“We are at war,” Emmanuel Macron said on Monday as he outlined the emergency measures France was taking to bolster its energy supply and protect its citizens and businesses from rising costs.
For months after Russia’s large-scale invasion of Ukraine, the French president strove to act as an intermediary and peacemaker between Kiev and Moscow. This week, he and other European leaders became combative in a highly escalating energy conflict between Russia and the west. It was time, Macron said, for a “general mobilization”.
The Kremlin’s weaponization of its fossil fuels has forced European governments to take drastic measures, unimaginable just a few months ago, to fend off the Russian attack and protect their energy markets and economies from the impact.
Sweden and Finland had to provide emergency liquidity support to their electricity generators faced with an increasing demand for collateral for their hedging activities.
Finnish Economy Minister Mika Lintilä said the region could be on the brink of the 2008 Lehman Brothers energy sector collapse.
Germany has unveiled a second support package for households and businesses worth €65 billion, bringing the amount allocated so far by EU governments to offset skyrocketing prices and diversify supply to around €350 billion . Just two days after taking office as Britain’s new prime minister, Liz Truss announced a cap on household and business energy bills, expected to cost a minimum of £150 billion in two years.
The G7 powers also agreed on Sept. 2 to impose a global price cap on Russian crude oil, a bigger source of revenue for the Kremlin than gas, though it could be difficult to implement and other major importers like China, India and Turkey can refuse to participate.
European Commission President Ursula von der Leyen, who is to outline a package of emergency measures next week, said the price of Russian gas imports should also be limited – an idea suggested by Italy’s Mario Draghi, who supported Friday. received from EU energy ministers, despite fears it would provoke the Russian leader to turn off the taps completely.
Russia has blocked gas supplies to European markets since September last year, pushing wholesale prices up tenfold, inflation reaching a 40-year high and economies on the brink of recession. Moscow has all along denied what it did or said it was for technical reasons – which Brussels and member states have disputed.
This week, it finally dropped appearances. On Monday, in what appeared to be retaliation for oil and gas price cap proposals, the Kremlin said gas deliveries through the Nord Stream 1 pipeline, the main channel to European markets, would not resume until the west lifts economic sanctions. against Russia.
“The last mask has fallen,” said von der Leyen.
Russia is still pumping gas through Ukraine and through the TurkStream pipeline — about a fifth of the total amount it sent in June — but the prospect of a complete shutdown of gas flows has come sooner than many in Europe expected.
Putin raised the threat at an economic forum in Vladivostock on Wednesday. “We will not deliver anything at all if it conflicts with our interests. No gas, no oil, no coal, no heating oil, nothing,” he said.
Moscow also got a show of support from other oil producers this week — three days after the G7 oil price cap — when the Opec Plus group of countries, including Russia, agreed to cut 100,000 bps of production.
Alexander Novak, Russia’s top energy official, cheered the ‘collapse’ of European energy markets. “Winter is coming and a lot of things are hard to predict,” he said.
However, some officials and analysts believe this may have been the week when the Russian pressure campaign began to lose momentum. An indefinite shutdown of Nord Stream 1, Russia’s gas pipeline, would be the Kremlin’s big weapon that would send wholesale price to new stratospheric levels. But by Wednesday, wholesale prices fell below Monday’s levels.
“If that’s it, that might mean the end of the show,” said Simone Tagliapietra, senior fellow at the Bruegel think tank in Brussels.
There is growing confidence in European capitals that Europe can survive the winter without serious economic and social disruption or energy rationing. Von der Leyen said the EU has “weakened Russia’s grip on our economy and our continent”.
Gas storage in facilities in the EU stands at 82 percent, well above the 80 percent target the bloc had set for the end of October. Member States have diversified stocks, increasing pipeline imports from Norway, Algeria and Azerbaijan and LNG from the US and other producers.
Before the invasion of Ukraine, Russia accounted for 40 percent of the EU’s gas imports, but now only 9 percent, von der Leyen noted.
“Everyone expects [Russia] to get to the Nord Stream closure in the winter as they can maximize the pressure in the winter,” said Tagliapietra. “This acceleration of events tells us that the Kremlin probably failed to consider the possibility for Europe to come up with such a response.”
“Putin has not achieved his goals – our dependence on him has decreased much faster than expected,” said an EU official.
Economists at Deutsche Bank now think the German economy could shrink by 3-4 percent in 2023 instead of 5-6 percent, due to higher-than-expected storage and lower consumption.
Yet EU leaders are also aware of the pain associated with rising energy bills this winter, and the escalating costs for EU governments to protect households from skyrocketing costs.
“All member states are suffering and they think it could be a winter of discontent,” the official said.
With inflation expected to remain high into next year, consumers are bracing for the biggest blow to living standards in a generation, as wages fail to keep pace with prices.
Consumer confidence fell to its lowest level since records began in 1974 in the UK and it fell to a near-historic low in the Eurozone. The latest S&P Global PMI, a monthly business survey, showed that activity contracted in August in both the eurozone and the UK.
The UK economy started to contract in the second quarter and even the latest government support has not dispelled a potential recession. The European Central Bank now expects the eurozone to stagnate in the last quarter of the year and the first three months of 2023, before contracting completely next year in a downward scenario.
Angel Talavera, head of European Economics at Oxford Economics, said it was “inevitable” for governments to come up with bigger support packages.
“As long as we are in this dire situation, it makes sense to take extraordinary measures to protect citizens and businesses,” said Roberto Cingolani, Italy’s energy transition minister.