By Geoffrey Smith
Investing.com -- Europe’s economic war with Russia over Ukraine has taken a sharp turn for the worse. It will take a miracle to stop it deteriorating further – and to protect the rest of the world from the fallout.
Over the last week, Russia has steadily turned off the gas taps to Europe, its biggest customer for the last 40 years. Germany has seen its supplies cut by 60%, Italy by 50%, France by 100%.
A relationship that has often been uneasy but always mutually beneficial is now in tatters. Moscow is making no secret of the fact that it considers the weaponization of energy supplies not only legitimate but expedient.
Indeed, Russia seems happy to leverage its position as a key exporter in many global commodities markets, confident that it can shift the blame for suffering to others. Margarita Simonyan, editor in chief of the RT news channel that has now been effectively shut down in Europe and the U.S., joked at a conference last week that “everyone is pinning their hopes famine now, because when famine strikes, they will realize that they have to be friends with us and the sanctions will be lifted.”
For its part, Europe is signalling that it has given up on any hope of economic relations with what had been its biggest energy supplier until March. The outlook for its economy is withering accordingly, and the euro's exchange rate has started to reflect fears of stagflation. Europe has accepted that it will not only have to pay higher prices for its energy for the foreseeable future, but also effectively suspend its contribution to slowing global climate change, a serious blow to the - admittedly narcissistic - self-image it has cultivated for the last three decades.
Germany, Austria and the Netherlands have all signalled they will restart coal-fired power stations this year in order to replace gas-fired generation. German Vice Chancellor Robert Habeck – who owes his place in government largely to a successful pressure campaign to shut down coal-fired power in Germany – called the move “bitter.” The news only just took the edge off benchmark European gas prices this week, which remain at over five times their level of early 2021.
As the market reaction suggests, even that may not be enough to avoid outright gas rationing in Europe later this year. Gazprom’s action forced European utilities last week to burn gas that they had put into storage for the winter, putting an abrupt end to the usual injection season. According to data from Gas Infrastructure Europe, EU storage facilities were currently 54.7% full at the weekend. That’s more or less in line with seasonal norms, but still means a lot of gas needs to be found by September if Gazprom (MCX:GAZP) – which usually supplies 25% of the bloc’s needs – isn’t playing ball.
The escalation has continued into this week, as Lithuania – with the explicit backing of the EU - has stopped the transit of sanctioned goods by rail across its territory between the Baltic enclave of Kaliningrad and the rest of the Russian Federation, dealing a serious blow to a local economy already hit hard by the collapse of trade with its neighbors. The force of that action will increase as the EU’s list of sanctions extends to such goods as coal and fuel later in the year.
Many in the Kremlin – let alone the pundits on Russian state television’s toxic talk shows redolent with puerile bravado - would see that as a brazen challenge, an invitation to restore links by force. Nikolay Patrushev, the former FSB head who now chairs Russia’s Security Council, promised a response that would have “serious negative consequences for the population of Lithuania.”
However, Lithuania – in contrast to Ukraine – is both a member of the European Union and, more importantly, NATO, its sovereignty guaranteed ultimately by the nuclear arsenals of three permanent members of the UN Security Council. For all the reckless miscalculations of Vladimir Putin’s regime over recent years, an outright attack on NATO is still – at least for now – unthinkable.
One ought, perhaps, to be grateful for small mercies. However, what has happened over the last week has entrenched divisions. Both sides obviously remain determined to securing something they can call victory. That means months, if not years, 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.