Published: 05 January 2021 Authors: Rohan Sinha and Stefan Talmon
Nord Stream 2 is a 1,230 kilometre underwater natural gas pipeline project through the Baltic Sea. The pipeline passes through the territorial sea and/or Exclusive Economic Zone of Russia, Finland, Sweden, Denmark, and Germany. The construction of the pipeline began in 2018 and by the end of 2019 the project was almost compete, having received all necessary construction permits from the coastal States. Upon completion, Nord Stream 2 will deliver natural gas from Russia to Germany, adding to the supply provided by the existing Nord Stream pipeline which runs largely parallel to it. The total export capacity of Nord Stream 2 is projected to be 55 billion cubic meters of gas per year, which is the same capacity as the already operational Nord Stream pipeline.
The planning, construction, and operation of the pipeline has been managed by the Swiss-registered project company Nord Stream 2 AG, whose sole shareholder is the Russian public joint stock company Gazprom – the world’s largest gas producer. The majority of shares in Gazprom are held by the Russian Government and companies controlled by the Russian Government. Nord Stream 2 AG signed financing agreements for the project with five major European energy companies (French ENGIE, German Uniper and Wintershall, Anglo-Dutch Shell and Austrian OMV) which provide financing for 50 per cent of the project’s total cost. The Nord Stream 2 project is to meet the increasing demand for natural gas in the European Union, which is caused by a decline in domestic gas production. The import of natural gas from Russia is said to improve security of supply, support climate goals, and strengthen the European energy market.
The Nord Stream 2 pipeline project has met with strong opposition from the United States. The U.S. Government believes that Nord Stream 2 will undermine Europe’s overall energy security and stability and increase Ukraine’s vulnerability to Russian aggression. In addition, the United States is concerned that the pipeline could open ways for Russia to install undersea surveillance equipment in the Baltic Sea. In a fact sheet of the U.S. State Department’s Bureau of Energy Resources, U.S. opposition to Nord Stream 2 is set out as follows:
“Nord Stream 2 is a tool Russia is using to support its continued aggression against Ukraine. Russia seeks to prevent it from integrating more closely with Europe and the United States. Nord Stream 2 would enable Russia to bypass Ukraine for gas transit to Europe, which would deprive Ukraine of substantial transit revenues and increase its vulnerability to Russian aggression. Nord Stream 2 would also help maintain Europe’s significant reliance on imports of Russian natural gas, which creates economic and political vulnerabilities for our European partners and allies. For these reasons, the United States Government and a plurality of European countries oppose Nord Stream 2.
The United States Government strongly supports diversification of energy supplies because options help diminish the role of geopolitics in energy markets, reduce consumer prices, and enhance a country’s energy security. For instance, it has been estimated that the availability of U.S. LNG saved European consumers $8 billion by enabling them to negotiate lower prices with existing suppliers. […]
The United States’ intention is to stop construction of Nord Stream 2.”
Opposition to Nord Stream 2 was also expressed at the highest level of the U.S. Government. Addressing the 73rd session of the UN General Assembly on 25 September 2018, U.S. President Donald Trump stated:
“In America, we believe strongly in energy security for ourselves and for our allies. […] Reliance on a single foreign supplier can leave a nation vulnerable to extortion and intimidation. […] Germany will become totally dependent on Russian energy if it does not immediately change its course.”
For several years, the United States has been threatening companies involved in the construction of Nord Stream 2 with sanctions in order to prevent the completion of the project. On 2 August 2017, President Trump signed into law the Countering America’s Adversaries through Sanctions Act (CAATSA). The Act codified, inter alia, existing sanctions regimes relating to the Russian annexation of the Ukrainian Crimea peninsula, strengthened these, and identified several new targets for sanctions. CAATSA states that it is the policy of the United States, inter alia, “to help Ukraine and United States allies and partners in Europe reduce their dependence on Russian energy resources, especially natural gas, which the Government of the Russian Federation uses as a weapon to coerce, intimidate, and influence other countries” and “to continue to oppose the Nord Stream 2 pipeline given its detrimental impacts on the European Union’s energy security, gas market development in Central and Eastern Europe, and energy reforms in Ukraine”. Notably, the U.S. policy is also to “prioritize the export of United States energy resources in order to create American jobs, help United States allies and partners, and strengthen United States foreign policy.”
