The energy stand-off between Russia and Europe is reaching high noon. The Kremlin last week shut down indefinitely its main westwards gas pipeline, Nord Stream 1, cutting total Russian gas flows to a fraction of prewar levels and sending prices surging. Vladimir Putin’s calculation is that European countries will prove less able to bear soaring winter energy bills and possible shortages than Russia can withstand western sanctions — and that their unity and resolve will shatter before the spring brings renewed military offensives in Ukraine. With Kyiv’s forces starting to make breakthroughs, the coming energy battle is one that democratic Europe cannot lose.
As the EU thrashes out its joint response, there is cause for guarded optimism. Ursula von der Leyen, European Commission president, says Russian gas has fallen from 40 per cent of EU gas imports before the war to 9 per cent today. New suppliers of liquefied natural gas have been found, fuel sources switched and efficiency measures brought in. The EU’s gas storage is 84 per cent full — higher than the 80 per cent target it set for the end of October.
Prices, though volatile, have dropped below the level before the Nord Stream 1 closure was announced. Some analysts dare to whisper that, having already fired his main gas weapon, Putin may have limited ammunition left.
Yet there can be no false sense of security. Russia’s NS1 closure makes the winter recession that has loomed over the eurozone an ever-growing reality. The already high risk of rationing and blackouts has increased, and a harsh cold snap could quickly drain gas stores. Not all countries will be affected equally: those traditionally most reliant on Russian gas, including Germany, Italy and central European nations, face a deeper economic downturn, which could impose strains on solidarity.
Super-high prices are still crushing households and industrial production, and higher interest rates will exacerbate the squeeze. Without robust action, German officials warned earlier this year of the potential for an “ice-cold winter”, and thousands left out of work in industries that shut down, never to reopen. Progress has been made since then, but social unrest from the cost of living squeeze — as exemplified by recent protests in the Czech Republic — remains a risk. EU nations will be under pressure to spend even more to prevent such dislocation and avoid a backlash against the privations being demanded in the name of solidarity with Ukraine.
This makes the co-ordinated EU approach — which von der Leyen is due to outline on Wednesday — all the more critical. So far, countries have responded with varying policy prescriptions, including price caps, one-off payments and subsidised transport. Some €350bn has already been spent and pledged, stretching public finances. Agreeing a joint plan will not be easy. Splits remain over plans for a gas price cap and mechanism to capture windfall profits. But the spirit of co-operation, within the EU and with other international partners, is the only way forward.
The higher gas demand remains and the tighter the availability of alternative supplies, the stickier high inflation will be and the deeper the economic costs for the whole bloc. Joint demand and supply management will now be crucial; proposals for common efforts to cut power use and facilitate liquidity to energy companies are laudable.
These will need to be combined with efforts to strengthen energy infrastructure to help balance supply and demand, and co-ordination to prevent hoarding of supplies. Europe has held its ground well so far. But the economic war with Putin will finally be won or lost on how well the bloc can stick together.
Source: Economy - ft.com
