LONDON (Business Standard) - Across Europe, signs of distress are multiplying as Russia’s war in Ukraine drags on. Food banks in Italy are feeding more people. German officials are turning down the air conditioning as they prepare plans to ration natural gas and restart coal plants.
A giant utility is asking for a taxpayer bailout, and more may be coming. Dairies wonder how they will pasteurize milk. The euro has sagged to a 20-year low against the dollar, and recession predictions are on the rise.
Those pressure points are signs of how the conflict and the Kremlin gradually choking off natural gas that keeps industry humming provoked an energy crisis in Europe and raised the likelihood of a plunge back into recession just as the economy was rebounding from the COVID-19 pandemic.
Meanwhile, high energy costs fuelled by the war are benefiting Russia, a major oil and natural gas exporter whose agile central bank and years of experience living with sanctions have stabilized the ruble and inflation despite economic isolation.
Europe’s most pressing challenge is shorter term: battle record inflation of 8.6% and get through the winter without crippling energy shortages. The continent relies on Russian natural gas, and higher energy prices are flowing through to factories, food costs and fuel tanks.
Uncertainty weighs on energy-intensive industries like steel and agriculture, which could face natural gas rationing to protect homes if the crisis worsens.
French President Emmanuel Macron says the government aims to conserve energy by switching off public lights at night and taking other steps. Similarly, German officials are begging people and businesses to save energy and ordering lower heat and air-conditioning settings in public buildings.
It follows Russia cutting off or reducing natural gas to a dozen European countries. A major gas pipeline also shut down for scheduled maintenance last week, and there are fears that flows through Nord Stream 1 between Russia and Germany will not restart.
Germany’s biggest importer of Russian gas, Uniper, has asked for government help after it was squeezed between skyrocketing gas prices and what it was allowed to charge customers.
Carsten Brzeski, chief eurozone economist at ING bank, foresees a recession at the end of the year as high prices sap purchasing power. Europe’s longer-term economic growth will depend on whether governments tackle the massive investments needed for the transition to an economy based on renewable energy.
Without investment, without structural change, the only thing left is to hope that everything will work as before but it won’t, Brzeski said.
While Europe is suffering, Russia has stabilized its ruble exchange rate, stock market and inflation through extensive government intervention. Russian oil is finding more buyers in Asia, albeit at discounted prices, as Western customers back off.
After being hit with sanctions, the Kremlin built a fortress economy by keeping debt low and pushing companies to source parts and food within Russia.
Economists say the ruble’s exchange rate stronger against the dollar than before the war and declining inflation present a misleading picture.
Rules preventing money from leaving the country and forcing exporters to exchange most of their foreign earnings from oil and gas into rubles have rigged the exchange rate.
And the inflation rate has partially lost its meaning, Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs, wrote in a recent analysis. That’s because it does not account for disappearing Western goods, and lower inflation probably reflects sagging demand.
Some 2.8 million Russians were employed by foreign or mixed ownership firms in 2020, according to political scientist Ilya Matveev. If suppliers are taken into account, as many as 5 million jobs, or 12% of the workforce, depend on foreign investment.
Foreign companies may find Russian owners, and protectionism and a glut of government jobs will prevent mass unemployment.
But the economy will be far less productive, Kluge said, leading to a significant decline in average real incomes.