European Energy Crisis Looms amid Russia-Ukraine Tensions, Incurring an Estimated GDP Loss of 1-2% on the Bloc

By GT staff reporters

Apr 03, 2022 02:27 PM

Photo: Xinhua

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

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 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 also severely lacking in LNG-receptive infrastructures.

These 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 payments.

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

European leaders have rejected paying with the ruble, which they said violates existing contracts. While Baltic country Lithuania said on Saturday that it has fully abandoned Russian gas imports, other European countries have yet to make clear what their stance or back-up plans are. 

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 condemned 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 stance against Russia, analysts predicted that there may be some 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, further heaping up inflation pressure and even intensifying political crises. 

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 than that of February. In March, German consumers' spending for household energy and fuels 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 their energy consumption. The country's energy-intensive sectors including steelmaking, papermaking, and logistics have reportedly felt the pinch. Some operations have had to be suspended as they cannot afford the skyrocketing energy price. 

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 not only on Germany but also the European economy - which has been battered by the pandemic," Cui warned, while estimating that such energy crises could erase Europe's GDP expansion by around 1 to 2 percentage points.

It is projected that the EU economy will 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 also weighs on fiscal government income, which matters to social welfare, resulting in a vicious circle that may even threaten the European bloc's political stability.

No way out

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 soaring gas price and 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 at least 15 billion additional cubic meters of LNG by the end of the year. "From a realistic point of view, US LNG shipments are also unable to fully cover the gap left by Russia's natural gas imports, not to mention higher logistical costs," Lin said.  

US exporters have shipped record volumes of LNG to Europe for three consecutive months, as prices increased10 times more than a year ago, another Reuters report said. 

According to a study by energy research institute Aurora Energy Research, it would cost between 60 and 100 billion euros filling up gasshortage from non-Russian sources.