The question is, how far will Putin go with gas cuts to Europe? Many economists and analysts believe that Russia is merely playing a long game and is hoping to take advantage of public anger over energy prices, but this could cause economic pain for both sides. While gas prices have been rising for some time, there has been a renewed push from some countries to increase production, such as Bulgaria. Germany, on the other hand, is concerned that increased production costs will make the euro weaken.
Gazprom’s stance on gas cutoffs
The gas cutoffs are the result of Russia’s refusal to pay its debts, which it has suffered since it invaded Ukraine. The halting of deliveries to Finland comes just days after the Nordic country announced it was joining NATO, and will likely spell the end of Finland’s 50-year relationship with Russia. Gazprom’s move came after Finland refused to pay in rubles, a demand Russian President Vladimir Putin has made since the day he invaded Ukraine. According to Finland’s state-owned gas company, natural gas deliveries have been cut off on Saturday morning.
This is the latest example of Gazprom’s tough stance toward its European partners. Its new gas rules were introduced in response to Western sanctions, including the freezing of Russian assets. Companies such as Orsted and GasTerra have stopped supplying gas to the Netherlands and Denmark and Shell Energy Europe has refused to pay in rubles for supplies to Germany. However, this decision surprised some traders, including Italian Prime Minister Mario Draghi.
Finland is heavily dependent on Russian gas supplies. It accounts for 5% of its total energy consumption. Moreover, Finland’s forestry and chemical industries are heavily dependent on natural gas. If natural gas supply is interrupted, these industries would be forced to shift to alternative sources. These alternatives could come from other sources, including GasTerra B.V., a partially Dutch SOE, and Orsted AS, a Danish energy company. Other European suppliers include Shell Energy Europe Limited (SEEL) in the UK.
However, this may not be enough to stop the EU from using Russian gas. The resulting disruption would be devastating. The EU is already facing problems in providing natural gas for its citizens. In addition to its low prices, the lack of gas is causing a slump in Europe’s economy. Because gas is a “swing” energy source, it kicks in when renewables produce less power or when electricity demand spikes.
A spokesperson for the German Economy Ministry declined to provide details on why the company has had to replace the missing volumes with other sources of natural gas. But he said it’s too early to say whether the gas cutoffs will have a substantial effect on the German company’s finances. In addition, the German government said the cuts were due to technical issues with Siemens Energy AG turbines, while the Russian energy company has been blaming it on economic sanctions against European banks.
The gas supply cutoffs in Europe are a result of Russia’s use of energy as a weapon. Earlier this year, Gazprom PJSC suspended pipeline shipments to Denmark and the Netherlands. But the company has now shocked markets by cutting off a small contract in Germany with the Netherlands. The Netherlands, Norway, Finland, and Denmark refused to pay in rubles, so Gazprom responded by shutting off gas shipments to these countries.
Russia’s demand for gas cuts to europe
With the escalating tensions between Russia and Europe over energy and Russia’s invasion of Ukraine, Gazprom has cut off natural gas supplies to Poland and Bulgaria. While this will likely not cause a significant impact on their economies, the cutoff could add to the pressure to reduce their dependence on Russian energy. Poland and Bulgaria had been requesting gas supplies in euros for years, but the Russian government refused to do so.
Meanwhile, in the meantime, European leaders have stepped up their own efforts to reduce their dependence on Russian gas. They are planning to order more liquefied natural gas, pursue new pipelines to supply their nations, and push for energy conservation measures. The European Union aims to reduce its reliance on Russian gas by two-thirds this year, and completely end it by 2027. Meanwhile, Russia’s gas supply is largely limited to its export terminals.
If Russia were to cut off all gas to Europe, the European economy would suffer. While the exact impact would depend on how many countries use it, there are varying estimates of how much growth Europe would lose. Moody’s, for instance, said in a recent study that a total energy cutoff would plunge Europe into recession. And, if that was the case, Germany’s central bank said it could lose five percentage points of output and experience higher prices.
