Bloomberg: Putin prepares to cut off natural gas, and Germany fears it won’t come back

In the calendars of Germany’s industrial heartland and the offices of power in Berlin, July 11 has been marked in red for weeks, Bloomberg reports.

When the main pipeline for Russian natural gas to Europe shuts down for 10 days of maintenance on Monday, Germany and its allies are bracing for President Vladimir Putin to use the opportunity to cut off flows for good.

If Moscow signals that the Nord Stream pipeline will not resume as planned, Chancellor Olaf Solz’s government will likely trigger emergency measures such as divestitures and company rescues. The consequences would almost certainly mean a deep recession for Europe’s largest economy and create ripple effects across the continent.

“Are we worried? Yes, we are very worried,” said Christian Kullmann, chief executive of German chemical giant Evonik Industries AG. “It would be naive and astronomical not to worry.”

Given Germany’s dependence on Russia for more than a third of its natural gas supplies and the lack of viable alternatives in the short term, the opportunity to inflict damage on Europe in retaliation for sanctions and support for Ukraine may be very good for the Kremlin for letting her through.

While Moscow denies using energy as a weapon, the calculation for Putin is as simple as it is cynical. Europe is desperately trying to fill warehouses to heat homes and keep factories running through the winter. So the sooner Moscow acts to further disrupt gas markets, the higher prices will be and the more time Russia will have to reap the benefits.

“Russia only has so many chips it can play,” said Olga Khakova, deputy director at the Atlantic Council’s Global Energy Center. “They’re trying to maximize the tools they have left.”

Russia’s decades as a stable energy partner have gone out the window in the months since its invasion of Ukraine in late February. The German government now has no visibility into Putin’s plans, with lines of communication with state gas giant Gazprom PJSC cut and officials in Berlin referring to the country as a “black box”.

Germany is gradually preparing the country of 80 million inhabitants for the difficult times ahead. Soltz compared the situation to the hyperinflation of the 1960s and 70s and warned that it will not end soon.

Economy Minister Robert Habeck has evoked images from the financial crisis, warning of Lehman Brothers-like contagion and recently echoing Mario Draghi, who as head of the European Central Bank at the time famously promised to do “whatever it takes” to save the euro

This time, the urgency is focused on preventing the collapse of energy markets and the impact that would have on Europe’s industrial engine.

The impact of energy compression is gradually becoming more tangible. Munich has lowered the temperature of its public pools, Cologne is turning off its street lights and Hamburg plans to have hot water only at certain times of the day.

Parliamentary offices in Berlin are turning down their thermostats, and Vonovia SE, Germany’s largest landlord, will begin lowering nighttime temperatures in most of its apartments to 17 degrees Celsius (63 degrees Fahrenheit).

In preparation, the Scholz government is strengthening its powers, including pushing through legislation that would allow it to acquire stakes to rescue troubled energy companies such as Uniper SE. Germany’s biggest buyer of Russian gas and a key supplier to local utilities put pressure on the government, saying on Friday it was cash-strapped.

Chief executive Klaus-Dieter Maubach warned that Uniper would soon have no choice but to pull gas from storage, raise prices for customers and even cut supply. That’s exactly the kind of fallout Habeck is seeking to avoid as he tries to defend the economy against the weaponization of Russia’s energy resources.

“We will not allow a systemically important company to go bankrupt and cause turmoil in the global energy market as a result,” Hambeck said in response to Uniper’s announcement, adding that the form of the support was still under discussion.

To combat the crisis, Germany is also backing down on its environmental commitments, reviving coal-fired power plants. The move will allow the country to reduce the amount of natural gas used for power generation by 52% over the next 12 months, according to BloombergNEF estimates.

The government already has the power to price natural gas. It escalated the alert level to the second-highest “alert” stage in mid-June after Russian state gas giant Gazprom PJSC cut Nord Stream flows by 60 percent.

The “emergency” declaration would allow Germany’s grid regulator Bundesnetzagentur to control distribution. While households and critical infrastructure such as hospitals would be protected, industrial companies could see deliveries reduced and consumers could still be forced to turn down thermostats and lower water boiler temperatures.

The regulator, known as BNetzA, is working on expedited models that would allow it to make a “less bad decision” on distribution, but they won’t be ready before the fall, said Klaus Müller, the agency’s head.

Germany aims to have storage facilities at least 90% full by November. Today’s level is around 63%, and the fill rate over the last week – which will likely drop when Nord Stream shuts down – would mean it would take 86 days to reach that target.

Meanwhile, companies across Germany are preparing by securing supplies, looking for alternative fuels and reviewing the risks of equipment downtime. Manufacturers in neighboring Poland are also preparing for a consumption report.

“Worrying about it is not enough,” said Evonik’s Kullmann, who also heads Germany’s chemical industry lobby. “We are not in a university seminar discussing sociology. We have to take action. We have to prepare for this scenario.”

Even without the complete shutdown of Nord Stream, Putin has already hurt the European economy. ING estimates that the eurozone will succumb to recession regardless of Russia’s next moves in the energy sector.

As tensions rise, Habeck has resorted to desperate measures. This week, he made a public appeal to Canada to release a Nord Stream turbine that was in the country for repairs but has been stalled by sanctions.

While Kremlin spokesman Dmitry Peskov said Russia would be able to lift pipeline flows if the component is repaired and returned, Habek does not expect a change of tack. He told Bloomberg that the appeal was intended to “move that path of excuses” away from Putin.

It’s a sign that Berlin knows it doesn’t have many options left.

“It was a serious mistake that Germany became so dependent on one country for energy supplies, and that country is Russia,” Habeck said in an interview. “It took decades to build up dependence on Russian natural gas, and we’re trying to change that now in a matter of months.”