Companies involved in the construction of the Nord Stream 2 pipeline are targeted by section 232 of CAATSA. This provision authorises sanctions against individuals and entities that invest or engage in trade valued at U.S.$1 million, or cumulatively at U.S.$5 million over 12 months, which diminishes Russia’s ability to construct energy export pipelines. However, section 232 leaves the imposition of sanctions at the discretion of the U.S. President. By December 2019, the provision had not yet been applied to Nord Stream 2, one reason being that in October 2017 the Trump Administration had limited the application of section 232 to contracts made on or after 2 August 2017, the date of CAATSA’s enactment. The five European energy companies had signed the financing agreements for the Nord Stream 2 pipeline with Gazprom in April 2017.
On 20 December 2019, further legislative authority for sanctions against companies involved in the construction of the Nord Stream 2 pipeline was created with the enactment of the Protecting Europe’s Energy Security Act of 2019 (PEESA). PEESA requires the imposition of sanctions on foreign persons whom the President determines to have sold, leased, or provided subsea pipe-laying vessels for the construction of Nord Stream 2.
The German Federal Government has rejected U.S. sanctions against Nord Stream 2. For example, on 15 June 2017, Federal Foreign Minister Sigmar Gabriel together with the Austrian Federal Chancellor, Christian Kern, issued a statement in response to the passing of the CAATSA Bill in the U.S. Senate which read:
“Since 2014, Europe and the United States have taken closely coordinated action, as partners, in response to the illegal annexation of Crimea and to Russian actions in eastern Ukraine. That was the correct and necessary reaction to behaviour on behalf of Russia that not only jeopardises peace and security in Europe, but also, for the first time since the end of the Cold War, was a flagrant infringement of our principles of inviolable national borders in Europe.
It is in the common interest of the EU and the US to take resolute and unified action with a view to resolving the conflict in Ukraine.
We cannot, however, accept the threat of illegal extraterritorial sanctions being imposed on European companies that are participating in efforts to expand Europe’s energy supply network!
The draft bill of the US is surprisingly candid about what is actually at stake, namely selling American liquefied natural gas and ending the supply of Russian natural gas to the European market. The bill aims to protect US jobs in the natural gas and petroleum industries.
Political sanctions should not in any way be tied to economic interests. Threatening to impose penalties on companies in Germany, Austria and other European countries with regard to their business in the United States if they participate in, or fund, natural gas projects involving Russia, such as Nord Stream 2, impacts European-American relations in a new and very negative way. This is about the competitiveness of our energy-intensive industries, and about thousands of jobs. We therefore strongly support the efforts of the US Department of State to amend this draft bill.
Europe’s energy supply network is Europe’s affair, not that of the United States of America!
We decide who supplies us with energy, and how they do it, and we do so based on transparency and on free market principles.
It would not only be highly regrettable, but would also diminish the effectiveness of our stance on the conflict in Ukraine, if we were to no longer take joint action, and if completely separate interests were to prevail, such as the US’s economic pursuits in the field of gas exports. Foreign policy interests must in no way be linked to economic interests! There is still enough time, and opportunity, to prevent this!”
The next day, the cabinet spokesperson told reporters that Chancellor Angela Merkel shared the concerns expressed in the joint statement. He continued:
“It is, putting it mildly, a peculiar move by the U.S. Senate. It is strange that when it comes to sanctioning Russian behaviour – for example in connection with the U.S. elections – the European economy should also be a target of American sanctions. That must not be. We reject sanctions with extraterritorial effect; that is, with effect in third States, as a matter of principle.”
