The U.S. government’s increased sanctions on companies linked to the Nord Stream 2 pipeline are reportedly discouraging European insurers from covering the Euros 9.7 billion ($11 billion) project.

Russian state-owned energy giant Gazprom (GAZP.MM) leads a consortium which has built the pipeline under the Baltic Sea - bypassing Ukraine – but with construction complete, insurance is a major issue.

Pipeline insurance would protect against property damage, business interruption and directors' and officers' liability.

However, the U.S. has stepped up sanctions on companies linked with the politically-sensitive project while Germany's energy regulator has temporarily halted its certification process. It said the Swiss consortium behind the pipeline had to form a German unit to show it has enough funding and independence from Gazprom.

The prospect of sanctions has been heightened by a build-up of troops on Ukrainian borders raising the possibility of a Russian invasion.

The worries over fresh sanctions saw leading European insurers AXA (AXAF.PA) and Zurich (ZURN.S) and reinsurer Munich Re (MUVGn.DE) pull out of insuring the construction this year. Without cover, the pipeline operator could also be exposed to costs for damage, delays or litigation and find it harder to secure loans.

The U.S. and some European opponents of Nord Stream 2 say it will make Europe too reliant on Russian gas, allowing Moscow to expand its political, economic and military influence.

In contrast, other governments say it is vital to secure energy supplies, as gas prices surge and the threat of power outages looms.

The Biden administration earlier this year waived sanctions on the pipeline's operating company, which theoretically enables non-U.S. companies to provide financing and insurance, while Germany has agreed to take action if Russia uses energy as a weapon in its relations with Ukraine.

A spokesperson for Nord Stream 2's Swiss-based operating company said "all construction, operation and other activities of our company are covered by appropriate insurances".

In the absence of European insurers, the project could use Russian entities, with one insurer Konstanta - now renamed RNCB Insurance - already sanctioned.

European insurers, such as those operating in the Lloyd's of London insurance market, could underwrite the pipeline, according to its Chief Executive John Neal, who said." We've been involved with the Nord Stream project previously, certainly insuring its construction. We need to be hugely respectful of sanctions."

If you wish to discuss any insurance questions relating to the effect of sanctions on insurance or have any general insurance related queries, please visit www.wdenis.eu or contact Vida Jarašiūnaitė Vida.Jarasiunaite@wdenis.eu