Russia Cuts Gas to Europe, Amplifying Inflationary Shock and Risk of Rationing, “Kremlin Should Have a Laugh”, Market News

Europe’s dependence on Russian energy became apparent after the war in Ukraine. No one, hitting the wallet, can ignore the inflationary shock caused by the sanctions. If it is not difficult for the European Union to wean from the Ural oil, then the replacement of Russian gas, on the contrary, is a real headache. Prior to the onset, about 45% of EU gas imports came from Russia.

“I know how to replace [l]Russian oil »explained in March TotalEnergies boss Patrick Pouyanne at the RTL microphone, but “If I decide to stop importing Russian gas, I don’t know what to replace it with, I don’t have it. » These statements have the merit of being clear. They provide information about why the “twenty-seven” has not yet imposed a joint embargo on Russian gas, when at the end of May they finally agreed not to buy oil from the aggressor. By the end of the year, Europeans will cut their imports by 90%.

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Energy crisis, “from bad to worse”

The EU, like the US, Canada or the UK, is waging an economic war against the Kremlin, which, taking advantage of the Europeans’ energy dependence, does not hesitate to strike back. “We are imposing sanctions on Russia to strangle it financially. In return, he turns off the gas, knowing that it is not easy to compensate for the drop in its supply.sums up Bruno Cavalier, chief economist at private bank Oddo BHF. “It follows that Europe will have to pay more for alternative suppliers (increasing inflationary shock), pollute more (coal-fired resurgence) and may soon have to ration its consumption (risk of recession). You have to have a good laugh in the Kremlin. »

The economist notes that the energy crisis in Europe will ” Worse and worse “. Last week, after discovering that Russia had cut its gas supplies via the Nord Stream 1 gas pipeline by 60% due to so-called repairs, Germany activated the “readiness level” of its plan aimed at guaranteeing gas supplies, bringing the largest economy closer Europe to possible rationing measures. A complete cessation of supplies from Russia will lead to “The effect of Lehman Brothers in the energy system”German Economics Minister Robert Habeck warned. Russia has already cut off gas supplies to Poland and Bulgaria, which refused to pay in rubles, as Moscow demanded.

Gas, regional market

War in Ukraine “affects Europe asymmetrically in relation to the US”explains Daniel Vernazza, an economist at UniCredit in London. “While the oil market is internationally integrated, the natural gas market is segmented by region because gas must be transported through physical infrastructure such as pipelines. » A point that Bruno Cavalier also insists on: “The gas market is very segmented because most of the trade is done through pipelines. » Although tanker-capable liquefied natural gas (LNG) is booming, its market share in global gas trade remains relatively low (10%). The degree of dependence on Russian gas varies by geography: “Russia was [jusqu’à récemment] in a quasi-monopoly on the supply of Eastern countries. Its share was about 50% in Germany and Italy, less than 15% in France and Spain. » Yesterday Lithuania adopted a law banning Russian gas imports.

Today, the import of Russian gas by the European Union is 40% of the norm, which, as Bruno Cavalier notes, “gives a boost to gas prices no longer at historical levels. This is one of the main reasons for the inflationary shock that Europeans have suffered. » According to economist Oddo BHF, in the event of further reduction in supplies by Russia “in the short term and at best [à supposer que les pays producteurs de GNL, comme les Etats-Unis, le Qatar et l’Afrique du Nord puissent répondre à la demande]using all unused import capacities [terminaux de regazéification], we estimate that the EU could find substitutes to limit the gas deficit to around 10% of its total consumption. »

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Diet Plans

When asked whether rationing will be necessary, Bruno Cavalier does not rule out such a scenario. A complete cessation of supplies from Russia will require ” without a doubt “ managed supply chain management, “complemented with relief mechanisms to prevent companies from going bankrupt due to exorbitant energy costs. Various countries are developing contingency plans of this type to determine what criteria will allow rationing to be distributed between types of economic agents or between sectors. »

In Germany, it has been estimated that in the case of rationing, GDP will fall by 0.5 to 3 points compared to the baseline scenario without rationing. “This range is so wide that it covers a wide variety of scenarios, ranging from stagnation to a severe recession.”, deciphered by Bruno Cavalier. To listen to the German business community, which claims a much larger impact, perhaps in double digits, rationing will certainly lead to a recession. In France, the Conseil d’Analyse Economique showed a minimal drop, of the order of 0.15 and 0.3 points of GDP.