In response to the question of whether the CAATSA Bill was contrary to international law, the spokesperson for the Federal Foreign Ministry stated:
“The extraterritorial application of American laws means that the Americans claim that third parties – in this case, German, Austrian or other European companies – can be subjected to American sanctions if they behave in a manner that, from the American point of view, is worthy of sanctions. It is not the first time that the Americans are doing this. I do not mean to say that this is a common thread running through United States sanctions legislation, but at least in the past generations it has happened quite frequently. […]
[…] if this law enters into force as it has been passed by the Senate, and if the U.S President uses the authorization that this law provides, namely, to impose sanctions also on German and European companies which are involved in any way in the construction, financing or operation of pipeline systems within the European Union, then we consider this to be contrary to international law, indeed.”
During the regular government press conference on 26 July 2017, the spokesperson for the Federal Foreign Ministry was asked about the limits of the extraterritorial effects of sanctions. In reply, he stated:
“I believe that the Americans, perhaps with some sense of mission, have been passing laws since the 18th century which do not really care about what other States think about these laws interfering in their affairs. The natural gas pipeline business of the mid-1980s is just one example of many. The handling of the compensation of forced labourers is another example, as is the current attempt […] by descendants of the Hereros and Namas from Namibia – formerly German West Africa – to claim compensation in American courts for wrongs that may have been committed. These are all issues for which, according to the German understanding of public international law, there is no adequate link to the United States which would give the courts and the government of the United States the right to sit in judgment or to pass laws on these issues.
In our view, the Americans do not have the right to sit in judgment over European companies […] and to dictate to these companies how they should conduct their contractual or other business with third parties – in this case perhaps with Russian energy companies.”
This view was echoed by the spokesperson for the Federal Ministry for Economic Affairs and Energy, who stated, “we reject such extraterritorial sanctions, as a matter of principle, because they are contrary to international law”. Five days later, Federal Minister for Economic Affairs and Energy, Brigitte Zypries, herself commented on the impending enactment of CAATSA as follows:
“We consider [the planned sanctions against German and European companies] to be contrary to international law, plain and simple. The Americans cannot fine German companies for doing business in another country.”
When asked to explain what the Minister meant when she referred to the sanctions being “contrary to international law”, the spokesperson for the Federal Ministry for Economic Affairs and Energy replied:
“We are concerned with so-called extraterritorial sanctions or sanctions affecting third parties. The Minister was referring to the effect on third parties; that actions of German or European companies that maintain contacts with Russia or do business there have negative consequences in the United States. We reject this effect of sanctions on third parties, which is also referred to as extraterritorial sanctions, and regard it as contrary to international law.”
On 2 August 2017, a spokesperson for the Economic Affairs Ministry provided some more detail on the German position on CAATSA:
“The law concerning the sanctions on Russia provides for so-called extraterritorial sanctions. Extraterritorial sanctions attach effects to the actions of foreign nationals/companies carried out outside U.S. territory which have no link to U.S. jurisdiction (so-called ‘secondary sanctions’). Such extraterritorial sanctions may also affect energy companies in Germany and Europe. In our opinion, extraterritorial sanctions are contrary to international law. We therefore reject them. The law gives the U.S. president certain discretion. The law also provides that prior to the imposition of sanctions the allies of the United States, in particular the EU, shall be consulted. We are ready to engage in dialogue at any time. It is a good sign that [U.S.] Secretary of State Tillerson has announced that he will speak with the European partners. If the United States actually imposes extraterritorial sanctions, it will be up to the European Union to consider what appropriate responses to take. We are constantly exchanging views with the EU Commission. The extent to which German companies will be affected will depend on the specific measures the United States is taking. We cannot predict that.”
On 10 January 2018, Federal Foreign Minister Gabriel, referring to U.S. sanctions against the Nord Stream 2 project, rejected any interference in the European gas market, saying:
“It is up to European firms to decide on who to buy gas from, taking into account security of supplies and market conditions. We oppose the attempts of political influence on the adoption of such solutions”.
“Legal certainty for the German economy cannot depend on it submitting to American competitive conditions. We must not submit to American rules.”
