Ukraine/Russian gas: Germany will have to go cold turkey

Business magazine Wirtschaftswoche encapsulated the problem with a recent cover: Vladimir Putin controls Germany the way a dealer controls a junkie. Natural gas is the drug of choice.

The shrewdness of Putin’s strategy is clear now Russian tanks are rolling. Effective sanctions would ban Russian energy exports, or payments for them via the international banking system. But that severe blow to Russia’s resource-dependent economy would badly hurt Germans. The energy policy errors of their leaders are woefully apparent.

Chancellor Olaf Scholz has only halted a second pipeline, Nord Stream 2, now that Russia is invading eastern Ukraine. This would have doubled the capacity of imports to 110bn cubic metres.

The first Nord Stream pipeline system already supplies two-thirds of Germany’s imported energy. Half of Germany’s 40m households keep warm using natural gas, 97 per cent of it from overseas.

Scholz’s predecessors Gerhard Schröder, a friend of Putin who is now a Gazprom board nominee, and Angela Merkel steered Germany towards its addiction. The renewables endorsed by Merkel provided 44 per cent of the country’s energy generation in the first half of 2021, according to official data. But she also ordered the closure of nuclear plants.

Fossil fuels produce the bulk of Russia’s foreign income. Last year, Russia’s natural gas exports brought in $55.5bn — mostly from Europe. That was the highest since 2013. European natural gas prices have quintupled over the past year. Tellingly, the futures curve has now flattened, says consultancy Rystad Energy. Fears of Russian supply disruption have forestalled the typical spring and summer price slide.

Annexing the whole of Ukraine would strengthen Russia’s grip on western Europe’s energy supply. Ukraine would no longer be a transit country able to cut off exports via its ageing pipeline system.

In the short term, Putin has the whip hand. Autocrats can contemplate hardship for their compatriots more cheerfully than democratic politicians. The west is unlikely to impose a full export ban on gas. Germany has few other energy choices. Conventional sources, such as coal and nuclear, are politically unpalatable with the Green party, a member of Scholz’s coalition government.

Longer-term, Germany must build up alternative gas supplies. It should finally heed US warnings and mothball Nord Stream 2 permanently. It should invest in terminals to import liquefied natural gas. It has none operating and only one under construction.

The easier, cheaper choice would be to open Nord Stream 2 after the renewed Russian invasion has faded into recent history. Politicians would bill this as “the normalisation of relations”. Pretending suppliers are friends is one hallmark of the addict.

The Lex team is interested in hearing more from readers. Please tell us what you think of Germany’s dependency on Russian gas in the comments section below.