European energy crisis looms amid Russia-Ukraine tensions, to reduce GDP by 1-2%
Published: Apr 05, 2022 04:29 PM
A view of the European Gas Pipeline Link Radeland 2 compressor station building site in Radeland, Germany Photo: CFP

A view of the European Gas Pipeline Link Radeland 2 compressor station building site in Radeland, Germany Photo: CFP

With Russia's ruble payment for natural gas taking effect on Friday, the clock is ticking for Europe to grapple with the looming gas cut-off threat which would not only make the bloc face an unprecedented full-blown energy crisis but also create a ripple effect throughout its manufacturing, logistics, and other services sectors, estimated to undercut European GDP by 1 to 2 percent and may even lead to a political crisis, analysts said.

Moscow said gas will continue flowing with payments for supply from April 1 due to be paid by the end of the month or early May, giving respite to Europe whose leaders insist that they will not comply with the ruble payment decree by Russian President Vladimir Putin. 

Analysts said the choices left for the bloc are limited, as the alternative LNG shipment from the US cannot cover demand in the short term and Europe is severely lacking in LNG-receptive infrastructure.

The dire consequences seem to be very ironic, as Washington stands to pocket huge profits from the Russia-Ukraine conflict, while the interests of its European allies are compromised or even sacrificed, observers said, pointing out that Europe could become one of the biggest victims of the US advancing its global hegemony.

Putin announced that the ruble payment for natural gas purchases for "unfriendly" countries took effect on Friday. Under the new rule, foreign buyers will need to open special ruble and foreign currency accounts with Russia's Gazprombank JSC to handle their payments.

If account payments are not made, Russia will consider it a default on the part of buyers, and stop natural gas supply, Reuters reported.

European leaders have rejected paying with the ruble, which they said violates existing contracts. Slovakian Prime Minister Eduard Heger said on Facebook Sunday that Slovakia will act in unity with the EU against Russia's gas payments demands, while Latvian Radio reported Russian natural gas is no longer flowing to Latvia, Estonia and Lithuania as of April 1.

According to a Bloomberg report, European buyers are "looking for clarity on how the new system will work." The German government was reportedly studying details, Denmark has criticized the move, and French Ecology Minister Barbara Pompili said she didn't see the request as a breach of contract as companies would still be able to pay in euros.

While the political wrestling would linger and European leaders may align to bolster their hard political posturing against Russia, analysts said there may be easement on actual practices.

For example, some European countries may apply for exemptions via the EU mechanism, or there may be "some difference" between governments' tough stance and how EU energy firms handle the payment, Cui Hongjian, director of the Department of European Studies at the China Institute of International Studies, told the Global Times on Sunday.

Looming energy crisis

Russia accounts for over 40 percent of Europe's total natural gas supply and 50 percent of the coal supply used in Europe. The European natural gas price reportedly jumped 34 percent after the ruble payment decree.

Analysts warned that a further hike in natural gas prices could drive up living costs for ordinary Europeans, heaping up inflation pressure and even intensifying political crises there.

According to Investec Bank, the UK's cap on energy prices could spike by another 50 percent in October to more than 3,000 pounds per household, driven by fears about disruptions to the European gas supply.

EU economic heavyweight Germany, which relies heavily on Russian energy imports, has seen its March energy price rise 129.5 percent from February. In March, German consumers' spending for household fuel grew by 22.5 percent year-on-year, according to data released by the Federal Statistical Office of Germany.

Germany declared an early warning in its national gas emergency plan on Wednesday, urging its people to cut energy consumption. 

The country's energy-intensive sectors including steelmaking, papermaking, and logistics have already felt the pinch. Some operations have had to be suspended.

According to media reports, there are three stages in Germany's emergency plan, and the final stage is only activated when "there is exceptionally high demand for gas or significant disruption to gas supply, with all market-based measures implemented and supply still insufficient."

"When the final stage is triggered as energy crisis snowballs, energy consumption will prioritize civilian use, and supply for industrial use could be totally halted in that case, exerting a devastating effect on Germany's and the European economy - which has been battered by the pandemic," Cui warned, while estimating that the energy crises could erase Europe's GDP expansion by 1 to 2 percentage points.

No easy way out

Previously, the EU economy was anticipated to grow by 4 percent in 2022, according to a report issued by European Commission on February 10, before signs of an energy crisis manifested.

Cui said a curb on industrial production will weigh on fiscal income, which matters to social welfare, resulting in a vicious circle that may even threaten the bloc's political stability.

A possible alternative to Russia's natural gas is to import LNG from the US. Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times on Sunday that US LNG shipment is not "an immediate solution" as the plan cannot be implemented within the next few months due to limited facilities to accommodate shipment.

In March, the US and Europe struck a major LNG deal, under which the US will provide the EU with some 15 billion additional cubic meters of LNG by the end of the year. "From a realistic point of view, US LNG shipments are unable to fully cover the gap left by Russia's natural gas imports, not to mention higher logistical costs," Lin said.