Putin’s new pressure on gas dooms Europe to recession and rationing winter

Europe previously received about 45% of its annual gas supply from Russia.

Leonard Weger | Reuters

Europe’s descent into economic downturn appears to have been confirmed with Russia squeezing natural gas supplies to the bloc and heavy industries facing tough rationing in the coming months.

Just days after Europeans breathed a sigh of relief as Russian gas giant Gazprom announced it would resume supplies via its Nord Stream 1 pipeline, it then announced on Monday that flows would decrease again.

The announcement, with Gazprom saying it would be for turbine maintenance along the pipeline, was greeted with suspicion and condemnation in Europe.

Ukrainian President Volodymyr Zelensky said the move – which would see flows to Germany drop to 20% of capacity from an already low level of 40% – amounted to a «gas war» with Europe. German Economy Minister Robert Habeck said the argument that maintenance was the reason for the supply cut was a «farce».

It puts Europe in a difficult position as it struggles with rampant inflation, the war in Ukraine and an already turbulent supply chain in the wake of the Covid-19 pandemic.

Germany, the region’s largest economy and a traditional engine of growth, has particular cause for concern. It is largely dependent on Russian gas and is heading for recession. The government is particularly concerned about how to keep the lights on during the winter: «We have a dangerous situation. It’s time for everyone to understand that,» Habek said Monday evening, during an interview with ARD.

He also said that Germany should reduce its gas consumption, noting, «We are working on it.» In a low supply scenario, he said, gas would be reduced for industries before private housing or critical infrastructure such as hospitals.

«Of course it’s a big concern, and I share it too, that this could happen. Then certain production chains simply won’t be made in Germany or Europe. We have to avoid that with all the strength we have,» he said.

Reliance on Russia

With a raft of international sanctions imposed on Russia in response to its war on Ukraine, gas is one weapon it could use against Europe.

The region previously received about 45% of its annual supply from Russia, and while it is desperately trying to find alternatives, such as LNG in the United States, it cannot replace Russian hydrocarbons quickly enough.

Unless the situation changes significantly, analysts expect a difficult winter ahead for the continent.

«High energy costs are pushing Western Europe into recession,» Standard & Poor’s Global Market Intelligence said in a report on Sunday.

“Our July forecast already includes moderate contractions in the second quarter of real GDP in the UK, Italy, Spain and the Netherlands. With sudden inflation rising, central banks are accelerating the pace of monetary policy tightening. Tourism and consumer services may give the region a slight boost in the summer quarter, Another setback is likely in the fourth quarter given the unreliable power supply.”

‘obvious’ stagnation

Exceptionally high prices for natural gas and electricity will damage the industrial competitiveness of Germany and other manufacturing centers. Standard & Poor’s has warned that the devastating Russo-Ukrainian war will likely continue into 2022, eroding consumer and business confidence across Europe.

He noted that real GDP growth in the eurozone is expected to slow from 5.4% in 2021 to 2.5% in 2022 and 1.2% in 2023, before improving to 2.0% in 2024.

European Union governments agreed on Tuesday to ration natural gas next winter in a bid to insulate themselves from further supply cuts by Russia as the bloc’s energy ministers approved a European bill aimed at slashing gas demand by 15% through the fall and into next spring. .

It remains to be seen whether the gas savings can be achieved, and there has been opposition among EU members over the legalization of gas use.

“Reducing consumption can only do so much. Basically, there is a huge demand for natural gas and especially liquid natural gas (LNG) in Europe. Rationing, which will particularly affect energy-intensive industries such as automakers, chemical companies, and crypto-mining, could” «It can’t be ruled out,» Simon Tucker, global head of energy, utilities and resources at Infosys Consulting, said in comments via email on Tuesday.

“EU countries and the UK need to do everything they can to replenish gas stocks before the cold starts – and that means looking at every possible way to reduce energy use and improve supply. We are already seeing a significant increase in LNG shipments from the Middle East and North America. But Countries need to accelerate modernizing their own infrastructure. Mass deployment of low-carbon domestic energy alternatives such as small nuclear reactors and community-based renewables isn’t just ‘fun,’ it’s essential if we are to emerge from this crisis stronger.»

With this infrastructure modernization program likely to take time, Europe is likely to feel more economic pain in the near term.

Citi economists and strategists said in a note on Tuesday that the potential for a recession in Europe now appears «clear,» with Russia’s decision to cut off gas flows again likely «the result of pushing Europe into a deeper recession.»

“With winter energy rationing plans agreed, we expect tighter financial conditions in Europe to lead to a much worse reaction in the real economy, given the position in savings, household leverage, and corporate balance sheets. Winter is knocking on Europe’s door,” Citi concluded.

There is, of course, a chance that Russia will once again be able to raise the taps on gas flows to Europe once the supposed maintenance of this turbine on the Nord Stream 1 pipeline is completed.

«It’s a bit puzzling as to whether this will be a short supply constraint while the repaired turbines are back online or whether the paperwork will never be completely resolved, and we’ve been living with only 20% of supply for so long,» Deutsche Bank analysts said. led by Jim Reed in a note on Tuesday, adding that Russia was likely looking for clearer guarantees on future sanctions waivers to preserve NS1 and related issues.

«It will probably be difficult to achieve this and the Russians will know that. So it looks like Russian policy is going to be in control here at the moment,» they said.

Strategists believe that with the pipeline flowing at 40% capacity, Germany can continue to winter even if some light rationing is needed. «At 20 percent it will probably need some significant rationing unless they cut gas exports, which is a very sensitive thing that needs to be done politically,» they said.

In the meantime, the potential 15% reduction that all EU member states have just agreed to could be difficult to implement in reality. «Expect a lot of concessions and concessions to emerge if a plan is agreed upon that can move forward,» they said.