Europe has previously received around 45% of its annual gas supplies from Russia.
Leonhard Foeger | Reuters
Europe’s descent into economic contraction appears to have been confirmed with Russia restricting natural gas supplies to the region and heavy industry facing harsh rationing in the coming months.
Just days after Europeans breathed a sigh of relief when Russian gas giant Gazprom announced it would resume supplies via the Nord Stream 1 pipeline, then announced on Monday that flows would be reduced once again.
The announcement, in which Gazprom said it would be for the maintenance of a turbine along the pipeline, was met with disbelief and condemnation in Europe.
Ukraine’s President Volodymyr Zelenskyy said the move, which will see flows to Germany fall to 20% of capacity from an already low 40%, amounted to a “gas war” with Europe. German Economics Minister Robert Habeck said the excuse that maintenance was the reason for the power cut was a “farce”.
It puts Europe in a delicate situation, as it faces rampant inflation, the war in ukraine and an already troubled supply chain following the covid-19 pandemic.
Germany, the region’s largest economy and traditional engine of growth, has particular reason for concern. It relies heavily on Russian gas and slides into recession. The government is particularly concerned about how it will keep the lights on through the winter: Habeck said Monday night that “we have a serious situation. It’s time for everyone to understand that,” during an interview with broadcaster ARD.
Habeck also said that Germany must reduce its gas consumption, noting that “we are working on that.” He said that in a scenario of low supply, gas for industries will be reduced before private residences or critical infrastructure such as hospitals.
“Of course it is a big concern, which I also share, that this could happen. Then certain production lines in Germany or Europe would simply not be manufactured anymore. We have to prevent that with all our might,” Habeck said.
Russian dependency
With Russia under a series of international sanctions in response to its war against Ukraine, gas is a weapon it can use against Europe.
The region has previously received about 45% of its annual supplies from Russia, and while it is desperately trying to find alternatives, such as US liquefied natural gas, it cannot replace its Russian hydrocarbons fast enough.
Unless the situation changes drastically, analysts predict a difficult winter for the continent.
“High energy costs are pushing Western Europe into recession,” S&P Global Market Intelligence said in a report on Sunday.
“Our July forecast already incorporates slight Q2 contractions in real GDP in the UK, Italy, Spain and the Netherlands. With inflation surprisingly on the rise, central banks are accelerating the pace of monetary policy tightening. While a rebound in tourism and consumer services could give the region a slight boost in the summer quarter, another setback is likely in the fourth quarter due to unreliable power supplies,” it added.
‘Clear’ recession
Exceptionally high prices for natural gas and electricity will hurt industrial competitiveness in Germany and other manufacturing centers. S&P warned that the destructive war between Russia and Ukraine is likely to drag on until 2022, deflating consumer and business confidence across Europe.
He noted that eurozone real GDP growth is forecast to slow from 5.4% in 2021 to 2.5% in 2022 and 1.2% in 2023, before improving to 2.0% in 2024.
EU governments agreed on Tuesday to ration natural gas next winter in a bid to protect themselves from further supply cuts by Russia, and the bloc’s energy ministers approved a European bill aimed at reducing demand for gas by 15% until the fall and until the next spring. .
It remains to be seen whether the gas savings can be achieved and there has been disagreement among EU members about rationing gas use.
“Reducing consumption cannot do much. Fundamentally, there is a huge demand for natural gas and especially liquefied natural gas (LNG) in Europe. The rationing, which will especially affect energy-intensive industries such as car manufacturers, chemicals and cryptocurrency mining, it can’t be ruled out,” Simon Tucker, global head of energy, utilities and resources at Infosys Consulting, said in emailed comments Tuesday.
“EU countries and the UK must do everything they can to replenish gas reserves before the cold weather sets in – this means looking at every possible way to reduce energy use and improve supply. We are already seeing a large increase in LNG shipments from the Middle East and North America But countries must speed up modernization of their own infrastructure Mass deployment of low-carbon domestic energy alternatives, such as mini nuclear reactors and community renewables, will not it’s just something “pleasant”, it’s an imperative if we want to come out of this crisis stronger”.
Since such an infrastructure modernization program is likely to take time, Europe is likely to feel more economic pain in the short term.
The possibility of a recession in Europe now seems “clear”, economists and strategists at Citi said in a note on Tuesday, and Russia’s decision to cut gas flows again is likely to have “the consequence of pushing Europe into a deeper recession.
“As winter power rationing plans are agreed, we expect tighter financial conditions in Europe to cause a much worse reaction in the real economy, given the stance of savings, household leverage and balance sheets.” companies. Winter is knocking on Europe’s door,” Citi concluded.
Of course, there is a possibility that Russia will reopen the taps of its gas flows to Europe once the alleged maintenance of this turbine in the Nord Stream 1 pipeline is completed.
“It’s a bit unclear if this will be a short supply crunch while the repaired turbine comes back online or if the paperwork will never be fully resolved, and we live with only 20% supply for a considerable time,” Deutsche Los banking analysts led by Jim Reid said in a note on Tuesday, adding that Russia was likely seeking clearer assurances on future sanctions waivers for NS1 maintenance and related issues.
“This is likely to be difficult to pull off and the Russians will know this. So it looks like Russian politics will be in control here for now,” they said.
Russian President Vladimir Putin speaks during a meeting with workers after riding a train across the bridge linking Russia and the Crimean peninsula at the Taman railway station December 23, 2019 near Anapa, Russia. yes)
Mikhail Svetlov | Getty Images News | fake images
Strategists believed that with the pipeline flowing at 40% capacity, Germany could make it through the winter even if light rationing was needed. “At 20%, it’s likely to need significant rationing unless they cut gas exports, which would be a very politically sensitive thing,” Deutsche Bank analysts said.
In the meantime, the possible 15% reduction that all EU member states have just agreed could be difficult to implement in reality. “Expect a lot of exceptions and compromises to appear if a plan is agreed that can progress,” they said.