Can Germany survive without Russian gas? | Business | Economy and finance news from a German perspective | DW | 29.03.2022

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Business

Can Germany survive without Russian gas?

Experts are divided on how quickly Germany could cut imports of Russian energy and stop funding President Vladimir Putin's invasion of Ukraine. How vulnerable would such a move leave Europe's largest economy?

Workers handling a pipe at the construction site of the Power of Siberia pipeline

Germany is under pressure to cut its reliance on Russian energy and stop funding Vladimir Putin's war machine

Germany remains under intense pressure to cut its reliance on Russian energy in the wake of the invasion of Ukraine. Though the United States, the United Kingdom and Canada have halted imports of fossil fuels from Russia, Germany has tried to temper expectations that such a move could happen quickly.

Chancellor Olaf Scholz told Germany's parliament last week that a sudden embargo on Russian energy imports "from one day to the next would mean plunging our country and the whole of Europe into a recession."

The reason, of course, is Germany's much higher dependence on Russia for its energy needs: up to 55% of gas and 34% of oil supplies, according to the Agora Energiewende think tank in Germany.

But patience is wearing thin as Germany is effectively funding Russian President Vladimir Putin's war machine. Europe's largest economy spends hundreds of millions of euros daily on Russian energy.

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Since the war in Ukraine began on February 24, the European Union has paid out €21 billion ($23.3 billion) for fossil fuel imports from Russia, according to the Helsinki-based Center for Research on Energy and Clean Air (CREA).

Several analysts believe that Berlin must now take greater strides to halt the Kremlin's military ambitions by joining the energy boycott, without severely damaging its export-oriented economy.

Energy boycott would be 'manageable'

In March, a group of scholars from the German National Academy of Sciences Leopoldina calculated that the effects of a short-term halt to the supply of Russian gas would be "substantial but manageable."

They said Germany's gross domestic product would drop 0.5%-3%, compared with a 4.5% fall in the first year of the pandemic. But the academics noted that finding alternative sources of oil and coal would be easier than for gas.

A study by the German Institute for Economic Research published Tuesday predicted a similar output drop and a further spike in inflation, which had already reached 5.5% in February. The report's authors cautioned that as there has never been an embargo on this scale, "any assumptions are subject to uncertainty."

In a recent interview with the Tagesspiegel newspaper, the German economist Rüdiger Bachmann acknowledged that the cost to economic growth would be "huge," but added that it's "nothing that you can't counteract with economic policy measures, even if the damage were twice as large."

Business chiefs warn against boycott

Leading opposition to a boycott is the Federation of German Industries (BDI), the country's main business-lobby group, which warned last week that the move may have "incalculable consequences."

BDI President Siegfried Russwurm said the boycott would have ramifications for the whole of Europe as the continent's gas network has not been designed for gas flows from west to east — referring to the Netherlands and Belgium, which operate liquefied natural gas (LNG) terminals that could theoretically handle new supplies from the United States, Qatar and Norway. 

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Christoph M. Schmidt, president of the Leibniz Institute for Economic Research, doubted the accuracy of the predictions that the boycotts would be manageable.

"It is currently almost impossible to make reliable statements about the magnitude of the associated economic consequences," he said.

Several industrial sectors have cautioned that a severe disruption to manufacturing and supply chains could lead to massive job losses. They include the mining, chemical and energy union (IG BCE), the steel industry association (WV Stahl) and groups representing the metals and electrical sectors.

Utility firms warn of 'massive damages'

The lion's share of the burden from any energy boycott would be shouldered by Germany's utility sector, whose representatives warned of huge economic and social ramifications. 

Leonhard Birnbaum, the chief executive of the German utility giant E.ON, told the TV news program Tagesthemen that, without Russian gas, the economy would suffer "massive damages, which should be avoided if in any way possible."

Kerstin Andreae, chair of the German Association of Energy and Water Industries (BDEW), said an embargo would create "immense, almost devastating challenges."

Andreae said coal power generation would need to be ramped up, while households and commercial users would have to cut their energy usage. According to BDEW, domestic gas use could be cut by 15%, commercial use by about 10% and industrial use by 8%.

Michael Hüfner, from the Cologne Institute for Economic Research, warned in a recent op-ed for Tagesspiegel that an embargo would mean "the end of raw material production" in Germany. 

Russian imports falling, will drop further

Even if it can't manage a total boycott, Germany's government reports that it has already reduced its dependence on Russian gas. By the end of this year, it aims to cut Russian gas imports by half and halt them completely within two years.

German Economy Minister Robert Habeck and Qatar's Energy Minister Saad Sherida al-Kaabi

Economy Minister Habeck traveled to Qatar and the UAE to source new energy supplies

German Economy Minister Robert Habeck has traveled to other major gas exporters Qatar and Norway in recent days to shore up future energy supplies. However, Germany has no terminals to receive LNG imports, the main alternative to Russia's natural gas — which is currently mostly piped in. The earliest the new facilities can come on stream is 2026.

A sudden disruption to the energy supply could also come from Russia, which last week announced that it would only accept future payment for fossil fuels in rubles. However, European countries have signed contracts with Moscow to pay in euros and have rejected demands for a currency switch.

Though Russia has so far met its contractual obligations, wholesale gas prices have risen again recently in anticipation that the Kremlin might be the one who switches off the taps.

Edited by: Uwe Hessler