- The United States sanctions those laying the pipes of Nord Stream 2, and Swiss firm Allseas suspended work.
- Germany rejected the extraterritorial sanctions as they affect European companies.
- The episode shows how one country’s sanctions can condition the contracts and projects of third-country companies.
On 20 December 2019, US President Donald Trump signed the annual defence policy bill, which includes sanctions on companies taking part in building the pipelines that carry Russian gas to Europe, in particular Nord Stream 2. This infrastructure, a project of about $11 billion led by Russia’s Gazprom, would double the capacity of the corridor linking Russia with Germany under the Baltic Sea.
The Swiss-Dutch company Allseas, which operates the pipe-laying vessels, announced in a statement dated 21 December that it was suspending work, in anticipation of the law coming into force, and that it would follow the wind-down provision it contains. The news cast doubt on the pipeline’s completion date. The German government rejected the measures as extraterritorial sanctions affecting European companies. The project was well advanced, so the sanctions came at a late stage of the works.
Why it is a European matter
Russia is one of the largest suppliers of natural gas to the European Union, and Germany, Europe’s largest economy, is its main destination. Nord Stream 2 would allow gas to be sent directly to Germany across the Baltic, without passing through Ukraine, which charges transit fees and has a contract with Russia that expires at year end. This worries Kyiv and several partners in eastern Europe.
The United States argues that the project increases European dependence on Russian gas, and it has its own commercial interests in selling its liquefied natural gas in Europe. Germany maintains that it is a commercial project and that energy policy decisions belong to Europeans. The conflict combines arguments of security, geopolitics and competition. On top of all this comes the energy transition: some countries see natural gas as a bridge fuel, while others prefer to accelerate renewables, which complicates the debate.
The reach of extraterritorial sanctions
US sanctions have an effect that goes beyond its borders, because they affect companies that operate in dollars, hold assets in the United States or depend on its financial system. A foreign company with no presence in the United States may be caught if its activity falls under a list of sanctioned operations, with the risk of being cut off from financing, from its market or from the payment system.
The European Union has had since 1996 a blocking regulation prohibiting compliance with certain extraterritorial sanctions of third countries, but its effectiveness is disputed because, in practice, many companies prefer to avoid US risk. Managing this dilemma has become a regular part of international companies’ compliance.
What to review
Companies with international activity should have a sanctions-compliance procedure: know their customers, suppliers and end users, screen official lists and review the origin of financing. Pay attention to sensitive sectors such as energy, defence, finance or technology.
Contracts with parties in affected jurisdictions should include clauses regulating what happens if a sanction prevents performance, with the possibility of suspension or termination. It is also advisable to follow the evolution of the lists and consult a legal adviser in case of doubt. It is not a matter only for large companies: small businesses that export, import or depend on international financing must also watch the sanctions lists.
When sanctions cross borders, compliance stops being a formality and becomes a strategic decision.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
