A protest against the Ukraine war in Cologne, Germany.
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Russia has been a reliable natural gas supplier to Germany for decades.Germany is facing pressure to cut Russian gas supplies off, and there are concerns the Kremlin could halt supplies.Russia accounted for 55% of Germany’s natural-gas imports in 2021 and 40% in the first quarter of 2022.For more stories visit www.BusinessInsider.co.za
Germany is facing mounting pressure to cut Russian natural gas from its economy, putting Berlin in a quandary as the move could devastate the economy.
Europe’s largest economy is heavily reliant on Russian gas: It accounted for 55% of Germany’s gas imports in 2021 and 40% of its gas imports in the first quarter of 2022, Reuters reported.
Due to the war in Ukraine, German banks are already expecting the country’s GDP growth to slow to 2% in 2022 from 2.7% in 2021, said Deutsche Bank CEO Christian Sewing, who was speaking in his role as president of Germany’s BDB bank lobby, per Reuters.
“The situation would be even worse if imports or supplies of Russian oil and natural gas were to be halted,” Sewing said on Monday, according to the news outlet. “A significant recession in Germany would then be virtually unavoidable.”
But it’s hard for Germany to break the habit. Russia has been Germany’s natural-gas supplier for about 50 years — and it has always been reliable, even during the Cold War and throughout the collapse of the Soviet Union, Davide Oneglia, a senior economist at London-based consultancy TS Lombard, told Insider.
Germany imported Russian gas to promote dialogue, trade, and peace
Germany started its Russian gas policy during the Cold War in the 1960s with the so-called Pipeline politik policy that connected both sides with a gas pipeline. The move aimed to incentivise the Soviet Union to move toward dialogue and trade with the West instead of conflict, said Henning Gloystein, the director of energy, climate, and resources at Eurasia Group, a geopolitical consultancy.
After the fall of the Soviet Union in 1991, a unified Germany and the emerging European Union were keen to support Russia economically to stabilize the huge nuclear power, Gloystein told Insider.
“Again, the policy was to cooperate, and hope that trade and prosperity would lead to peaceful relations. Until recently, this policy worked well, though now of course this policy is in shambles,” he said.
Germany is now under pressure to ban Russian natural gas due to mounting reports of Russian atrocities in the Ukraine war. Last week, Russian President Vladimir Putin demanded payment in rubles and threatened to shut off Russian gas to Europe altogether.
“I think everybody was taken aback, because the whole energy transition plan from the various governments, from Germany has always been implicitly relying on Russian gas always flowing in the same quantity, at the same price,” Oneglia said. “Historically, they have never weaponised energy, or commodities.”
“This was a miscalculation,” he added.
What are Germany’s options if Russian natural gas is halted?
If the Russian natural-gas supply is halted, there are few options for Germany, which gets its natural gas via pipelines from Russia.
The country has been phasing out nuclear energy since Japan’s Fukushima nuclear disaster in March 2011. Germany’s last three nuclear plants are set to close by the end of 2022. On Wednesday, Chancellor Olaf Scholz rejected an appeal by lawmakers for the closures to be delayed, Bloomberg reported.
Alternatives such as liquefied natural gas (LNG) — the supercooled version of natural gas that can be transported on ships over long distances — are available. But Germany doesn’t have the infrastructure to deal with the fuel right now, said TS Lombard’s Oneglia.
LNG has to be converted back into gas at terminals before it’s transported via pipelines, but Germany doesn’t have any such terminals. In February, Chancellor Scholz announced Germany would be building two new terminals to reduce the country’s reliance on Russian gas — but they may take years to construct, according to Fieldfisher, a Berlin-based law firm.
And even if Germany could immediately buy LNG off the global markets, it would be expensive. Even before the Ukraine war, LNG prices were increasing rapidly due to a resurgence in demand as the pandemic ebbed — spot prices were 435% higher on-year in 2021 in Asia, the key market for the fuel, according to a report from consulting firm McKinsey.
LNG contracts are also typically long-term contracts spanning decades, so major suppliers like Qatar and Australia would already have committed much of their future supplies to the traditional markets like Japan, South Korea, and China.
Germany’s dependency on energy imports from Russia grew in the last 20 years
Economy minister Robert Habeck said on February 24 that Germany would be creating a strategic reserve of coal for energy security, Spiegel news outlet reported. The country had earlier planned to phase out the high-carbon fossil fuel by 2030, so stocking up on it would be “one step or two steps back” for Germany’s transition to a future powered by clean energy sources, said Oneglia.
“We have maneuvered ourselves into an ever-greater dependency on fossil energy imports from Russia in the last 20 years,” Habeck said, per Associated Press. “That is not a good state of affairs.”
Germany will wean itself off Russian gas by 2024, Habeck said in a March 25 press release.
Last week, Germany activated an emergency plan to deal with disruptions to its natural-gas supply after Putin’s threat to cut off energy supply if payment isn’t made in ruobles.
Germany is now in the “early warning phase” of its energy emergency plan, with Berlin calling for all energy consumers — both industry and households — to save energy and reduce consumption. If the situation worsens, the country might ration gas in the last of the three-stage plan, with industry first in line for power cuts, as outlined by Germany’s economy ministry. The move could devastate the economy and lead to job losses.
Although Germany’s predicament comes on the back of a confluence of events ranging from the war in Ukraine to a surge in global energy demand, TS Lombard’s Oneglia said he has to wonder if the industrial giant could have been better prepared for its energy security needs.
“In the end, there was no plan B,” he said.
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