By Serge Rousskikh – Jul 13, 2022
The West’s “shock and awe” sanctions campaign has done little to deter Russia’s military campaign in Ukraine and is now increasingly pitting members of the bloc against each other. The latest miscalculation in the seemingly ill-planned economic war with Moscow emerged last month when Canada impounded natural gas turbines vital to Germany’s energy consumption. With Canada and the Western Bloc forced to yield in the face of dire prospects for Germany, The Canada Files takes a look back at what transpired and what it means going forward.
• As preparation for the fall and winter heating season began, Russian state-owned energy giant Gazprom sent a turbine engine from its Nord Stream pipeline for routine service to the manufacturer Siemens Energy. The German engineering giant, in turn, sent the turbine engine to Montreal, where they were manufactured.
• When the time came to return the turbine to Siemens Energy, the service centre refused to release the equipment citing Ottawa’s sanctions against Gazprom, leveled on February 24 in response to Russia’s special military operation in Ukraine.
• With the Leningrad Oblast-based Portovaya natural gas terminal down one of eight gas compressors and several others in need of repair or service, Gazprom slashed natural gas deliveries to Germany via the pipeline from 167 million cubic meters to 100 million cubic meters, a reduction of approximately 40 percent.
The big picture:
• Germany is one of the European states most dependent on Russian gas, with imports from Eurasian giant accounting for over 60 percent of the total share as recently as 2020. The share of Russian gas fell to 35% since the start of the military campaign in Ukraine, according to Bloomberg,
• Amid the standoff, Berlin moved one step closer to gas rationing triggering the second level of its emergency gas plan, which sees far more stringent oversight of the industry from the federal authorities.
• Reports of dwindling gas reserves suggest that Germany may not only face energy shortages during the heating season but could see production slow in the near future.
While average German citizens face an uncertain and potentially frosty winter, officials from all sides pointed the finger at each other. German Chancellor Olaf Scholz suggested that politics may have played a role in the reduced flow via the Nord Stream pipeline. Scholz’s finance minister was far less diplomatic in his assessment.
“We must not fool ourselves: The cut in gas supplies is an economic attack on us by (Russian President Vladimir) Putin,” Federal Minister for Economic Affairs and Climate Action Robert Habeck said in a statement as quoted by Reuters.
Gazprom vigorously emphasized that the situation is beyond its control, with top officials taking aim at Canada for the predicament.
“Siemens, which is our partner whereas the Canadian factory is not, brought the engine to the factory and is unable to get it back,” Gazprom CEO Alexey Miller told attendees of the St. Petersburg International Economic Forum last month. “The only country that has imposed sanctions against Gazprom is Canada. Canada? We do not work in Canada. What does Canada have to do with it? Still, Canada has sanctioned Gazprom.”
Ottawa Yields Despite Tough Rhetoric
Despite tough talk, Canada, ultimately folded in a game of “pipeline poker,” as some observers coined the affair. On Saturday, Minister of Natural Resources Jonathan Wilkinson confirmed Ukrainian reports that Ottawa will return the turbine engines to Siemens and subsequently Gazprom.
“Canada will grant a time-limited and revocable permit for Siemens Canada to allow the return of repaired Nordstream 1 turbines to Germany,” Wilkinson said in a statement, underscoring that the decision was made following consultation with Germany, Ukraine and the European Commission and in support of “Europe’s ability to access reliable and affordable energy as they continue to transition away from Russian oil and gas.”
The decision was accompanied by more rhetoric, with Foreign Minister Melanie Joly issuing a statement vowing to cripple Russia’s oil, gas, chemical and manufacturing sectors. However, the posturing did little to appease several actors, including Kiev and the Ukrainian Canadian Congress (UCC), who accused the Canadian government of “bowing to Russian blackmail.”
The West Was Left With Few Options
As the impasse dragged on for a over a month and forecasts appeared bleaker by the day, there were ultimately few options left for the West, experts said.
“Either the collective West admits that Russian energy is presently a necessity and cannot be supplanted and deals with the consequences… or Germany has to call Canada – Scholz has to call [Prime Minister Justin] Trudeau – and Canada has to ease its sanctions regime,” Stanislav Mitrakhovich, an expert with National Energy Security Fund and the Financial University under the Government of the Russian Federation, said in an interview with The Canada Files.
Alexander Frolov, the Deputy Director General of the Institute of National Energy, on a Geoenergetica Info segment proposed that Germany and other European partners could have alternatively enticed Ukraine to redirect its gas pipeline system to the EU or even launch the Nord Stream II pipeline. However, the expert downplayed both scenarios as improbable given the political implications.
Mitrakhovich explained that the resolution, which came after a very vocal and public outcry by Habeck, required the collective will of the Western Bloc as no one wanted to bear sole responsibility for the decision.
“An agreement seemed to be out of reach without making the issue a collective Western problem… so that no individual officials, Canadian or otherwise, could be held responsible for making the decision,” the expert said.
The United States and the European Commission have backed Ottawa’s decision to return the turbine engines.
Furthermore, the Russian expert believes that the parties involved were caught off guard by Gazprom’s adherence to the maintenance schedule and the company making no effort to unilaterally alleviate the situation.
Conflict Not Over, Sanctions Regime May Need Adjustment
While the acute phase of the conflict is over, there may be sequels to this saga. The Nord Stream pipeline is out of service between July 11 and 21 for routine maintenance and it is unclear where the other damaged turbine engine will be repaired or whether the service schedule will be in any way altered as a result of the standoff.
Gazprom and Siemens Energy did not immediately respond to The Canada Files’ request for comment.
Mitrakhovich did not rule out the possibility of sanctions being tweaked with time, citing Washington’s previous rollbacks on sanctions against Russian fertilizer products.
Plenty of Risks Remain
Aside from the possibility of a repeat, all parties – Gazprom, Canada and Germany – face varying degrees of risk, experts The Canada Files spoke to said.
Mitrakhovich warned that Gazprom will have to slash revenue projections during a volatile period if it is not able to bring its product to market. The Russian energy giant recently opted out of dividend payout for 2021 to the tune of $23.37 billion (1.24 trillion rubles), which some analysists say suggests the company is preparing for a full European embargo on Russian energy products.
Meanwhile, Ottawa faces the risk of incurring reputational damages. The federal government is already facing accusations of folding to Russian demands, meanwhile, the episode could be a cautionary tale for entities conducting or considering conducting business in Canada.
However, it is Europe that stands to lose the most from an extended confrontation.
Not only is Berlin at risk of fielding insufficient energy stockpiles for the winter heating season, the country responsible for a third of European manufacturing could be forced to scale back production in short order, especially if rationing were to become a reality. Furthermore, natural gas deliveries to Germany are used to supply several EU nations, including Italy, Austria, Denmark and the Netherlands, and the current situation is already reportedly having an impact on gas depositories in those nations.
Serge, or by his full first name, Sergei, is an internationally-accredited journalist based in Toronto, Canada. A former mathematician, today he travels the world covering anything from politics to sports to pop culture and wherever they may intersect.