The Hindu Editorial

Discussion
 30-December-2021
True peace is not merely the absence of tension: it is the presence
of justice

- Martin Luther King

Nord
Stream
pipeline
A whiff of trouble in the
Nord Stream pipeline

GS PAPER II
Effect of policies
and politics of
developed and
developing
countries on India’s
interests.
A whiff of trouble in the Nord Stream pipeline
 A whiff of trouble in the Nord Stream pipeline
• What was meant to be an ordinary energy project from Russia to Germany is
now a powerful geopolitical tool
• It would be considered an ordinary gas pipeline were it not for the
controversial nature of the project.
• Called the Nord Stream 2, it will spell a direct supply of natural gas under the
Baltic Sea from the Russian city of Ust-Luga to the German city of Lubmin,
avoiding transit through Ukraine and other European countries.
• However, the Ukrainian authority has called the project a ‘dangerous
geopolitical weapon’.
• There is also strong opposition from the United States and most of the
European countries (except for Austria, Germany, Hungary and the
Netherlands).
 A whiff of trouble in the Nord Stream pipeline
• Their concern is that, once operational, the project would render more
leverage and bargaining power to Russia while dealing with Europe and its
energy market.

• Some political commentators share the view that Russia is trying to use Nord
Stream 2 as a political weapon to put pressure on European security and
‘undermine the democratic resilience of European institutions’.
• At the same time, during the St. Petersburg International Economic Forum
2021, Russian President Vladimir Putin dismissed these concerns, saying that
‘Nordstream 2 is purely a commercial project, which is shorter, cheaper, and
economically more viable, compared to the gas transit through multiple
European countries’.
• Mr. Putin even went as far as calling opposing views as ‘foolish propaganda’.
 Mounting complexities
• The construction of Nord Stream 2 began in 2015, when Russia’s main energy
company Gazprom took ownership of the project’s operator, the Switzerland-
based company Nord Stream 2 AG.
• The project was expected to double the capacity of the existing pipeline, Nord
Stream 1, that had been operational around 2011-12.
• The estimated costs are around €11 billion, with the new pipeline stretching
for 1,225 kilometres.

• Throughout its short history, the project has undergone a series of sanctions
and controversies, morphing itself into the source of contention and political
battleground.
• At the end of 2019, U.S. President Donald Trump had signed a law that
imposed sanctions on any EU company that was involved in completing the
Nord Stream 2 pipeline.
 Mounting complexities
• The Trump administration feared that the pipeline would give Russia more
influence over Europe’s energy supply and reduce its own share of the lucrative
European market for American liquefied natural gas (LNG).
• Many European politicians, including then German Chancellor Angela Merkel,
were opposed to the ‘extraterritorial sanctions’, stating that they were able to
decide their own energy policies without an ‘interference in autonomous
decisions taken in Europe’.
 Mounting complexities
• In July 2021, the U.S. and Germany reached an agreement to allow completion
of the Nord Stream 2 pipeline.
• Besides, the agreement aimed to invest more than €200 million in energy
security in Ukraine, as well as sustainable energy across Europe, according to
media reports.
• Earlier in May 2021, the Joe Biden administration decided to issue a national
security waiver for the Nord Stream 2 AG, the major company involved in the
construction of the pipeline.
• The main reason was apparently to restore trust and close cooperation
between the U.S. and Germany.
 Energy security dilemma
• According to data from 2015, Germany imported about 40% of natural gas
from Russia, 29% from the Netherlands, 34% from Norway, with only around
10% from Germany’s own gas fields.
• According to a media report, about a quarter of Germany’s electricity now
comes from coal, about another quarter from renewables, 16% from natural
gas and around 11% from nuclear energy.

