How Germany – Europe’s largest economy – became so dependent on Russian natural gas – Reuters

Demonstration against the war in Ukraine in Cologne, Germany.

  • Russia has been a reliable supplier of natural gas to Germany for decades.
  • Germany is under pressure to cut Russian gas supplies, and the Kremlin fears supplies could be cut off.
  • Russia accounted for 55% of Germany’s natural gas imports in 2021 and 40% in the first quarter of 2022.
  • To learn more, visit www.BusinessInsider.co.za.

Germany is facing mounting pressure to phase out Russian natural gas from its economy, leaving Berlin in a dilemma as the move could devastate the economy.

Europe’s largest economy is heavily dependent on Russian gas: it accounted for 55% of Germany’s gas imports in 2021 and 40% of its gas imports in the first quarter of 2022, according to Reuters.

Because of the war in Ukraine, German banks are already expecting the country’s GDP growth to slow to 2% in 2022 from 2.7% in 2021, Christian Sewing, CEO of Deutsche Bank, who served as chairman of the German bank’s BDB lobby, said, according to Reuters. .

“The situation would be even worse if the import or supply of Russian oil and natural gas were interrupted,” Schewing said on Monday, according to the publication. “A major recession in Germany would then be almost inevitable. »

But it is difficult for Germany to break this habit. Russia has been a supplier of natural gas to Germany for about 50 years, and it has always been reliable, even during the Cold War and during the collapse of the Soviet Union, Davide Oneglia, senior economist at London-based consulting firm TS Lombard, told Insider. .

Germany Imports Russian Gas to Promote Dialogue, Trade and Peace

Germany began its gas policy towards Russia during the Cold War in the 1960s with the so-called pipeline policy, which connected the two sides with a gas pipeline. The move was meant to sway the Soviet Union towards dialogue and trade with the West rather than conflict, said Henning Gloistein, director of energy, climate and resources at Eurasia Group, a geopolitical consultancy.

After the collapse of the Soviet Union in 1991, a reunified Germany and the emerging European Union sought to provide economic support to Russia to stabilize the huge nuclear power industry, Gloistein said.

“Again, the policy was to cooperate and hope that trade and prosperity would lead to peaceful relations. Until recently, this policy worked well, although now, of course, this policy is in decline,” he said.

Germany is currently under pressure to ban Russian natural gas due to growing reports of Russian atrocities in the war in Ukraine. Last week, Russian President Vladimir Putin demanded payment in rubles and threatened to completely cut off Russian gas supplies to Europe.

“I think everyone was surprised because the whole energy transition plan of the various German governments has always implicitly relied on Russian gas, which always comes in the same quantity at the same price,” Oneglia said. “Historically, they have never used energy or raw materials as a weapon. »

“It was a miscalculation,” he added.

What options does Germany have if Russian gas is stopped?

If Russian natural gas supplies fail, Germany, which gets its natural gas through pipelines from Russia, has few options.

The country abandoned nuclear power with the arrival of Japan. The nuclear disaster at Fukushima in March 2011. Germany’s last three nuclear power plants are due to close by the end of 2022. On Wednesday, Chancellor Olaf Scholz rejected lawmakers’ call to delay the shutdown, Bloomberg reported.

Alternatives are available such as liquefied natural gas (LNG), a sub-cooled version of natural gas that can be transported by ship over long distances. But there is currently no fuel handling infrastructure in Germany, said Oneglia of TS Lombard.

LNG must be converted back to gas at terminals before being transported through pipelines, but there are no such terminals in Germany. In February, Chancellor Scholz announced that Germany would build two new terminals to reduce the country’s dependence on Russian gas, but they could take years to build, according to Land Fisher, a Berlin-based law firm.

And even if Germany could immediately buy LNG on world markets, it would be expensive. Even before the war in Ukraine, LNG prices were rising rapidly due to a resurgence in demand as the pandemic eased: spot prices were up 435% year-on-year in 2021 in Asia, the main fuel in the market, according to a report from consulting firm McKinsey.

LNG contracts also tend to be long-term contracts spanning decades, which is why major suppliers such as Qatar and Australia have already committed much of their future supplies to traditional markets such as Japan, South Korea and China.

Germany’s dependence on energy imports from Russia has increased over the past 20 years

Economics Minister Robert Habeck said on February 24 that Germany would create a strategic coal reserve for energy security, Spiegel reported. The country had previously planned to phase out high-carbon fossil fuels by 2030, so acquiring them would be “a step or two back” in Germany’s transition to a fossil fuel and clean energy future,” Oneglia said.

“Over the past 20 years, we have become increasingly dependent on imports of fossil fuels from Russia,” Habek said, according to the Associated Press. “This is not a good situation. »

Germany will phase out Russian gas by 2024, Habek said in a March 25 press release.

Last week, Germany launched a natural gas supply disruption plan after Putin threatened to cut energy supplies unless payment was made in rubles.

Germany is now in the “early warning phase” of its energy contingency plan and Berlin is calling on all energy users – both industry and households – to save energy and reduce their consumption. If the situation worsens, the country could ration gas under the latest three-phase plan, with industry at the forefront of blackouts, according to the German economy ministry. This decision could destroy the economy and lead to job losses.

While Germany’s predicament is the result of a confluence of events ranging from the war in Ukraine to rising global energy demand, TS Lombard’s Oneglia said he has to wonder if the industrial giant could have been better prepared for its energy security needs.

“At the end of the day, there was no plan B,” he said.

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