The situation is particularly serious in the case of European countries. The EU will have to find a new buyer for its gas to ensure that there is a constant flow of energy. However, the European gas companies are risk-averse and profit-maximising. So buying gas at record prices has limited upside and massive downsides. In addition, the cutback will hurt the EU’s growth by 2.5 percentage points.
While these efforts are vital, they are unlikely to be enough. The hard physical bottlenecks cannot be removed overnight. Without Russian gas, Europe will face a massive gap between supplies and demand. Taking exceptional measures would show a united European defiance and would stop billions of euros from flowing from the west to the east. So, we cannot wait any longer, and we should begin building our gas inventories now.
European countries must find a way to balance their gas demands in an equitable manner. This means finding alternative energy sources and distributing the costs fairly. This is no easy task, especially when the EU is aiming to reduce their gas imports dramatically in the coming decades. The IEA 10-Point Plan also calls for an end to EU dependence on Russia for energy and a move to increase domestic gas production. This strategy may have a profound impact on the EU’s gas consumption.
While gas cuts from Russia do not affect consumers immediately, it could lead to significant shortages later in the year. Most European nations stockpile gas in advance of winter, when demand for energy is at its peak. According to the European Union, EU countries should have at least 80 percent of their gas storage capacity by Nov. 1. With the gas cuts, some countries may need to resort to gas rationing to keep vital services running.
Germany’s response
Germans have reacted positively to the threat of Russia’s gas cut, but they are also sceptical about the German government’s reaction. According to a recent poll, Scholz’s popularity rose by 13 percent. Ninety percent of respondents said that Russia was unreliable, while 80% said that Berlin’s actions were appropriate. Two-thirds said they support the German government’s decision, while four-fifths believe NATO is important to keep Europe safe.
In Germany, gas prices are six times higher than a year ago, putting Germany in a trilemma. The government’s goal is to phase out coal and nuclear power by December 2022. Germany also depends heavily on Russian gas, and is only slowly embracing renewable energy. It appears that Russia’s gas cuts to Europe are an emergency response to the country’s energy supply shortage.
Russia’s gas supply cut to Europe hit the German pipeline the hardest, but it also shook up the Netherlands, Italy and France. As Russia’s largest customer on the continent, Germany is highly vulnerable to a gas shortage. But, Germany has convened an expert group to monitor the situation. If the Russian gas supply is cut, Germany plans to ration its natural gas supplies to keep its economy running.
If Germany continues to rely on Russian gas supplies, the effects could be devastating. Germany’s GDP could fall by almost a full percentage point if gas deliveries are suspended. In fact, it could contract by two percentage points by 2023. Those numbers aren’t even factoring in the costs of delaying the decision. A delay would further feed Russia’s war machine, so the German government needs to act pragmatically.
If European leaders don’t stop Russia’s gas deliveries to Europe, they could end up paying for the gas in roubles. But Europe’s leaders can’t afford to wait until that day. So, they’re scrambling to fill Germany’s gas storage facilities. The federal network regulator is racing to fill up its reservoirs. By October, it must reach 80 percent full. Its largest storage facility – the Gazprom Germania – is nearing capacity, but it’s not quite there yet. A new law may be in play in Rehden.
While the decision to reduce the flow of gas to Europe was made before the gas cuts, it could trigger an emergency response if the Russians don’t supply their own gas supplies. As part of this emergency response, Germany has triggered a second stage of its gas rationing plan. This may include gas rationing. A full halt could also result in the collapse of the Nord Stream pipeline.
Russia has many good reasons not to cut off its gas supplies to Europe overnight, but this decision has a negative impact on Germany. The EU is dependent on Russia for 40 percent of its oil and gas imports, and a total cutoff could put the country into recession and increase inflation rates. Despite its strong position against the Russian gas cutoff, Germany has also refused to implement a full-scale ban on imports.