During the regular government press conference on 29 June 2018, the spokesperson for the Federal Ministry for Economic Affairs and Energy reiterated the German position on U.S. extraterritorial sanctions. German rejection of U.S. sanctions against Nord Stream 2 was independent of who held the post of Federal Foreign Minister. On 28 August 2019, the new Federal Foreign Minister, Heiko Maas, said in a speech:
“In relations with Russia […] extraterritorial U.S. sanctions are also threatening trade with the EU. It is simply unacceptable that the US is trying to influence European energy policy through the use of sanctions. Germany and Europe need low energy prices in order to remain internationally competitive. If the U.S. wants to sell more liquefied natural gas in Europe, that would be a welcome contribution to our energy supply and would make our supply more diverse. But purchasing decisions must be based on price and not forced by the use of sanctions. And that is why we are not taking part in a discussion on blocking Nord Stream 2.”
Notwithstanding the German Government’s position, the U.S. ambassador to Berlin, Richard Grenell, constantly lobbied against the construction of the Nord Stream 2 pipeline. In an opinion piece for a German newspaper, he wrote, “Companies involved in Nord Stream projects run the risk of being sanctioned.” He also wrote letters to individual German companies involved in the pipeline project, warning them that they would be exposed to sanctions. In response to a parliamentary question regarding such letters, the Minister of State at the Federal Foreign Office, Niels Annen, stated on 23 January 2019:
“In the view of the Federal Government, it is not unusual for ambassadors accredited in Germany to promote the position of their home country, whether orally or in writing. However, the Federal Government firmly rejects the threat of sanctions against companies and individuals because of their participation in an infrastructure project which is being carried out in accordance with the existing legal framework and, in the view of the Federal Government, strengthens Europe’s security of natural gas supply.”
In December 2019, when the National Defense Authorization Act (NDAA) for Fiscal Year 2020, which included the PEESA, was going through the U.S. legislative process, the German Government reiterated its rejection of extraterritorial sanctions. On 11 December 2019, a spokesperson for the Federal Ministry of Economic Affairs and Energy stated that, as a matter of principle, Germany rejected extraterritorial sanctions. The next day, after the U.S. House of Representatives had passed the NDAA, Federal Foreign Minister Heiko Maas stated:
“European energy policy is decided in Europe, not the United States. We are opposed, as a matter of principle, to foreign interference and to extraterritorial sanctions”
Responding to a parliamentary question, Chancellor Angela Merkel said on 18 December 2019:
“We are opposed to extraterritorial sanctions, and not just since yesterday’s decision [of the U.S. Congress to impose sanctions], but also with regard to Iran, where we face the same problem. I see no alternative to conducting talks – though very firm talks – and to say that we do not approve of the practice of extraterritorial sanctions. Now we will see how things go with Nord Stream 2.”
On 20 December 2019, U.S. President Donald Trump signed the NDAA into law. On the same day, the deputy spokesperson for the Federal Government stated with regard to the mandatory imposition of sanctions in section 7503 in the PEESA:
“The Federal Government is opposed to extraterritorial sanctions. We do not approve of this practice. We especially reject extraterritorial sanctions that affect German and European companies.”
On 21 December 2019, Switzerland-based Allseas, which operated the ships laying sections of the Nord Stream 2 pipeline, said in a brief statement that “in anticipation of the enactment of the National Defense Authorization Act (NDAA), Allseas has suspended its Nord Stream 2 pipelay activities.” On the same day, the Federal Government also issued a statement, saying:
“The German Government has regretfully taken note that, with today’s signing by U.S. President Donald Trump, the sanctions introduced by the U.S. Congress against Nordstream 2 and Turkstream enter into force.
The German Government rejects such extraterritorial sanctions which target German and European companies and represent an interference in our internal affairs.
In light of the talks this Thursday [19 December 2019] on the transit of gas through Ukraine, such U.S. measures, which are specifically being justified to protect Ukraine, are particularly incomprehensible. An agreement in principle was reached between Ukraine and Russia at those talks with the support of the European Commission and the German Government, paving the way for a new accord on the transit of gas through Ukraine starting in 2020. We welcome that a concrete agreement was now able to be signed on Friday [20 December 2019].”
This position was reiterated by Federal Finance Minister and Vice Chancellor Olaf Scholz who told broadcaster ARD:
“Such sanctions are a serious interference in the internal affairs of Germany and Europe and their sovereignty. We firmly reject this. It is now up to the company and the companies involved in the construction of the pipeline to take the next decisions. It is clear to us that we will not accept the imposition of such a sanction, and we will make this clear to the U.S. Government at all talks and at all opportunities.”