• The dispute over Nord Stream 2 takes place at a time when Germany has set
out a plan to shut down its nuclear and coal power plants, with an objective of
gradually moving towards renewable sources of energy.
• In order to fill the supply gap and diversify the sources, the country plans to
build its first LNG terminal to receive gas from Qatar, the U.S., and others.
 Energy security dilemma
• This winter, Europe is facing a ‘perfect storm’ in its energy market, whereby
wholesale energy prices have more than doubled in 2021, and there is a
limited supply of fossil fuels altogether.
• Russia is blamed for an intentional decrease in gas supplies to Europe, aiming
to speed up the controversial Nord Stream 2 gas pipeline by European Union
(EU) market regulators.
• There is a ‘silver lining’ in the current energy crisis in Europe though, since it
could provide additional incentives for green energy investments and
production of green hydrogen.
 Latest developments
• In November this year, Germany’s network regulator (Bundesnetzagentur)
suspended the certification procedure for Nord Stream 2.
• In an official statement it said: ‘it would only be possible to certify an operator
of the Nord Stream 2 pipeline, if that operator was organised in a legal form
under German law.’
• For practical reasons, Nord Stream 2 AG decided not to undergo a complete
legal transformation, but establish a subsidiary under German law that would
manage only the German part of the pipeline.
• The involved bureaucracy inevitably means further delays in project
commencement as it requires re-submission of paperwork and a renewed
certification process.
• In December, Germany’s energy regulator said it would not make a decision on
certifying Nord Stream 2 until, at least, the second half of 2022.
 Latest developments
• Meanwhile, tensions have been growing between Russia and the North
Atlantic Treaty Organization allies, amidst fears of Russia’s invasion into
Ukrainian territories and a replication of 2014 scenario.
• The new German Chancellor, Olaf Scholz, has inherited the Nord Stream 2
dilemma from his predecessor and will have to make difficult choices going
forward.
• Some EU leaders have called for stronger actions toward the controversial
pipeline from the government in Berlin, including its possible termination in
the event of further military escalation.

• Thus, what was meant to be an ordinary energy project has transformed itself
into a powerful geopolitical tool, available to every stakeholder involved, and
even beyond.
• Development processes and the
development industry the role of
NGOs, SHGs, various groups and
associations, donors, charities,
institutional and other stakeholders

• Ethics
 Context

• Recently, Ministry of Corporate Affairs brought into effect the

Companies (CSR Policy) Amendment Rules, 2021 by amending
amend the Companies (CSR Policy) Rules, 2014.
 About Corporate Social Responsibility (CSR)
• It is a management concept whereby companies integrate social and
environmental concerns in their business operations and interactions with
their stakeholders.
• • In 2013, Companies Act 2013 introduced changes with respect to
company formation, administration, and governance, and incorporated an
additional section i.e. Section 135 on CSR obligations for companies listed
in India.
• With this, India became the first country to legislate CSR activities under
Companies Act 2013.
• • Every qualifying company requires spending of at least 2% of its average
net profit (Profit before taxes) for the immediately preceding 3 financial
years on CSR activities in India.
• • CSR is also applicable to branch and project offices of a foreign company
in India.
• • In 2019, amendments introduced, which require companies to deposit
the unspent CSR funds into a fund prescribed under the Act within the
end of the fiscal year.
 Activities
that can be
undertaken
under CSR
as listed in
the
Companies
Act,2013
 Newly amended rules

• Exclusion from CSR activities:

• Activities undertaken in pursuance of normal course of business of
the company.
• ✓ Exception: A company engaged in R&D of a new vaccine, drugs
and medical devices in their normal course of business may
undertake such activities related to Covid 19 for the financial year
2021, 2021-22 & 2022-23 as CSR.
• Activities undertaken outside India, except training of National or
International level Indian sportspersons.
• Contribution of any amount to any political party;
• Activities benefitting employees of the company, as under Code on
Wages, 2019.
 Newly amended rules

• Activities supported by the company on sponsorship basis, for

deriving marketing benefits for its products/services.
• Activities carried out for fulfilment of any other statutory
obligations under any law in force in India.
• Mandatory registration: Entities have to register itself with the
Central Government and fill the CSR-1 Form electronically with the
Registrar of Companies from April 1, 2021.
• Engagement of external organizations for design, evaluation,
capacity building and monitoring of CSR projects has also been
permitted.
 Newly amended rules

• Annual Action plan: CSR committees of Companies shall be required

to formulate an annual action plan and recommend the same to the
board of the company.
• Administrative overheads: Board of company needs to ensure
administrative overheads do not exceed 5% of the total CSR
expenditure for a financial year.
• Administrative overheads mean the expenses incurred for general
management and administration of CSR functions in the company
and explicitly exclude any expenses incurred for the designing,
implementation, monitoring, and evaluation of a particular CSR
project.
 Newly amended rules

