Putin’s new gas tightening condemns Europe to recession and winter of rationing

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 reducing natural gas supplies to the region and heavy industry facing severe rationing in the coming months.

A few days after Europeans heaved a sigh of relief when Russian gas giant Gazprom announced it would resume supplies through the Nord Stream 1 pipeline, it announced on Monday that flows would be reduced again.

The announcement, with Gazprom claiming 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 drop to 20% of its capacity from an already low 40% level – amounts to a “gas war” with Europe. . German Economy Minister Robert Habeck said the excuse that maintenance was the reason for the cut in the offer was a “farce”.

It puts Europe in a difficult situation as it grapples with 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 growth engine, has a particular cause for concern. It is largely dependent on Russian gas and is sliding into a recession. The government is particularly concerned about how it will keep the lights on during the winter: Habeck said on Monday evening that “we have a serious situation. It is time for everyone to understand,” during an interview with broadcaster ARD.

Habeck also said that Germany must reduce gas consumption, stressing that “we are working on it”. You said that in a scenario of low supply, gas for industries will be reduced before private residences or critical infrastructures such as hospitals.

“Obviously it is a big concern, which I also share, that this could happen. So some production chains in Germany or Europe would simply no longer be produced. We have to avoid it with all the strength we have,” said Habeck.

Relying on Russia

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 around 45% of its annual supplies from Russia and while it desperately tries to seek 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 driving Western Europe into recession,” S&P Global Market Intelligence said in a report on Sunday.

“Our July forecast already incorporates slight contractions in real GDP in the second quarter in the UK, Italy, Spain and the Netherlands. With inflation surprising to the upside, central banks are accelerating the pace of policy tightening. While a rebound in tourism and consumer services could give the region a slight hike in the summer quarter, another setback is likely in the fourth quarter due to unreliable energy supplies, “he added.

Net recession

The exceptionally high prices of natural gas and electricity will damage industrial competitiveness in Germany and other production centers. S&P has warned that the destructive Russia-Ukraine war is likely to drag on into 2022, deflating consumer and business confidence across Europe.

It noted that euro area real GDP growth 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.

EU governments agreed on Tuesday to ration natural gas next winter in an effort to insulate themselves from further Russian supply cuts with the bloc’s energy ministers passing a European bill aimed at reducing the gas demand by 15% during the autumn and next spring.

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

“Reducing consumption can only do so much. Basically, there is a huge demand for natural gas and in particular liquid natural gas (LNG) in Europe. Rationing, which will mainly impact energy-intensive industries like car makers, chemical companies and cryptocurrency mining, it can ‘not be ruled out,’ said Simon Tucker, global head of energy, utilities and resources at Infosys Consulting on Tuesday.

“EU countries and the UK need to do everything they can to replenish gas depots before cold weather arrives – this means looking for every possible way to reduce energy consumption and improve supply. We are already seeing a Large increase in LNG shipments from the Middle East and North America. But countries must accelerate the modernization of their infrastructure. The mass deployment of low-carbon domestic energy alternatives such as mini nuclear reactors and community renewables is not alone. a “nice to have”, it is imperative if they come out stronger from this crisis “.

With such a time-consuming infrastructure modernization program, Europe is likely to suffer from greater economic hardship in the short term.

The possibility of a recession in Europe now seems “clear”, Citi economists and strategists said in a statement Tuesday, with Russia’s decision to cut gas flows again that is likely to have “the consequence of pushing Europe. into a deeper recession “.

“As energy rationing plans for the winter are agreed, we expect tighter financial conditions in Europe to induce a much worse reaction in the real economy, given the stance in terms of savings, household leverage and company balance sheets. Winter is knocking on Europe’s doors, “concluded Citi.

There is, of course, the possibility that Russia may again open the taps to its gas flows to Europe once the alleged maintenance of this turbine on the Nord Stream 1 pipeline is completed.

“It’s a bit confusing if this will be a brief supply restriction as the repaired turbine comes back online or if the paperwork will never be resolved at all, and we live on only 20% supplies for a considerable time,” Deutsche Analysts bank led by Jim Reid said in a statement Tuesday, adding that Russia was likely seeking clearer guarantees on future sanctions exemptions for maintaining NS1 and related issues.

“It will probably be difficult to achieve and the Russians will know it. So it looks like Russian politics will have control here for now,” they said.

Russian President Vladimir Putin speaks during a meeting with workers after crossing the bridge connecting Russia and the Crimean Peninsula to Taman Railway Station by train on December 23, 2019 near Anapa, Russia. S)

Mikhail Svetlov | Getty Images News | Getty Images

Strategists believed that with the pipeline running at 40% capacity, Germany could survive the winter even if a slight rationing was required. “At 20% you would probably need a hefty rationing unless they cut gas exports, which would be a very sensitive thing to do politically,” Deutsche Bank analysts said.

Meanwhile, the potential 15% reduction that all EU Member States have just agreed may be difficult to apply in reality. “Expect a lot of cutbacks and compromises to appear if a plan is agreed that can progress,” they said.

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