by Alex Davidson

The conflict in Ukraine and western economic sanctions against Russia are having a huge impact on European economies and working people. EU officials have warned of an impending “crunch point” when countries start to feel acute economic pain while also still being asked to help the Ukrainian military effort.

Russian gas exports to western Europe had fallen to 20% capacity due to a short halt for regular maintenance and also a gas turbine being repaired in Canada and then its return delayed due to western sanctions. Now, Russia has stated that the gas flow will be suspended indefinitely.

GAS CRISIS

Germany is particularly affected by the loss of Russian gas. Some years ago Germany had taken the decision to phase out its use of coal and nuclear technology and of course was counting on Nord Stream 2 coming online before it was halted by western sanctions. Some 37% of Germany’s gas is from Russia, 20% from Norway, 12% from Holland, 5% is produced domestically and some 25% is in storage. Gas keeps half of Germany’s 41.5 million households warm and many manufacturing industries depend on the fuel. In addition to the gas imports, Germany imported 34% of its crude oil and 53% of its coal for power generation and steelmaking from Russia in 2021.

The main German utility company, Uniper, reported a loss of more than €12 billion ($12.2 billion) for the first half of 2022, ranking among the biggest in German corporate history and laying bare the unprecedented crisis engulfing Europe’s energy markets. The size of the hit for the utility company, which in July received a government bailout of $17 billion, shows just how severe the situation is. “Uniper has for months been playing a crucial role in stabilizing Germany’s gas supply -- at the cost of billions in losses resulting from the sharp drop in gas deliveries from Russia,” Chief Executive Officer Klaus-Dieter Maubach said in a statement detailing the firm’s financial results. Reduced supply of gas from Russia forced the company to buy gas in the spot market to fulfil contracts, pushing it to the edge of insolvency. That led to a multi-billion euro rescue package from the German government to prevent the company’s collapse.

Germany is now racing to build sufficient stockpiles to avoid severe rationing when the weather turns cold. The government has urged lower consumption, is seeking to revive coal power plants and is rethinking the phasing out of its remaining nuclear power plants. It has also slapped a levy on gas use, leaving households bracing for higher energy bills and exacerbating the Europe-wide cost-of-living crisis.

Uniper will have to deal with the full economic loss of replacing Russian gas until 30 September, when the government will introduce a mechanism to allow utilities to pass on 90% of costs to customers. “There is no end in sight to this development,” Maurbach said. “For globally active foreign oil and gas companies, such losses might be bearable. In Germany, on the other hand, there is not a single energy company that such a development would not bring to its knees.”

Notwithstanding the drastic impact on the German people in terms of the cost-of-living and heating bills, German Foreign Minister, Annalena Baerbock of the Green Party, has stated, “I will put Ukraine first no matter what my German voters think” or how hard their life gets in the winter.

NORD STREAM 2

Wolfgang Kubicki, Vice-President of the German Parliament, said on 19 August 2022, that Germany should allow the blocked Nord Stream 2 pipeline to begin pumping Russian natural gas so "people do not have to freeze in winter and that our industry does not suffer serious damage.” Kubicki, a member of Finance Minister Christian Lindner’s Free Democrats (FDP), called for activating the pipeline “as soon as possible” to fill gas storages ahead of winter. He said there is “no sound reason not to open Nord Stream 2", because Germany is already getting gas through the older Russia-to-Germany Nord Stream pipeline. Getting "gas from Nord Stream 2 is no more immoral than from Nord Stream 1. It's just a different pipe," he said. Kubicki said opening Nord Stream 2 would test whether Russian President Vladimir Putin is willing to increase gas shipments to Germany. Several FDP members criticised Kubicki's remarks, including Marie-Agnes Strack Zimmerman, chair of the Bundestag’s defence committee, who said, "Nord Stream 2 is dead." 

The United States had the aim of stopping Nord Stream 2 long before Russia’s 24 February 2022 military operation in Ukraine. In 2017 parts of the US sanctions against Russia, Iran and North Korea were aimed at businesses involved in piping Russian natural gas via the Nord Stream pipeline. One of the aims of the sanctions was to block Russian gas supplies to Europe in order to sell shale gas from the United States. In a joint statement on 15 June 2017, the then Foreign Ministers of Germany and Austria stated that, “The draft bill of the US is surprisingly candid about what is actually at stake, namely selling American liquefied natural gas and ending the supply of Russian natural gas to the European market.” (1) US liquefied natural gas (LNG) export capacity has grown rapidly since it first began in 2016. In 2019 the US became the third largest LNG exporter behind Australia and Qatar. In 2022 the US is now the world’s largest exporter of LNG.

Lithuania signed a deal in May 2017 to buy US LNG and received its first delivery in August 2017. Poland received its first delivery in June 2017. Croatia completed the building of a floating LNG terminal on the island of Krk in 2019. President Donald Trump speaking at a Three Seas (2) summit on 6 July 2017 said, “We are sitting on massive energy and we are now exporters of energy. So, if one of you need energy, just give us a call…In fact I want to congratulate the government and the people of Poland for receiving their first shipment of US liquefied natural gas last month. And you made a very good deal, I understand.” (3) American LNG is much more expensive than Russian natural gas so it was certainly a good deal for the US and its energy companies.

