Rosenthal, one of Germany’s oldest porcelain manufacturers, has seen plenty of disruption in its 140-year history. But nothing has prepared it for this: the threat of a cut-off of natural gas that would bring production of its bone china plates, bowls and vases to an abrupt halt.
“We can’t live without gas,” says Mads Ryder, Rosenthal’s chief executive. “We don’t have an alternative energy source.”
The war in Ukraine is reordering the global energy landscape. Shocked by the devastation visited on Ukrainian cities by Russian bombs, the EU has imposed swingeing sanctions on Russian hydrocarbons. Coal is banned; oil could be next. Gas may also be on the agenda.
But talk of a full-scale embargo on Russian energy is spreading panic in Germany, which until the war received 55 per cent of its imported gas from Russia. The fear is that any sudden gas shut-off could paralyse large parts of the country’s industry. Martin Brudermüller, chief executive of the chemicals group BASF, says it would plunge German business into its “worst crisis since the second world war”.
Rosenthal, a small company with 600 employees near the Czech border, would be profoundly affected. “If the gas is cut off we would have to close down our production within a few days or weeks,” says Ryder. A long closure “would mean the end for some companies in the industry”, which, burdened by high labour and energy costs, is “already fighting for its survival”.
It is this fear that explains Germany’s profound opposition to the idea of turning off the Russian gas tap. In early April, Chancellor Olaf Scholz told the Bundestag that Germany’s energy reliance on Russia had “grown over decades and cannot be ended from one day to the next”. All of the country’s big parties agree with him.
But that view could become increasingly indefensible as the war in Ukraine progresses. The mounting evidence of war crimes committed by Russian troops in places such as Bucha and the launch of a major new Russian offensive in the eastern Donbas region this week are raising the pressure on all European countries to at least consider a gas import ban — and Germany is no exception.
Meanwhile, Germany also faces the risk that Russia could itself retaliate against western sanctions by unilaterally stopping the flow of gas to Europe. Either way, Berlin is facing a scenario unthinkable even a few weeks ago — a gas supply shock that would force it to ration energy to industry and could shutter some of the country’s largest factories.
Energy veterans are at a loss. “I’ve seen many disruptions,” says Leonhard Birnbaum, chief executive of German energy group Eon. “I’ve seen the energy transition from zero to, let’s say, full steam. I’ve seen Fukushima . . . I’ve seen turbulent times. But what we are observing right now is . . . unprecedented.”
The pressure on Europe feeds off outrage at the vast sums it has been handing over to the Kremlin for its hydrocarbons, even as it prosecutes a war that has claimed thousands of civilian lives and laid waste to Ukrainian towns and cities.
Since the war began the EU has forked out more than €35bn for Russian energy supplies, according to Josep Borrell, the EU’s foreign policy chief. His colleague Charles Michel, president of the European Council, said in early April that “sooner or later” the bloc would have to consider banning imports of Russian oil — and even gas.
But German businesses insist such an embargo would have catastrophic consequences. Siegfried Russwurm, head of the BDI business association, says a sudden gas import ban would bring whole sectors of industry to a standstill and “massively damage Germany’s greatest strength, also in international conflicts — its economic strength and stability”.
In its insistence on a gradual approach, the government has been given cover by some of Germany’s leading economists. A forecast released on April 13 by its top economic institutes said a full EU energy embargo would trigger a sharp recession in Germany, sending output down 2.2 per cent next year and wiping out more than 400,000 jobs.
“Germany would forfeit €220bn in economic output in 2022 and 2023, equivalent to 6.5 per cent of gross domestic product,” says Stefan Kooths of the Kiel Institute for the World Economy.
Such gloomy predictions come with Germany already looking like the sick man of Europe. Its GDP shrank in the final quarter of last year under pressure from global supply chain bottlenecks and, unlike the US, China, the UK and the overall eurozone, Germany has not rebounded to pre-pandemic output levels.
But debate continues to rage over the future of Germany’s gas supplies from Russia. Some analysts and economists say the projected costs of a moratorium, and the difficulty of filling the supply gap, have been overstated. Others think the economic importance of Russian gas should not be policymakers’ sole consideration.
Janis Kluge, an expert on eastern Europe at the German Institute for International and Security Affairs, thinks Germany should consider a gas embargo — if only for moral reasons.
