Europe sounds "full mobilization" after the Kremlin shuts down a key gas pipeline

Europe sounds “full mobilization” after the Kremlin shuts down a key gas pipeline

“We are at war,” Emmanuel Macron said on Monday as he described emergency measures France was taking to bolster its energy supply and protect its citizens and businesses from soaring costs.

For months after Russia’s full-scale invasion of Ukraine, the French president aspired to serve as a go-between and peacemaker between Kyiv and Moscow. This week, he and his fellow European leaders have become 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 measures, unthinkable only a few months ago, to mitigate the Russian attack and protect their energy markets and economies from the impact.

Sweden and Finland had to provide emergency liquidity to their electricity producers who were facing increasing demands for guarantees for their hedging transactions.

Finnish Economy Minister Mika Lintilä said the region could be on the brink of the energy sector’s version of the Lehman Brothers bank collapse in 2008.

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

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

Line chart of consumer confidence indicator (net balance, more confident less less confident, %) showing that eurozone consumer confidence is at an all-time high

European Commission President Ursula von der Leyen, who is due to present an emergency package next week, said the price of Russian gas imports should also be capped – an idea proposed by Italian Mario Draghi who won the backing of EU energy ministers on Friday, despite fears it could push the Russian leader to turn off the taps altogether.

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

This week, he finally gave up the pretense. On Monday, in what looked like retaliation for proposed oil and gas price caps, the Kremlin said gas deliveries through the Nord Stream 1 pipeline, its main conduit to European markets, would not resume until once the West dropped economic sanctions against Russia.

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

Russia continues to pump gas through Ukraine and via the TurkStream pipeline – about a fifth of the total amount it was sending in June – but the prospect of a complete shutdown of gas flows has come sooner than expected by many in Europe.

Putin exaggerated the threat at an economic forum in Vladivostock on Wednesday. “We will not provide anything if it is against 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 OPEC Plus group of countries, which includes Russia, agreed to cut 100,000 bpd its output.

Cartogram showing gas imports of European countries by source, 2021 compared to January-June 2022

Alexander Novak, Russia’s top energy official, boasted of the “collapse” of European energy markets. “Winter is coming and a lot of things are hard to predict,” he said.

However, some officials and analysts believe 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 on Wednesday, wholesale prices fell below Monday’s level.

“If that’s all, it could mean the end of the show,” said Simone Tagliapietra, senior researcher at the Bruegel think tank in Brussels.

European capitals are increasingly convinced that Europe can get through the winter without serious economic and social upheaval or energy rationing. Von der Leyen said the EU had “weakened the grip that Russia had on our economy and our continent”.

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

Ursula von der Leyen speaks to the media
European Commission President Ursula von der Leyen, who is due to present an emergency package next week, said the price of Russian gas imports should also be capped © Olivier Hoslet/EPA/Shutterstock

Before its invasion of Ukraine, Russia accounted for 40% of EU gas imports, but now just 9%, von der Leyen noted.

“Everyone was waiting [Russia] to get to the Nord Stream shutdown in winter, because 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 of Europe coming up with such a response.”

An EU official said: “Putin has failed to achieve his goals – our dependence on him has diminished much faster than expected.”

Deutsche Bank economists now believe the German economy will contract 3-4% in 2023 instead of 5-6%, with higher-than-expected storage and reduced consumption.

Yet EU leaders are also aware of the pain that will come with soaring energy bills this winter and the rising cost to EU governments of protecting households from exorbitant costs.

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

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

Consumer confidence has fallen to its lowest level since records began in 1974 in the UK and it has plunged to near-record lows in the euro zone. The latest S&P Global PMI, a monthly business survey, showed a contraction in business activity in August in the eurozone and the UK.

The UK economy began to contract in the second quarter and even the latest government aid has not dispelled a possible recession. The European Central Bank now expects the euro zone to stagnate in the last quarter of the year and the first three months of 2023, and contract completely next year in a bearish scenario.

Vladimir Putin gestures at an event

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

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

Roberto Cingolani, Italian Minister for Energy Transition, said: “As long as we are in this terrible situation, it makes sense to have extraordinary measures to protect citizens and businesses”.

Video: How Putin Held Europe Hostage For Energy | FT power source

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