Germany’s dependence on Russian gas used to be seen as an advantage. Former chancellor, Angela Merkel, believed that it drew Russia closer to Europe, making it easier to influence Russia while providing Germany with cheap gas. That consensus has been blown to bits since Russia invaded Ukraine on February 24. Since the 10-day scheduled maintenance to the Nord Stream 1 pipeline ended on July 21, Russia’s state-owned gas company, Gazprom, has not resumed exports to Germany, triggering a gas crisis at a time of fragility in Europe. Since Nord Stream 1 supplies 58% of Germany’s gas needs and is a crucial supplier for other European countries, the German gas crisis will reverberate across Europe.
Russia Fights Back
Sanctions on Russia were supposed to hurt her, but since then, economists have been unable to come to a consensus about whether or not they are working. A study by economists at Yale University argues that sanctions are working and have crippled the Russian economy. In contrast, the International Monetary Fund (IMF) believes that sanctions have not had the desired effect and that Russia’s economic prospects are improving. The Russian ruble has been the strongest currency of the year, and Russia has found new markets for its products in India and China and managed to use import substitution to blunt the effects of sanctions. Yale’s economists may be right that Russia has suffered, but it has had the tools to fight back by sanctioning Europe and cutting or limiting gas supplies.
The latest gas supply report from Germany’s Federal Network Agency, the Bundesnetzagentur, paints a troubling picture.
Source: Bundesnetzagentur
Gas Rationing is On the Cards
The Bundesnetzagentur says that “the situation is tense, and a further worsening of the situation cannot be ruled out.” Supplies from Nord Stream 1 stand at 20%, and the agency believes that if supplies remain this way, Germany will not be able to reach its storage level target of 95% by November. The reduction in supply from Nord Stream 1 has also affected gas transfers to France, Austria, the Czech Republic, and other European countries. Currently, Germany has a storage level of 70.39%. A critical facility, Rehden, has a storage level of 46.52%. Due to the gas crisis, wholesale gas prices are historically high, with the agency signaling that businesses and private consumers should expect rising gas prices.
Indeed, the European TTF gas price has been up 171.8% since the start of Russia’s invasion of Ukraine, to €202 per megawatt hour. As of late June, when Russia cut supplies by 60%, Germany is on Stage 2 of its national gas emergency plan. If the situation worsens, Germany will have to ration supplies.
The German Economy Is Shaken
Germany has a trade deficit due to rising gas prices for the first time in three decades. Germany remains heavily reliant on industries that consume a lot of gas. The country is also experiencing its highest inflation rate in decades and is on the edge of a recession.
The euro is trading at near-parity with the U.S. dollar, something that hasn’t happened since 2002 when it first went into circulation.
A Shift Back to Coal
Gas supplied Germany with a cheap source of energy. Still, with sanctions, the country’s Economics Minister, Robert Habeck, has revived the coal industry and asked Germans to make sacrifices to save energy. Standards for building gas terminals have been loosened so Germany can build supply faster. The country has, along with the rest of the European Union and the United States, sought to win back the support of new gas supplies from Saudi Arabia and the United Arab Emirates (UAE).
Many businesses have already indicated that if there are further rations or Nord Stream 1 shutdowns, they will be forced to close down for good. This problem across Europe is particularly acute in Germany, where emergency plans prioritize households over businesses. Germany has indicated it will support businesses suffering due to the gas crisis. This is new for Germany, which, in the days of the debt crisis in the PIGS (Portugal, Ireland, Greece, and Spain), lectured its southern partners about sustainable policies.
Germany’s crisis is Europe’s crisis. For instance, the energy giant, Uniper, which supplies most of Germany’s gas, is owned by the Finish state-owned energy company, Fortum. The Finnish state will be directly prejudiced due to any challenges Unipro faces.
Russia has also cut supply to nearly a dozen European countries. Without a gas-sharing agreement, there are no suitable mechanisms to help countries like Germany, suffering the brunt of the crisis. Indeed, France, Belgium, the Netherlands, and Spain, which import most of their gas from non-Russian sources, are not part of any bilateral agreements signed in solidarity. Those countries that are not dependent on Russian gas have enjoyed lower inflation than those that are dependent. The rest of Europe is likely to suffer from rising gas prices and struggling industries, and this will require a massive stimulus package to avert disaster.