“By not exerting enough pressure on Moscow in this war, we’re losing political capital in Europe and the west,” he says. “Germany doesn’t seem to realise what huge costs doing too little entails.”
The Berlin-Moscow energy axis
The gas dilemma goes to the heart of a far wider debate in Germany that revolves around a simple question: how did it come to be so reliant on a country that under Vladimir Putin has morphed into a revisionist dictatorship willing to invade its neighbours and plunge Europe into war?
The close energy relationship has its roots in a historic agreement between then West Germany and the Soviet Union in 1970, which saw the Germans pay for Soviet natural gas with exports of steel pipes.
“It was a great deal for everybody, including the Soviets,” says Eon’s Birnbaum. “They got their export infrastructure financed from the West . . . and we got cheap gas.”
As the relationship bedded in, Russia gained the reputation as a reliable supplier that kept pumping gas even when the Soviet invasion of Afghanistan brought east-west tensions to boiling point.
“There was an element of stability . . . at an operational level because of the symbiotic nature of customer and supplier,” says Frank Mastiaux, chief executive of EnBW, Germany’s third-largest energy company.
As Germany’s energy policy shifted, it grew ever more reliant on Russian gas. Under former chancellor Angela Merkel, Berlin decided to phase out nuclear power in 2011 and later also moved to close all of the country’s remaining coal-fired power stations. Yet with the buildout of renewables stalling, gas as a bridge fuel to a low-carbon future began to loom even larger in the energy mix.
“In the last 20 years we have shut down every alternative,” says Birnbaum. “The Germans didn’t want anything . . . no hard coal, no lignite, no nuclear, and all of a sudden we were overdependent [on Russia].”
Even as Russia invaded Georgia, intervened in Syria, annexed the Crimean peninsula and fomented a separatist war in eastern Ukraine, Germany continued to expand its energy partnership with Russia.
Not only did Merkel’s government back the Nord Stream 2 pipeline to increase the flow of Russian gas pumped directly to Germany across the Baltic Sea, it also stood by as key pieces of Germany’s energy infrastructure were snapped up by Kremlin-controlled companies.
One example is the PCK oil refinery in the east German town of Schwedt that is now owned by Rosneft; another, Rehden, western Europe’s largest gas storage facility, is owned by Gazprom. Both acquisitions occurred after Russia invaded Crimea.
Meanwhile, Berlin took decisions that locked it into Russian supplies of gas for decades to come, to the exclusion of other sources. The Nord Stream 1 and 2 pipelines destroyed the business case for building import terminals for liquefied natural gas, which would have allowed Germany to diversify its energy inflows.
The German politicians seen as having fostered close ties to Russia are now being pilloried. One is Frank-Walter Steinmeier, a former foreign minister in Merkel’s government who is now Germany’s president. He had planned to visit Kyiv last week but was told by Volodymyr Zelensky’s government that he would be unwelcome — a spectacular snub.
But the Berlin-Moscow energy axis was in fact the work of successive German governments. And it was driven not just by economic factors — the relative cheapness of Russian gas — but also by the imperative of Wandel durch Handel, or change through trade, the idea that a “growing interdependence would stabilise the Russia-Germany relationship”, says Kluge.
“That political narrative took away the fears people might otherwise have had of this lopsided dependence on Russia,” he says.
‘Freeze for freedom’
Despite its preference for a slow unwinding of this relationship, Germany is now actively preparing for the eventuality of a Russian gas shut-off.
After EU states rebuffed Moscow’s demand to be paid in roubles for its gas last month, the German government activated the first of three warning stages in its emergency supply plan, a scheme put in place during the Arab oil embargo of the 1970s.
Under its provisions, in the case of acute shortages the German government would eventually nationalise the country’s gas distribution network, ensuring supplies would be reserved for critical infrastructure, such as hospitals, and for households. Industry would be forced to cut back on its gas consumption, though it remains unclear whether small or large companies would be asked to do so first, or by the same measure.
German boardrooms are in uproar. Government officials say they have been inundated with letters from industries insisting how “systemically relevant” they are — particularly from the chemicals sector, which feels that the true importance of its core products to the broader economy has not been fully understood.
Companies jostling for a place in the rationing queue are hiring lawyers to advocate on their behalf. They point out that while a car assembly line can be idled and then restarted with minimal permanent damage, the same cannot be said of blast furnaces at steel plants or large steam crackers that break down hydrocarbons.
