Europe previously received about 45% of its annual gas supply from Russia.
Leonhard Foeger | Reuters
Europe’s slide into recession appears to have been confirmed with Russia squeezing natural gas supplies to the bloc and heavy industry facing allocation difficulties in the coming months.
Just days after Europeans breathed a sigh of relief when Russian gas giant Gazprom announced that it would resume supply through the Nord Stream 1 pipeline, it announced on Monday that flow will decrease again.
The announcement, with Gazprom saying it would be servicing a turbine along the pipeline, was greeted with skepticism and condemnation in Europe.
Ukrainian President Volodymyr Zelenskyy said the move – which would reduce flows to Germany to 20% of capacity from an already low 40% – equated to a “gas war” with Europe. German Economy Minister Robert Habeck called maintenance as the reason for the supply cuts a “farce”.
It puts Europe in a difficult position in the face of rampant inflation, the war in Ukraine, and supply chains already in trouble after the Covid-19 pandemic.
Germany, the region’s largest economy and a traditional engine of growth, has special cause for concern. It depends largely on Russian gas and is sliding toward recession. The government is particularly worried about how it will keep the lights on over the winter: Monday night, Habeck said “we have a dire situation. It’s time for everyone to understand that” in a statement. Interview with ARD TV station.
He also said that Germany must reduce its gas consumption, noting that “we are working on that.” He said that in the context of low supply, gas for industries will be reduced to private residences or critical infrastructure such as hospitals.
“It is of course a big concern, which I also share, that this could happen. Then some production chains in Germany or Europe will simply cease to be produced,” he said. We have to avoid that with all our might.”
Depends on Russia
With Russia under a raft of international sanctions in response to the Ukraine war, gas is one of the weapons it could use against Europe.
The region previously received about 45% of its annual supply from Russia, and while efforts were made to find alternatives, such as US liquefied natural gas, the region could not replace the Russian hydrocarbons fast enough.
Unless the situation changes dramatically, analysts are predicting a difficult winter ahead 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 incorporates a slight second-quarter decline in real GDP in the UK, Italy, Spain and the Netherlands. With inflation rising surprisingly, central banks are stepping up the pace. While the recovery in tourism services and consumption could give the region a slight boost in the summer quarter, another setback could occur in the fourth quarter due to supply unreliable energy,” it added.
Recession ‘obvious’
Outrageously high electricity and natural gas prices will hurt industrial competitiveness in Germany and other production centres. S&P warned that the destructive Russia-Ukraine war could drag on until 2022, denting consumer and business confidence across Europe.
It noted that eurozone 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% by 2024.
EU governments on Tuesday agreed to supply natural gas next winter in an attempt to protect themselves from further Russian supply cuts with the bloc’s energy ministers passing draft legislation Europe aims to reduce gas demand by 15% through the end of autumn and into the spring of next year. .
Whether gas savings can be achieved remains to be seen and there is disagreement among EU members over the distribution of gas use.
“Cutting consumption can only do so much. Basically, there’s huge demand for natural gas and especially liquid natural gas (LNG) in Europe. The allocation, in particular, is huge. will impact energy-intensive industries such as auto manufacturers, chemical companies and cryptocurrency miners, possibly” “Cannot be ruled out,” said Simon Tucker, global head on energy, utilities and resources at Infosys Consulting, said in emailed comments Tuesday.
“EU countries and the UK must do all they can to replenish their gas stores before the cold snap starts – this means looking for every possible way to reduce energy use and We have seen a large increase in LNG shipments from the Middle East and North America. However, countries need to accelerate their own infrastructure modernization. Deploying a range of domestic, low-carbon energy alternatives such as mini-nuclear reactors and community renewables is not only a ‘good thing to have’, it is a must if we are to escape come out of this crisis stronger.”
With such an infrastructure modernization program likely to take a long 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 possibility of a recession in Europe appeared to be “clear”.
“Once winter energy allocation plans are agreed, we expect tighter financial conditions in Europe to trigger a much worse response in the real economy, based on a more economic stance.” savings, household leverage and corporate balance sheets.Winter is knocking on Europe’s door,” Citi concludes.
Of course, it is possible that Russia could once again boost its gas flow nozzles to Europe once the supposed maintenance of this turbine on the Nord Stream 1 pipeline is completed.
“There’s a bit of confusion as to whether this is a short limited supply while the repaired turbine is back online or if the paperwork will never be resolved and we just live.” with 20% supply for a substantial period,” Deutsche banking analysts led by Jim Reid said in a note on Tuesday, adding that Russia may be looking for clearer reassurances. regarding future sanctions waivers for the maintenance of NS1 and related matters.
They said: “This will probably be difficult to achieve and the Russians will know this. So it looks like Russian politics will be under control here at the moment.”
Strategists believe that with pipelines flowing at 40% capacity, Germany can weather the winter even if some rations are needed. “At 20% you’re probably going to need some notable allocations unless they cut gas exports, which is a very delicate thing to do politically,” they said.
Meanwhile, the enforceable 15% reduction that all EU member states have just agreed to may be difficult to enforce in practice. “Expect a lot of remediation and compromise to emerge if a workable plan is agreed upon,” they said.