• Surplus cannot be utilised for other purposes: Surplus from any

project cannot be utilized for any business profits and must be
reinvested into the same CSR project or may be transferred into
fund.
• Impact assessment: Any corporation with a CSR obligation of Rs 10
Cr or more for the 3 preceding financial years would be required to
hire an independent agency to conduct impact assessment of all of
their projects with outlays of Rs 1 Cr. or more.
• Mandatory disclosure of CSR projects: It would be placed on the
website of the company to ensure accountability of companies and
a closer check on the compliance of rules.
 Challenges

• Tool to tax: CSR is also criticized as a tool to tax corporates which

already face high taxation in the country, which makes India
unattractive for business.
• • Skewed pattern of spending: About 65% of CSR spending was
incurred on education and healthcare while eradication of hunger,
rural development and environmental protection are at lower side
of expenditure.
• • Regional disparity: Companies usually undertake CSR activities in
areas where work can be done without any hardship. This may be
the reason that aspirational districts and North-east region with
their poor infrastructure and development level, are not in the focus
of companies
 Challenges

• • Non-compliance: It is found that 50% of the companies were

unable to spend the mandated amount on CSR and in the past five
years after the act was enforced, 70% of the companies still do not
have a strategy to implement CSR activities.
• • Cheating and favoured donations: It is found out that companies
made donations to charitable trusts, which are well known and then
received them back after deduction of minor commissions.
 Way forward
• Community and employee participation: Improving community relations,
involving employees in CSR can help motivate them and encourage their
personal and professional development by inculcating social and ethical
values.
• Collaboration for efficiency: Facilitating collaboration between NGOs,
agencies involved in environmental and social work will enable better
utilization of CSR funds.
• • Evaluation and monitoring: CSR activities and projects needs to be
monitored periodically to prevent fraudulent activities and complete
project within stipulated time.
• • Fair and balanced expenditure: Encouraging corporates to spend in
neglected areas such as aspirational districts and North east region to
have regional parity in socio-economic development.
• • Relaxation and incentives: Government should further provide
relaxation and incentives in corporate tax to corporates complying with
CSR regulations.
 LIQUIDITY TRAP

• Recently, the IMF economist

Gita Gopinath stated that the
global economy may be
heading towards a liquidity
trap.
 What is a liquidity trap?

• A liquidity trap is a contradictory economic situation in which

interest rates are very low and savings rates are high, rendering
monetary policy ineffective.
• It leads to a scenario where any additional money supply that is
generated in the economy get channeled towards savings rather
than investment thus rendering the economy to remain at same
liquidity level.
 Is the global economy stuck in a liquidity trap?
• The economic situation created by the pandemic has led to following
developments which indicate towards a liquidity trap:
• • Very low interest rates: 60 per cent of the global economy - including 97 per
cent of advanced economies -- central banks has pushed policy interest rates
below 1 percent. In one-fifth of the world, they are negative. As a result, central
banks have little room to further cut interest rates if another shock strikes.
• • Global demand still sluggish: Despite the extremely low interest rates, the
global demand is still sluggish due to the impact of the COVID-19 pandemic.
• • Threat of a potential currency war: Due to decrease in interest rates, money
supply around the world would increase which can potentially trigger a
currency war due sliding exchange rates in the trading arena.
• • Effects reaching the developing world: Generally, the developing countries are
unlikely to develop this problem due to high average interest rates. But
recently, developing countries like Peru and Chile have almost brought the
borrowing costs to zero due to their crashing economies, thus signaling a
liquidity trap.
 Should India worry?

• The second-order effects of lockdown in India could later see

demand slump again to drag India’s economy down.
• In this context, we risk slipping into a liquidity trap if inflation fails
to fall below 6% within a quarter or so, as projected by the RBI. (As
the policy rates have been brought close to 4%)
• This calls for a circumspect approach on part of India with regard to
its fiscal as well as monetary policy.
 What could be done as remedial measures?

• • Global synchronized fiscal push: Fiscal authorities can actively

support demand through cash transfers to support consumption and
large-scale investment in medical facilities, digital infrastructure and
environment protection.
• • Coordination and collective easing of the monetary policy:
Increased global coordination can potentially deter a global
deflationary path which may lead to prolonged recession.
• This would be akin to the Quantitative Easing (QE) measures which
were initiated by US.
• • Revisiting global economic arrangements: Reevaluating the global
arrangements like trade agreements and global supply changes
could help better invest the calibrate the available liquidity.