As part of the government plan, the Federal Network Agency, the regulator that oversees Germany’s energy infrastructure, has been holding talks with businesses to prepare for “unavoidable shutdowns” should energy supply shortages occur.
“Unfortunately we can’t exclude a situation where we have to make decisions that have terrible consequences for companies, jobs, supply chains, whole regions,” Klaus Müller, the agency’s president, told the newspaper Handelsblatt.
Already, some companies such as Thyssenkrupp and BASF are drawing up lists of production units they can afford to shut down in an emergency. Some retailers are reducing the temperature in their outlets to cut energy costs. Former German president Joachim Gauck last month called on his compatriots to “freeze for freedom.”
Meanwhile, the government is scrambling to find alternatives to Russian gas. Economy minister Robert Habeck, a prominent figure in the Green party, travelled to Qatar last month to secure long-term LNG supplies from the Gulf state.
Habeck has optioned three floating storage and regasification units that will provide Germany with 27bn cubic meters of gas a year, and he has also expedited a deal to build a permanent LNG terminal in Brunsbüttel, a port near Hamburg.
Meanwhile, the government is pushing for more wind farms and solar parks to increase its share of renewable power. But it might also allow Germany’s coal-fired power stations, which are slated for closure by 2030, to operate for longer — a bitter pill for the Greens to swallow.
Habeck’s ministry says that since Russia invaded Ukraine, the government has reduced its dependence on Russian coal from 50 to 25 per cent, oil from 35 to 25 per cent, and gas from 55 to 40 per cent. The plan is for Germany to all but wean itself off Russian gas by mid-2024 and become “virtually independent” of Russian oil by December. Eon’s Birnbaum, however, says it will take three years for Germany to fully break its addiction to Russian energy imports.
Others, though, disagree. According to a report by the DIW think-tank, Germany could easily fill its gas supply gap were Russian exports to stop, partly by increasing pipeline imports from Norway and the Netherlands, tapping more LNG via import terminals in Rotterdam, Zeebrugge and Dunkirk, and forcing industry to conserve energy.
“German industry has been developing these horror scenarios, saying we just can’t do without Russian gas, and by doing this they’re taking the whole economy hostage,” says Claudia Kemfert, an energy expert at the DIW. “But we’re living in a different world now . . . We can’t do business with Russia any more and industry has to realise that.”
But government officials dismiss suggestions that Germany can somehow make do without Russian gas. “Russian gas imports are still, in our view, irreplaceable,” says one.
The costs of a cut-off
Opinion is just as mixed about the potential economic impact of an energy embargo, on Germany and the EU. Some leading economists support the government’s gradual approach, warning a sudden, continent-wide supply cut-off could permanently damage the competitiveness of Europe’s economy and even fuel social unrest.
“It would be a very asymmetric shock, hitting Germany and Europe very hard, much harder than the US and other parts of the world,” says Marcel Fratzscher, head of the DIW. “There is a risk of a social backlash if we have a long period of much higher prices, company closures and rationing of gas supplies.”
Not so, says Rüdiger Bachmann, an economics professor at the University of Notre Dame who co-wrote one of several reports after the invasion of Ukraine estimating that ending Russian energy imports would be “manageable” for the German economy. “It is a temporary crisis,” he says. “We can protect jobs with short-time work and support companies with capital injections by the government. We have done this before with Covid. Germany has the fiscal capacity to pay for this.”
Veronika Grimm, an economics professor at the University of Erlangen-Nüremberg, who sits on the council of economic experts advising the government, agrees, saying efficiency measures could also reduce gas consumption in the short-term by as much as 15-25 per cent.
Such calculations are met with scorn by many German companies, who warn of the chaotic consequences of a sudden shut-off of Russian gas. Rosenthal is an example. It fires its porcelain in kilns that are heated to 1,200C and that temperature must be maintained constantly.
“We can’t just reduce our gas consumption a little,” says Ryder. “If we don’t have a constant temperature the porcelain doesn’t fire and starts to break.”
He is already working on an emergency plan for the eventuality of a gas supply shortage — but the outlook is bleak. “If we’re cut off slightly, or 100 per cent, we would be able to work on the existing inventory, packaging and finishing the goods, but only for a while. Then we’d have to send our people home.”
Copyright The Financial Times Limited 2022
