Russia has cut off the flow of gas via the Nord Stream 1 pipeline to 40% of capacity, triggering a warning of a “Lehman moment” in the European energy market – a reference to the September 2008 bankruptcy that triggered a global financial crisis.
Russia’s action on June 22 came two days after Lithuania blocked rail supplies of sanctioned goods to Russia’s Baltic Sea enclave of Kaliningrad, citing European sanctions against the transhipment of Russian shipments of coal, metals, electronics, building materials and other goods.
Lithuania claims that it has not restricted the shipment of food and medicine.
The prospect of a “Lehman Moment” for Europe is not metaphorical. Last week, the world’s largest hedge fund, Ray Dalios Bridgewater Associates, doubled its short position on European equities to 10.5 billion. The Markit Purchasing Managers’ Index for Germany released on June 23 showed a sharp decline in new production orders at an index level of 42.2. (A level of 50 indicates no change.)
The price of natural gas at the Dutch terminals rose to levels not seen since the end of February when Russia invaded Ukraine. German electricity futures rose to the highest level since December.
The economic consequences for Germany will be severe next winter, unless gas flows resume, German Energy Minister Robert Habeck warned on Thursday, comparing energy problems to the 2008 crisis.
Gas rationing would cut deep into German industrial production, Habeck warned, and ultimately cut household consumption.
European utilities have fixed-price contracts to supply gas to industrial consumers and households, Habeck explained. If their costs suddenly jump due to a severe shortage, a chain of bankruptcies could hit the energy sector in a Lehman-like crisis.
A calculation from the German center-right daily newspaper The world predicts an increase in the heating bill for a typical German household by 2,640 EUR (2,772 USD) per year compared to 2020.
“It will be more than many Germans can pay,” the newspaper wrote, noting that “4.4% of German households are classified as materially disadvantaged and a third of households have financial reserves for only a few weeks of consumption. “
It is not surprising that Russia’s apparent retaliation for the Lithuanian sanctions hit Germany. Lithuanian Foreign Minister On 22 June, he said that the blockade of Russian rail freight fell under EU sanctions, which came into force on 17 June, and that his country had acted in consultation with the European Commission in Brussels.
Russia condemned the blockade as a violation of international agreements on Kaliningrad’s status.
Apparently, Moscow has decided to step on the sore toe one could find.
German support for the Ukraine war is appalling. Opinion polls show that the Germans are evenly distributed on the issue of Ukraine’s potential membership of the EU, with 35% each supporting and opposing it and the rest unresolved.
Moscow has not objected to Ukrainian membership of the EU, which has no military role. German antipathy to Ukrainian membership stems from a reluctance to subsidize poorer EU members.
Several members of the German Chancellor Olaf Scholz’s Social Democratic Party oppose sending heavy weapons to Ukrainee than support it, according to a April 28 vote. Overall, the Germans are divided 45% -45% on the issue, with 10% unresolved. In early April, an identical poll found 55% of Germans to send heavy weapons to Ukraine.
Rising energy and food prices and a total annual inflation of 7.9% explain the difference.
Only 23% of Germans believe that a military victory is possible against Russia, according to one June 7 poll, while 70% believe a negotiated solution will be needed.
A cold winter in need of millions of German households would undermine Scholz’s already shaky coalition. On May 15, his party suffered its worst election defeat since 1947 in its stronghold state of North Rhine-Westphalia, handing over the leadership of the state government to the Christian Democrats.
Last Sunday’s parliamentary elections in France, meanwhile, left President Emmanuel Macron’s coalition in the minority following progress by Marine Le Pen’s National Front and Jean-Luc Mélenchon’s left-wing alliance.
Both the French right and left are against the Ukraine war. Political support for the Ukraine war and for the European leaders who made common cause with Kiev and Washington is rapidly eroding, and deteriorating economic conditions could undermine the attitudes of Scholz and Macron.