Mint explainer: Is Putin pushing Europe into recession?

What caused the crisis?

Russia supplies about 40% of Europe’s natural gas imports, which power its industry and households. Now, as the EU resists Russia’s invasion of Ukraine, imposes sanctions against Russia and offers military and humanitarian aid to Ukraine, Putin has responded with sharp cuts in natural gas supplies to the EU. It is already causing widespread misery in Europe.

While Russia has openly punished some EU countries for being “unfriendly”, Putin is also seen to covertly target other countries.

In March, Putin announced that “uncivilized” countries would have to pay for piped gas in rubles. However, the European Commission ruled that taking these orders from Putin would violate EU sanctions on Russia and urged companies to pay only in the currency mentioned in their contracts. -Mostly Euros or Dollars. Russia later cut gas supplies to Poland, Bulgaria, Finland, the Netherlands and Denmark.

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On 27 July, the Russian state-owned energy company Gazprom increased the amount of natural gas flowing through the Nord Stream 1 pipeline to Germany to about 20% of capacity, and attributed it to technical reasons. However, Germany saw this as a calibrated move to offset the hike in gas prices after the Ukraine war. There are three other pipelines supplying Russian gas to Europe, but the pipeline passing through Poland and Belarus has also been closed.

Now, in another twist, Gazprom has announced that it will shut down the Nord Stream 1 pipeline for three days, from 31 August to 2 September, for unscheduled maintenance works, which will increase European natural gas prices. The EU will see this as another attempt by Putin to turn his hand.

What has been the effect of Russia’s cuts in natural gas supplies?

Recently there has been a sharp drop in Russian gas supplies to Europe – from about 40% to about 15% of imports. This has raised natural gas prices across the continent. About 20% of European electricity is powered by gas plants.

On Friday, the year-ahead contract for German electricity touched 995 euros per megawatt hour, and in France, prices rose to more than 1,100 euros, more than a tenfold increase in both countries from last year. Germany buys nearly half of its gas supply from Russia and now faces dwindling supplies in the winter months amid concerns that Putin may cut gas feed altogether.

Meanwhile, Britain’s energy regulator Offgame has announced that it will nearly double the price cap on electricity and gas to an average of £3,549 a year, thanks to Russian cuts in gas supplies and the lifting of Covid restrictions.

How serious is the problem?

Consider this to understand the gravity of the energy crisis in Europe. Rising energy prices in the UK will leave nearly two-thirds of all UK households in fuel poverty by January, shows a recent study from the University of York. Even with planned government support, many middle-income households will find it hard to pay their energy bills. The study shows that 18 million households, about 45 million people, will see a cost-of-living crisis.

Until recently, Germany used to buy more than half of its gas from Russia. And the government of Europe’s biggest economy is now battling to shore up winter gas supplies amid growing fears that Moscow may soon turn off the tap altogether.

Rising energy costs threaten to slide into recession – consumption in Europe’s largest economies will be hit as household budgets shrink, and businesses may even have to postpone expansion plans due to rising energy inflation.

Meanwhile, Russia’s oil and gas companies may be selling less energy, but their earnings may have actually increased due to the jump in prices, the International Energy Agency says.

How is Europe fighting the crisis?

Without Russian natural gas supplies, the EU has been forced to consider alternatives. One of them is the import of liquefied natural gas (LNG) from the US and Qatar. Germany is accelerating the construction of LNG import terminals, but this may not be a near-term solution. There is also a high demand for LNG from Asia, making LNG imports costlier.

European countries are adopting desperate measures, pushing energy-conserving measures. For example, Spain has introduced a new energy-saving scheme with guidelines for air conditioning and heating systems. France also has new rules for air-conditioned shops, while in Germany the government debates the possibility of keeping its nuclear plants running for some time rather than shutting down. Some media reports suggest that many Germans are also saving wood for the winter.

In July, EU energy ministers signed an agreement requiring member states to reduce gas use by 15% from August to March in the wake of developments in Russia. Still, it promises to be a cold winter in Europe.

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