Russia Puts the Squeeze on Europe’s Gas By Investing.com


© Investing.com

By Geoffrey Smith

Investing.com — Europe’s economic war with Russia over Ukraine has taken a sharp turn. It will take a miracle to stop it from deteriorating further – and to protect the rest of the world from the consequences.

Over the past week, Russia has steadily turned off gas taps to Europe, the largest customer of the past 40 years. Germany saw its supplies cut by 60%, Italy by 50%, France by 100%.

A relationship that was often uncomfortable but always mutually beneficial is now in tatters. Moscow makes no secret of the fact that it considers arming the energy supply to be not only legitimate but also expedient.

Indeed, Russia seems eager to leverage its position as a major exporter in many global commodity markets, confident that it can blame others for the suffering. Margarita Simonyan, editor-in-chief of the RT news channel now effectively shut down in Europe and the US, joked at a conference last week that “everyone now hopes for famine because when the famine hits, they will realize they have to be friends with us. and the sanctions will be lifted.”

For its part, Europe indicates that it has given up hope of economic relations with what was until March its largest energy supplier. The outlook for its economy is fading accordingly, and its exchange rate is beginning to reflect fears of stagflation. Europe has accepted that in the near future it will not only have to pay higher prices for its energy, but also effectively suspend its contribution to slowing global climate change, a serious blow to the – albeit narcissistic – self-image it has cultivated for the last three decades.

Germany, Austria and the Netherlands have all indicated that they will restart coal-fired power stations this year to replace gas-fired generation. German Vice-Chancellor Robert Habeck — who owes his seat in government largely to a successful press campaign to cut off Germany’s coal-fired power supply — called the move “bitter.” The news only just took the lead this week, which remains at more than five times the level of early 2021.

As the market response suggests, even that may not be enough to prevent outright gas rationing in Europe later this year. Gazprom’s move last week forced European utilities to burn gas they had stored for the winter, bringing an abrupt end to the usual injection season. According to data from Gas Infrastructure Europe, EU storage facilities were currently 54.7% full over the weekend. That’s more or less in line with seasonal norms, but still means there’s a lot of gas to be found in September if Gazprom (MCX:) – which typically supplies 25% of the block’s needs – doesn’t join in.

The escalation has continued this week as Lithuania – with the explicit support of the EU – has halted the transit of sanctioned goods by rail through its territory between the Baltic enclave of Kaliningrad and the rest of the Russian Federation, dealing a serious blow to a local economy already hard hit by the collapse of trade with its neighbors. The force of that action will increase as the EU’s list of sanctions expands to goods such as coal and fuel later in the year.

Many in the Kremlin — let alone the pundits on Russian state television’s poisonous talk shows that reek of childish bravado — would see that as a brutal challenge, an invitation to forcibly mend ties. Nikolay Patrushev, the former head of the FSB who now chairs the Russian Security Council, promised a response that would have “serious negative consequences for the people of Lithuania”.

However, Lithuania – unlike Ukraine – is both a member of the European Union and, more importantly, of NATO, whose sovereignty is ultimately guaranteed by the nuclear arsenals of three permanent members of the UN Security Council. Despite all the reckless miscalculations of the Vladimir Putin regime in recent years, an outright attack on NATO is still – at least for now – unthinkable.

One should perhaps be thankful for small mercies. But what has happened in the past week has deep-seated the division. Both sides remain clearly determined to secure something they can call victory. That means months, if not years, of more misery for the people of Ukraine, and economic distress for Europe and all those in Africa and Asia who need grain from the Black Sea basin to feed their populations. Cold comfort indeed.

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