Putin gas assault is a survivable test of EU unity

LONDON, July 19 (Reuters Breakingviews) - Vladimir Putin is about to fire his gas weapon at European solidarity. Planned maintenance has shut Russia’s key Nord Stream 1 pipeline for 10 days until July 21. By being sly about whether and how he will reopen it, the Russian president could try to undermine the unity European Union members and the United States have demonstrated since Russia invaded Ukraine in February. The risks are real, but the chances he could succeed look slim.

If Putin were to keep Nord Stream 1 shut, Europe’s ongoing gas drama would turn into a full-blown crisis, especially in Berlin. The pipeline, which flows directly from Russia under the Baltic Sea to the German coast, contributed 35% of Germany’s 1,774 terawatt-hours (TWh) of gas supply in 2021, UBS analysts reckon. Add in Russian imports by other routes, and a complete shut-off could knock 63% off that total.

While Germany’s dependency on Russian gas imports has shrunk since the start of the war, this would still be a huge blow. UBS thinks Germany may be able to secure 200 TWh of extra liquefied natural gas imports in 2023 and turn back on 100 TWh of heavy-polluting coal power stations, even though the former would be expensive and the latter undermine Chancellor Olaf Scholz’s carbon-reduction objectives. Yet the Swiss bank thinks this year’s shortfall could still force Germans to reduce domestic household energy consumption by 20%, and industrial companies to cut their power use by 50%.

This would inevitably cause a major economic contraction. UBS estimates a full shut-off would knock the equivalent of 5.9% off Germany’s GDP by the end of next year. The economy would contract by 2.8% in 2023 alone. The biggest losers would be commercial and public sector offices, which would have to drastically curtail their energy use, and chemicals groups like BASF (BASFn.DE), which use gas both as feedstock and as an energy source.

The rest of the EU would suffer too. Other countries would get less gas from Germany, and so have to ration their energy, while also coping with a gas price likely to jump to over 200 euros per megawatt-hour, 10 times the level it was trading at last year. Overall, the bloc might have to cut demand by 19%, RBC analysts reckon. The European Commission estimates the total hit to the EU economy could be around 1.5% of GDP if there’s a cold winter.

Then there’s the danger that stems from what German Economy Minister Robert Habeck has described as a possible “Lehman moment”. His country re-exported over 800 TWh to other European countries like France, Austria, Switzerland and the Czech Republic in 2020, according to network agency Bundesnetzagentur. The risk is that Berlin decides to hoard what gas it does have, ignoring loosely worded solidarity agreements. If Putin is cunning, he could limit gas exports but not cut them off completely. That might tempt Scholz to prioritise his domestic customers over those of his European neighbours, triggering tensions within the EU.

Putin has other ways to challenge European and Western unity. Citing Nord Stream 1’s technical issues, he could offer to provide cheap gas instead through Nord Stream 2, the mothballed sister pipeline that was near completion before the war. That would enrage the United States, which has imposed sanctions on the pipeline, and hawkish member states like Poland.

These are hair-raising risks. But to cause lasting damage to the future of the bloc, the economic hit from Putin’s gas assault would have to be so extreme that it would legitimise Berlin taking a knife to any gas export contracts, as well as ignoring the optics of stabbing Ukraine in the back. It’s not certain that’s the case.

In a scenario where Putin does restore Nord Stream 1 gas flows at half their previous level, the 2023 hit to German GDP would be under 1%, UBS reckons. Even in the bank’s total shut-off scenario where that year’s contraction is 2.8%, that would be less than the 4.6% hit caused in 2020 by the pandemic, and the 6% slump for the EU as a whole. The bottom line is that with public debt at less than 70% of GDP, Germany has ample financial firepower to prop up the economy by supporting jobs and businesses.

Scholz and Habeck still face a tortuous winter. But in 2020 Covid-19 forced the EU to devise joint fiscal solutions to a common enemy. If Putin does turn all his gas off, the need to see off a similarly seismic threat could see history repeat itself.

Follow @gfhay on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

CONTEXT NEWS

Russian Foreign Ministry spokeswoman Maria Zakharova said on July 14 that the future of the Nord Stream 1 gas pipeline to Germany would depend on gas demand in Europe and Western sanctions against Russia read more .

The pipeline from Russia to Germany is undergoing annual maintenance until July 21 but European governments are worried that Moscow could extend that in order to restrict European gas supply, disrupting plans to build up storage for winter.

Kremlin-controlled energy giant Gazprom said on July 13 that it could not guarantee the safe operation of a critical part of Nord Stream 1 because of doubt over the return of a turbine from Canada, which had imposed sanctions against the company.

Canada said at the weekend it had issued a permit to allow the return of the turbine for Nord Stream 1’s Portovaya compressor station in Russia.

“As far as the gas pipeline’s work in future is concerned, a lot will depend on our partners in terms of gas demand and illegitimate sanctions, as happened with the turbines in Canada,” Zakharova said.

She said the maintenance on the pipeline had been agreed in advance with consumers.

Last month, Russia cut gas flows to 40% of Nord Stream 1’s total capacity, citing the delayed return of the turbine.

Our Standards: The Thomson Reuters Trust Principles.