While the German Government objects to U.S. sanctions directed at German and European companies involved in the construction of the Nord Stream 2 pipeline, the reasons for such objections have not always been explained consistently. Some statements speak of a rejection “as a matter of principle”, while, at other times, the U.S. sanctions are described as being “contrary to international law”. The sanctions have repeatedly been described as “extraterritorial”. Some statements also speak of an interference in Germany’s internal affairs.
Although the statements differ in their wording, they all convey the same message: namely, that the United States has exceeded its jurisdictional powers under international law. Jurisdiction refers to the competence of States to regulate the conduct of natural and juridical persons. Jurisdiction is primarily territorial and thus reflects the territorial nature of State sovereignty. The limits on a State’s jurisdictional power derive from the territorial sovereignty of other States and are reflected in the basic principles of the sovereign equality of States and non-interference in domestic affairs.
While primary sanctions directly target a State, company or person engaged in an objectionable activity or relationship, secondary sanctions target third parties that are engaged with the State, company or person that is subject to the primary sanctions. German Government officials have explained the illegality of U.S. secondary sanctions with reference to their extraterritoriality.
However, the relevant U.S. sanctions legislation applicable to the Nord Stream 2 project can be based on the territoriality and active personality principles, both well-established bases of jurisdiction in international law. The sanctions imposable under section 232 CAATSA are described in section 235 and provide, inter alia, for access restrictions to the U.S. economy. The President is authorised to direct the relevant U.S. Government agencies to deny sanctioned persons the necessary approvals to conduct business in the United States. The President can also prohibit U.S. persons to conduct transactions with a sanctioned person. For example, the President “may direct the Export-Import Bank of the United States not to give approval to the issuance of any guarantee, insurance, extension of credit, or participation in the extension of credit in connection with the export of any goods or services to the sanctioned person”. Similarly, the “United States Government may not procure, or enter into any contract for the procurement of, any goods or services from the sanctioned person.” Transactions as such are regulated only to the extent they are “subject to the jurisdiction of the United States” or addressed to a “United States person”. For instance, the President “may prohibit any United States financial institution from making loans or providing credits to the sanctioned person”.
The territoriality and active personality principles are also the jurisdictional bases for the sanction powers provided by the PEESA. The President shall exercise powers to block and prohibit all transactions in all property and interests in property of a sanctioned person “if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.” The presidential powers include the regulation of transactions “by any person, or with respect to any property, subject to the jurisdiction of the United States.” Other sanctions against individual persons, such as denying them entry into the United States, are a clear exercise of the State’s prerogative to control its borders, rooted in territorial sovereignty.
While the legality of the exercise of enforcement jurisdiction based on CAATSA and PEESA depends on the U.S. authorities’ interpretation and application of these acts, the underlying exercise of prescriptive jurisdiction is in conformity with international law. Although these sanctions are intended to affect foreign companies and their conduct outside of U.S. territory, the laws do not directly regulate the conduct of foreigners abroad. Instead, the acts regulate events and activities in U.S. territory and are addressed to U.S. persons and the U.S. administration. Thus, the sanction powers applicable to the Nord Stream 2 project are rooted in the principles of territoriality and active personality. Strictly speaking, they are not “extraterritorial sanctions”, as often labelled by the Federal Government. Legislation having extraterritorial effects is not the same as extraterritorial legislation.
The firm rejection of the U.S. sanctions legislation by the German Government may be explained by the legislation’s deterrent effect on German companies. After all, most companies engaged in international business rely on access to the U.S. financial and economic market. Past experience regarding the implementation of U.S. sanctions has shown that the U.S. authorities tend to interpret sanctions legislation rather broadly, thereby calling into question the legality of certain enforcement practices. Against this background, the Federal Government’s strong and repeated statements may not be directed at the exercise of U.S. prescriptive jurisdiction, but rather reflect a sense of foreboding of an excessive exercise of U.S. enforcement jurisdiction.
Category: Jurisdiction of the State