Russian gas: Germany prepares for the worst

Posted Apr 27, 2022 6:24pmUpdated April 27, 2022 at 7:58 p.m

After Poland and Bulgaria, will Germany be the next country to suffer from a halt to Russian gas supplies? “As soon as we approach the point where we are no longer dependent, we have to expect such political gestures,” said the elected liberal foreign politician Alexander Graf Lambsdorff on Deutschlandfunk on Wednesday morning.

The country has reduced its dependence on Russian gas from 55% to 35% in two months, according to Economy Minister Robert Habeck, who is multiplying trips to diversify Germany’s energy supply. It can do without Russian coal and soon without Russian oil, but this level does not protect against a recession if Moscow cuts supplies.

A stunted growth

Especially since the cost of the war in Ukraine has already dampened executive hopes for a speedy economic recovery. Robert Habeck announced on Wednesday that he only expects growth of 2.2% this year, compared to 3.6% forecast in January. This slowdown has been accompanied by a virtual doubling in annual inflation forecasts to 6.1% from 3.3% expected at the start of the year, on the back of rising energy and food prices.

The environment minister is refusing to sound the alarm for the time being, emphasizing that gas reserves have been rising steadily since mid-March. You now reach 33.4%. Robert Habeck still wants to believe that Moscow will honor its supply contracts. Unlike Poland and Bulgaria, Germany has accepted the system of double accounts demanded by Moscow: it allows GazpromBank to convert euro payments by German companies into rubles.

A real threat to the industry

Still, the executive branch is in the process of amending the Energy Security Act to avoid a wave of utility bankruptcies in the event of a supply disruption and skyrocketing gas prices. In this case, energy companies and their partners would be entitled to pass on the increases to their end customers. Such a scenario would have serious consequences, stressed Robert Habeck, that the state could not compensate for everything.

According to a study by the Halle Economic Institute (IWH) published on Tuesday, the country’s three main regional engines, on which the manufacturing sector is concentrated, would be hit hard. Assuming that gas reserves will be exhausted by the end of the year, the IMF estimates that gross value added in North Rhine-Westphalia could fall by EUR 40.8 billion in 2022 and 2023, and by EUR 38.6 billion in Bavaria and in Baden-Württemberg by 35.4 billion euros. Overall, the decline in the number of people in employment in western Germany is likely to reach -6.2%.

Reduced financial leeway

However, the economic downturn is already weakening the promise of the liberal finance minister to return to the path of budgetary orthodoxy and debt reduction next year. He hopes to increase it from 69.3 percent in 2021 to 65.75 percent from 2023. In order to absorb the shock of the war and the prolongation of the pandemic, Christian Lindner has already had to have the Council of Ministers approve a loan extension of 39.2 billion euros, which increases the debt to 138.9 billion euros required to balance the budget in to complete this year.

Robert Habeck is therefore working hard to reduce Germany’s dependence on Russian gas and limit damage. But unlike oil and coal, transporting this energy source requires the construction of infrastructure, particularly LNG terminals. According to the Environment Minister, it is not realistic to assume that this process will be completed by next year, but “we must try the impossible,” he concludes.

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