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Home Economy News

Europe sounds ‘full mobilisation’ after Kremlin shuts down key gas pipeline

admin by admin
September 9, 2022
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“We are at war,” Emmanuel Macron said Monday as he outlined the emergency measures France is taking to shore up its energy supply and protect its citizens and businesses from rising costs.

For months after Russia’s full-scale invasion of Ukraine, the president of France sought to act as an intermediary and peacemaker between Kiev and Moscow. This week he and fellow European leaders became belligerents in a sharply escalating energy conflict between Russia and the west. It was time, Macron said, for a “general mobilization”.

The Kremlin’s weaponization of its fossil fuels has forced European governments to take drastic steps, unthinkable only a few months ago, to blunt the Russian onslaught and protect their energy markets and economies from the impact.

Sweden and Finland had to provide emergency liquidity assistance to their power producers who were faced with increasing demands for collateral for their hedging operations.

Finland’s Economy Minister Mika Lintilä said the region could be on the verge of the energy sector’s version of the 2008 Lehman Brothers banking collapse.

Germany unveiled a second support package for households and businesses, worth €65 billion, bringing the amount earmarked so far by EU governments to offset prices and diversify supply to around €350 billion . Just two days after taking office as the UK’s new Prime Minister, Liz Truss has announced a cap on energy bills for households and businesses expected to cost at least £150 billion over two years.

G7 powers also agreed on September 2 to impose a global price cap on Russian crude oil, a bigger source of revenue for the Kremlin than gas, although it could be difficult to implement and other major importers such as China, India and Turkey may refuse to participate.

Line graph of consumer confidence indicator (net balance, more confident minus less confident, %) showing Eurozone consumer confidence at record lows

European Commission President Ursula von der Leyen, who will outline a package of emergency measures next week, said the price of Russian gas imports should also be capped – an idea suggested by Italy’s Mario Draghi who on Friday backed EU- energy ministers got, despite fears it would provoke the Russian leader to turn off the taps completely.

Russia has been withholding gas supplies to European markets since last September, sending wholesale prices up 10 times, pushing inflation to 40-year highs and economies to the brink of recession. All the while, Moscow denied what it was doing or said it was for technical reasons – which Brussels and member states disputed.

This week it finally dropped the handicap. On Monday, in what appeared to be retaliation for the oil and gas price cap proposals, the Kremlin said gas deliveries through the Nord Stream 1 pipeline, its main channel to European markets, would only resume once the west dropped economic sanctions against Russia.

“The last mask has fallen,” von der Leyen said.

Russia is still pumping gas through Ukraine and via the TurkStream pipeline – about a fifth of the total it sent in June – but the prospect of a complete halt in gas flows has arrived sooner than many in Europe expected.

Putin outlined the threat at an economic forum in Vladivostok on Wednesday. “We will not provide anything at all if it is contrary to our interests. No gas, no oil, no coal, no fuel oil, nothing,” he said.

Moscow also received a show of support from other oil producers this week – three days after the G7 oil price cap – when the Opul Plus group of countries, which includes Russia, agreed to shave 100,000 bpd from output.

Cartogram showing European countries' gas imports by source, 2021 compared to Jan-Jun 2022

Alexander Novak, Russia’s top energy official, has crowed about the “collapse” of Europe’s energy markets. “Winter is coming, and many things are hard to predict,” he said.

However, some officials and analysts believe that this may have been the week when Moscow’s pressure campaign began to lose steam. An indefinite shutdown of Nord Stream 1, Russia’s gas pipeline, was supposed to be the Kremlin’s big weapon that would send the wholesale price to new stratospheric levels. But by Wednesday, wholesale prices had fallen below Monday’s level.

“If this is it, it might mean the end of the program,” said Simone Tagliapietra, senior fellow at the Bruegel think tank in Brussels.

Confidence is growing in European capitals that Europe can get through the winter without serious economic and social disruption or energy rationing. Von der Leyen said the EU had “weakened the grip that Russia had on our economy and our continent”.

Gas storage at facilities in the EU stands at 82 percent, well ahead of the 80 percent target set by the bloc for the end of October. Member countries have diversified supplies, increasing pipeline imports from Norway, Algeria and Azerbaijan and LNG from the US and other producers.

Ursula von der Leyen speaks to the media
European Commission President Ursula von der Leyen, who will outline a package of emergency measures next week, said the price of Russian gas imports must also be capped © Olivier Hoslet/EPA/Shutterstock

Before its invasion of Ukraine, Russia accounted for 40 percent of the EU’s gas imports, but now only 9 percent, von der Leyen noted.

“Everyone expected [Russia] to get to the shutdown of Nord Stream in the winter, because the winter is when they could maximize the pressure,” Tagliapietra said. “This acceleration of events tells us that the Kremlin probably did not consider the possibility for Europe to come up with such a response.”

One EU official said: “Putin has not achieved his goals – our dependence on him has declined much faster than expected.”

Economists at Deutsche Bank now think Germany’s economy will contract by 3-4 percent in 2023 rather than 5-6 percent, on higher-than-expected storage and reduced consumption.

Yet EU leaders are also aware of the pain this winter will bring with rising energy bills, and the rising costs for EU governments to cushion households at sky-high costs.

“All the member states are suffering, and they feel this could be a winter of discontent,” the official said.

With inflation expected to remain high into next year, consumers are bracing for the biggest blow to living standards in a generation as wages fail to keep pace with prices.

Consumer confidence fell to its lowest level since records began in 1974 in the UK and it fell to a near-record low in the eurozone. The latest S&P Global PMI, a monthly business survey, showed that business activity contracted in August in the eurozone and the UK.

The British economy began to contract in the second quarter and even the latest government bailout did not rule out a possible recession. The European Central Bank now expects the eurozone to stagnate in the last quarter of the year and the first three months of 2023 and shrink completely next year in a downside scenario.

Vladimir Putin gestures at an event

Vladimir Putin outlined the threat at an economic forum in Vladivostok on Wednesday. He said: ‘We will not provide anything at all if it is against our interests. No gas, no oil, no coal, no fuel oil, nothing’ © via REUTERS

Angel Talavera, head of European Economics at Oxford Economics, said it was “inevitable” that governments would come up with larger support packages.

Roberto Cingolani, Italy’s energy transition minister, said: “As long as we are in this terrible situation, it makes sense to take extraordinary measures to protect citizens and companies.”

Video: How Putin held Europe hostage over energy | FT Energy Source



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