, scandals such as the prosecution of Paul Manafort and the activities of Rudy Giuliani have taken attention away from the significant progress Ukrainians have made. American professional service firms have often abetted and profited from Ukraine’s corruption. Examples include the “Big Four” accounting firms wanting to be retained by oligarchs and corrupt officials to help launder companies they acquired through illegal corporate raids, or law firms paid millions of dollars to legitimise the prosecution and imprisonment of opposing politicians.

Ukrainians have consistently proved that they want to live in a democratic country under the rule of law. Recently, Ukraine Catholic University in Lviv hosted a virtual event, primarily to present the activities of some of its alumni. You can watch the event here.  Does anyone think that the individuals included in this event will ever willingly live in a country controlled by Russia? What will the West do to ensure that Ukraine stays truly free from Russia?


Nord Stream II  

It is difficult to understand the decision taken yesterday by the Biden Administration, to lift sanctions on the company responsible for building Nord Stream II, along with the CEO, given its professed support for Ukraine. The US Congress voted to impose the sanctions, but the Biden Administration didn’t ask for Congressional approval to remove them.  Today, Senate Robert Menendez (D-NJ), Chairman of the Senate Foreign Relations Committee, made a strong statement against the decision of the Biden Administration. The Biden Administration made the decision four months before Angela Merkel leaves office.  She supports the completion of Nord Stream.  However, the German Green Party, which may become part of a new ruling coalition taking power after the election, is opposed to Nord Stream II.

Today, I read a very informative article emailed to me by a well-placed German friend, covering many of the issues connected with Nord Stream II. The article is entitled “The Nord Stream II Gas Pipeline and Germany’s Relationship with Russia.” I cannot open the URL without paying. Anyone who wants to read the entire article can contact me by email, and I’ll send it to you. Nord Stream II is a more complicated matter than I had realised.

In the last paragraph of the article, the author concluded that a deal to initiate the operation of the pipeline is unlikely, on terms satisfactory to everyone. The author states: “In any deal, Germany would have to be willing to use Nord Stream II as a point of leverage against Moscow, moving away from Ostpolitik and towards the more confrontational approach advocated in Central Europe and Washington. It has thus far been unwilling to do so, and (Germany) will probably not take a different position with the project verging on completion (barring a change in government).”

The article makes some important points, and I'll add a few of my own.

  • Gazprom has agreed to keep shipping gas via Ukraine up to the end of 2024. No one, including me, believes that Gazprom would live up to this deal unless there are hard arrangements in place that would force Gazprom to live up to the agreement, such as automatic shut-offs of Nord Stream II (assuming completion) if Gazprom breaks the deal. The article describes various arrangements that are under discussion.
  • Gazprom's commitment to ship gas via Ukraine could be extended as part of a deal to bring Nord Stream II into service.
  • If completed, the pipeline must be certified. One company from Norway that does certifications has pulled out of the consortium under threat of US sanctions.
  • Gazprom has agreed to abide by EU rules relating to unbundling and common carrier requirements. The article describes ways that Gazprom can get around the rules. The EU and Germany need to shut off these potential loopholes.
  • As described in the article, there are all sorts of political cross-currents in Europe, between Germany and the EU, and within Germany. If the Greens make it into the German government, they're opposed to Nord Stream II. It is doubtful that Nordstream II will begin transporting gas before the German elections.

Here are four of my own points:

  • In the medium to long term, with or without the pipeline, Ukraine needs to move away from reliance on transit fees, such as reducing the percentage of the "grey economy," "de-oligarchisation," etc. Solving either would make up for the loss of gas transit revenues many times over.
  • Even if Nord Stream II is brought into service, Germany's long-term objective is a carbon-free economy. Germany sees gas as an intermediate step toward a carbonless future. Ukraine must plan on the likelihood of losing gas transit revenues, regardless of what happens with Nord Stream II.
  • Ukraine has by far the most extensive gas storage facilities in Europe. European energy companies are already using these facilities, and they will continue to do so.
  • In the short term, Ukraine likely sees the pipeline network as a form of insurance against a Russian attack.

One of the leading Washington lobbyists on behalf of Nord Stream II is Richard Burt, who now works for McLarty Associates. Burt is a former Ambassador to the former West Germany, and he has had all sorts of Russian connections, including a board seat at Alfa Bank. A couple of years ago, I had a drink with a guy who worked for Burt. He brought up the subject of Ukraine's reliance on gas transit fees, serving as a kind of crutch for Ukraine.  I had to agree that he had a legitimate point throwing away the crutch is up to Ukraine.

For the US, the immediate issue is whether Congress will allow the Biden Administration to go around the sanctions that Congress imposed. Ukraine must start planning for a future without transit fees. At the same time, Ukraine must try to obtain guarantees from the EU and the US to ensure that Gazprom lives up to its commitment to pay transit fees at least until the end of 2024 and, hopefully, beyond that date.

We all remember the Budapest Memorandum.

Robert Homans is an International Financial Sector Consultant based in Washington DC and tweets at @rhomansjr