Russia has cut the flow of gas via the Nord Stream 1 pipeline to 40% of capacity, prompting a warning of a “Lehman Moment” in Europe’s energy market – a reference to the September 2008 bankruptcy that triggered a global financial crisis.
Russia’s June 22 action came two days after Lithuania blocked rail deliveries of sanctioned goods to Russia’s Baltic Sea enclave of Kaliningrad, citing European sanctions on the transshipment of Russian shipments of coal, metals, electronics, construction materials and other goods.
Lithuania claims that it has not restricted the shipment of food and medicine.
The prospect of a “Lehman Moment” for Europe isn’t metaphorical. Last week the world’s largest hedge fund, Ray Dalio’s Bridgewater Associates, doubled its short position on European stocks to $10.5 billion. The Markit Purchasing Managers’ Index for Germany released June 23 showed a sharp contraction in new manufacturing orders, at an index level of 42.2. (A level of 50 indicates no change.)
The price of natural gas at Netherlands terminals spiked to levels not seen since late February when Russia invaded Ukraine. German electricity futures rose to the highest level since December.
Economic consequences for Germany will be dire this coming winter unless gas flows resume, German Energy Minister Robert Habeck warned on Thursday, comparing the energy predicament to the 2008 crisis.
Gas rationing would cut deeply into German industrial production, Habeck warned, and eventually cut household consumption.
European utilities have fixed-price contracts to provide gas to industrial consumers and households, Habeck explained. If their costs suddenly jump because of a severe shortage, a chain of bankruptcies could hit the energy sector in a Lehman-style crisis.
A calculation by the German center-right daily Die Welt predicts a boost in the heating bill for a typical German household by EUR 2,640 (US $2,772) a year compared with 2020.
“That will be more than many Germans can pay,” the newspaper wrote, noting that “4.4% of German households are classified as materially deprived, and a third of households have financial reserves for only a few weeks of consumption.”
It’s not surprising that Russia’s apparent retaliation for the Lithuanian sanctions hit Germany. Lithuania’s foreign minister June 22 said that the blockade of Russian rail freight fell under European Community sanctions that took effect June 17, and that his country had acted in consultation with the European Commission in Brussels.
Russia denounced the blockade as a violation of international agreements about the status of Kaliningrad.
Apparently, Moscow has decided to step on the sorest toe it could find.
German support for the Ukraine war is shaky. Opinion polling shows the Germans evenly split on the issue of Ukraine’s prospective membership in the European Union with 35% each supporting and opposing it and the remainder undecided.
Moscow has raised no objection to Ukrainian membership in the EU, which has no military role. German antipathy to Ukrainian membership stems from an aversion to subsidies for poorer EU members.
More members of German Chancellor Olaf Scholz’s Social Democratic Party oppose sending heavy weapons to Ukraine than support it, according to an April 28 poll. Overall, Germans are split 45%-45% on the question, with 10% undecided. At the beginning of April, an identical poll found 55% of Germans in favor of shipping heavy weapons to Ukraine.
Soaring energy and food prices and an overall 7.9% annual inflation rate explain the difference.
Only 23% of Germans believe that a military victory is possible against Russia, according to a June 7 poll, while 70% believe a negotiated solution will be necessary.
A cold winter with hardship for millions of German households would undermine Scholz’s already-shaky coalition. On May 15, his party suffered its worst electoral defeat since 1947 in its stronghold state of North Rhein-Westphalia, ceding leadership of the state government to the Christian Democrats.
Last Sunday’s parliamentary elections in France, meanwhile, left President Emmanuel Macron’s coalition in a minority, after gains by Marine Le Pen’s National Front and Jean-Luc Mélenchon’s left-wing alliance.
Both the French right and left oppose the Ukraine war. Political support for the Ukraine war and for the European leaders who made common cause with Kiev and Washington is eroding rapidly, and worsening economic conditions may undermine Scholz’s and Macron’s positions.
Traders react in the S&P pit of the Chicago Mercantile Exchange at the moment the world turned to junk: Global markets plummeted in 2008 after Lehman Brothers went bust even though it had top credit rating. Photo: Reuters / John Gress