The US/NATO provoked the war in Ukraine by its expansion up to Russia’s borders, its support of Ukraine’s attacks on the Donbas and its opposition to the Minsk Agreements. As Jens Stoltenberg has stated, “NATO was there [in Ukraine] since 2014”. When Russia responded to the provocations on 24 February 2022 the US then imposed more sanctions, brought Germany into line and got it to abandon Nord Stream 2. One of America’s major aims had been achieved, namely, the killing of Nord Stream 2. However, it has caused severe energy problems for the Europeans. The EU could not achieve a united response to the stopping of Russian oil and gas and had to settle for exemptions from the sanctions for some countries including land-locked Hungary.

CAR PRODUCTION - SHORTAGE OF KEY ELEMENTS

Germany's automotive sector already had a lot to cope with before the conflict in Ukraine. First, there was the COVID-19 pandemic and a global semiconductor shortage. Later came rising oil, gas and coal prices, which have continued to skyrocket since the war in Ukraine. Now there is a fresh threat of supply bottlenecks and price hikes for other key materials from Russia and Ukraine. The supply shortfalls for important raw materials for car manufacturers and their suppliers is now beginning to hit. This is leading to rising prices, longer waiting times for new cars for customers and slowing down the move to electric vehicles.

Ukraine is one of the most important suppliers of neon, a gas needed for semiconductor production and chips have been in in short supply worldwide for almost all industries for some time now.

Palladium is required for automotive catalytic converters which clean exhaust fumes in petrol and hybrid vehicles. With a global market share of 38%, Russia is the second-most-important supplier after South Africa with 39%. The price of palladium has risen sharply since 2015 and rose again in March 2022 after the latest outbreak of the Ukraine conflict. It is difficult to see how supply issues of palladium from Russia could be bridged by other producing countries as the palladium market has been in deficit for some years.

Nickel is used in stainless steelmaking and is an important component for lithium-ion batteries, which are needed to power electric cars. Russia is Germany’s biggest provider of nickel accounting for 39% of the country’s supply. Sanctions as well as the pre-existing shortages will push up electric vehicle prices and slow their production. This will hit the German car industry hard.

CHINA BENEFITS

Electric car and battery manufacturers in China, on the other hand, could benefit from the sanctions against Russia by offering to buy the raw materials from Russia. China already has a strong position in the battery metals supply chain and would further strengthen its global competitive position if it were to buy Russian nickel because of the sanctions.

The only option left for Western manufacturers is to expand business relationships with other nickel-producing countries such as Indonesia or the Philippines. Indonesia took a decision to ban the export of nickel in 2020 with the aim of encouraging domestic production of refined nickel products. The EU filed a case against it last year with the World Trade Organisation. However, Europe's dependency on China would increase as Chinese companies play a key role in the main nickel mines in both countries.

The German economy is much more dependent on China than the other way round. This happened in the first half of 2022, with direct investment and the German trade deficit reaching new heights. At the same time, growth in German exports to China weakened significantly. German investment in China amounted to around €10 billion ($10 billion) between January and June 2022, far exceeding the previous peak half-year value recorded since the turn of the millennium of  €6.2 billion. China's share of German imports rose to 12.4% in the first half of 2022, compared with 3.4% in 2000, while German imports of Chinese goods surged in value terms by 45.7% year on year during that six-month period. Germany's trade deficit with China had leapt to almost €41 billion by mid-2022.

US AIMS TO PRESERVE DOMINANCE

The United States has so far succeeded in stopping Nord Stream 2, brought Germany into line on sanctions and prolonged its proxy war in Ukraine. It has little concern about the huge loss of Ukrainian lives nor of the impact of sanctions against Russia on its allies in western Europe.

Germany has been steadily militarising and playing a prominent role in the NATO deployment in Eastern Europe in recent years, albeit with some initial reluctance in the recent conflict in Ukraine. Macron has been intent on putting France into pole position in the EU military apparatus and with Britain out of the EU France is the only nuclear armed member.

The severe blow to Germany’s economy will weaken its dominance of the EU and strengthen the influence and control of the US in Europe. At the same time Macron has stated that while France is an ally of the US it does not want to be dependent on another country.

The US sees its economic dominance under threat particularly from China. It seems set on provoking China with its support for Taiwan’s independence contrary to long-standing international agreements. The US has a history of turning to its military power when it feels its position of world dominance is under threat. It is a danger to the whole world. 

(1) https://www.auswaertiges-amt.de/EN/infoservice/Presse/Meldungen/2017/170615_Kern_Russland.html

(2) 12 countries bordering the Baltic, Black and Adriatic seas formed a consortium in 2016. It was dubbed the “Three Seas Initiative”. The 12 countries are Poland, Hungary, Czech Republic, Slovakia, Romania, Bulgaria, Lithuania, Estonia, Latvia, Croatia, Slovenia, Austria.

(3) http://time.com/4846780/read-donald-trump-speech-warsaw-poland-transcript/

 

Liquified natural gas terminal - photo by Tgegasengineering

German foreign minister Baerbock meets US Secretary of State Blinkin pic by Ron Przysucha