Russian state-owned energy giant Gazprom announced it would halt gas supplies to Poland and Bulgaria after refusing to pay for gas in Russian rubles after the Kremlin demanded it.
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Europe could be pushed into recession if Russia’s gas shortages widen, economists have suggested after Gazprom halted supplies to Poland and Bulgaria.
The state-owned energy giant announced on Wednesday that gas supplies to the two eastern European countries had been halted after they rejected Moscow’s demand to pay for gas in rubles. Gazprom said supplies would resume once those payments were made, leading to allegations of “blackmail” by Bulgarian Prime Minister Kiril Petkov.
With the coming weeks approaching payment deadlines from a host of other European countries unlikely to give in to the Kremlin’s demands for the ruble to be paid, concerns over President Vladimir Putin’s earlier threats of a widespread gas lockdown have increased “unfriendly” nations returned to the fore.
In a research note on Wednesday, Berenberg chief economist Holger Schmieding and senior economist Kallum Pickering explained that the shutdown appeared to be a warning from Moscow that it could make that threat come true.
Gas accounts for about a quarter of the European Union’s energy production, and Russia typically supplies about 40% of the bloc’s natural gas imports.
Europe is facing simultaneous economic shocks from the war in Ukraine and soaring food and energy prices, exacerbated by the conflict, which has raised concerns about “stagflation” – an environment of low economic growth and high inflation.
Berenberg indicated that the current headwinds are likely to sustain stagflationary pressures in the second quarter of 2022.
“A sudden halt to Russian gas supplies to Europe could plunge Europe into recession. The precise impact of such an immediate gas embargo is difficult to predict,” said Schmieding and Pickering.
“Calculations that Eurozone GDP levels would be reduced by 3 percentage points in 2023 compared to a baseline scenario… seems a bit too pessimistic in our view, but it would certainly be a big hit to activity through to the end of the next one cold season in spring 2023.”
However, such a move would also be costly and difficult for Russia to implement, and while the decision to halt supplies to Poland and Bulgaria could bolster the EU’s determination to end its reliance on Russian gas, many member states oppose an immediate import embargo.
While Poland had announced plans to phase out all Russian fuel imports by the end of this year, the EU plans to drastically reduce gas purchases by the end of 2022 while working towards a full phase-out by 2030.
Therefore, Berenberg’s baseline scenario is that the EU will reduce gas imports as quickly as possible without risking physical shortages, likely leading to an end to imports in 2024.
“In such a case, energy prices would remain high, but probably not rise any further. Europe could gradually digest the energy price shock and likely return to significant growth over the summer unless China’s COVID-19-related lockdowns and resulting supply shortages would get much worse beyond the second quarter,” they added economists added.
However, they noted that the cessation of Russian gas flows remains a tail risk that would likely force some European countries to ration gas supplies to certain industries in late 2022 or early 2023.
Eurozone inflation rose to a record high of 7.5% in March as the war in Ukraine and subsequent sanctions on Russia pushed up energy prices. Russia’s move increases upside risks to the inflation forecast, but Capital Economics commodities economist Edward Gardner noted on Thursday that any further rises would likely be small compared to those already seen since the Russian invasion.
“We currently forecast eurozone inflation of 7% and 3% this year and next. If European natural gas prices rose to €150 per MWh and stayed there, instead of falling to €75 by the end of next year as currently forecast, headline inflation would be 0.2 percentage points higher than our forecasts,” Gardner said.
He added that Gazprom’s announcement on Wednesday increased the risk of outright gas shortages, which “would exacerbate the recession” Capital Economics forecast for the eurozone as early as 2022.
“If Russia stops gas exports to Germany, the government would probably ration gas consumption. Households would likely be protected, so industry (especially chemicals and metallurgy) would be hit the hardest, causing a deep recession,” Gardner said.