Wanted In Europe: Mild Winter, ‘Specialized Repair Company’

Wanted: “A specialized repair company.”

If that’s you, and you can ensure the “complete elimination of oil leakage” around Siemens-built gas turbines, contact Gazprom immediately. Your services are needed posthaste.

The quotes are from Gazprom’s statement announcing that the Nord Stream won’t be reopening on schedule following three days of “maintenance.” The news was billed Friday as a “surprise,” a “shock” and a “dramatic escalation” in Europe’s existential energy crisis. I doubt the veracity of those characterizations, although I’ll readily concede the necessity of feigning incredulity.

On Tuesday morning, I called this week’s farcical shutdown a “stark, if superfluous, reminder that gas flows from Russia can cease at any time.” Gazprom’s statement was reminiscent of the maintenance announcement last month — it too was delivered late on a Friday. The following week, gas and power prices went parabolic, dragging the euro below parity and prompting analysts to dust off their Econ 101 textbooks.

Prices calmed this week as Europe mulled price caps and a plan to de-link gas and electricity costs, but most observers knew the odds of Gazprom restarting the pipe were a coin toss, at best. Although similar concerns kept European officials up at night during 10 days of maintenance in July, that work really was planned. This week’s maintenance, by contrast, was pure pretext.

Siemens did appear to confirm Gazprom’s oil leak story, but the company suggested it shouldn’t have prevented the resumption of flows through the link, which were only running at 20% of capacity anyway.

Earlier Friday, G7 finance ministers agreed to go forward with a plan to cap prices on Russian oil. “Today, the G7 took a critical step forward in achieving our dual goals of putting downward pressure on global energy prices while denying Vladimir Putin revenue to fund his brutal war in Ukraine,” Janet Yellen said. “By committing to finalize and implement a price cap, the G7 will significantly reduce Russia’s main source of funding for its illegal war, while maintaining supplies to global energy markets by keeping Russian oil flowing at lower prices.”

Gazprom’s announcement was plainly retaliatory, although I’d reiterate my contention that Moscow and Brussels were engaged in a kind of coordinated decoupling over the summer. I’ll recycle some familiar language in that regard. If either side were truly dedicated to crippling the other economically, there wouldn’t have been any discussion in Moscow, nor in Brussels. Russia would’ve cut all supplies to Europe in retaliation for sanctions and weapons shipments to Ukraine and Europe would’ve impose a total energy embargo to deprive Putin of revenue.

Instead, Putin reduced flows in steps as Europe rushed to fill storage, and Europe ratcheted up sanctions in steps, as Elvira Nabiullina rushed to rescue the Russian economy. All the while, Putin marauded through Ukraine, vicariously, through reluctant conscripts.

Gazprombank’s dual account system, which allowed European states to keep buying Russian energy without running afoul of sanctions while simultaneously satisfying Putin’s demand that payments be made in rubles, represented an absurdly laborious effort to dance around the reality that both sides were transacting with a wartime belligerent.

Now that Europe has enough gas in storage to make it through an average winter, and now that Putin averted a domestic economic collapse and is actively seeking to weaken the ruble which, ironically, strengthened too much amid capital controls, high energy prices and a bloated current account surplus, it appears it’s time to sever the link. Figuratively and literally.

No one should misconstrue my point. I’m not positing a conspiracy. I’m simply stating what I think is obvious — namely that neither side was prepared to cut the gas link the day Russian tanks rumbled into Ukraine. Decouplings are painful, and even when differences are irreconcilable, a “clean break” is often the messiest option for all parties. Both sides subjugated principle to expediency.

What happens from here depends in no small part on the weather. I realize that sounds trite, but it’s true. If it gets too cold in Europe this winter (and assuming Gazprom doesn’t find a “specialized repair company”), some industries could be forced to shut down and, yes, some citizens in some countries could be in serious jeopardy of freezing. You’d like to think not to death. Rationing and blackouts are possible, and Germany may face a severe recession.

Eric Manner, Ursula von der Leyen’s chief spokesman, called Gazprom’s announcement “confirmation of its unreliability as a supplier.” “It’s also proof of Russia’s cynicism, as it prefers to flare gas instead of honoring contracts,” he added, referring to burning at Portovaya.

“Even if volumes were to go to zero, the bulk of the decline has already occurred, but what happens to the remaining 20% is still an important swing factor in any supply/demand modeling,” Morgan Stanley wrote, in a note examining the impact of a full shutoff.

A lot hangs on demand. “The fact that the projected inventory paths look manageable is only partially a reason for comfort,” Morgan Stanley’s analysts went on to say, adding that “they are only so because we have lowered our demand assumptions.” Gas consumption in power generation, the bank emphasized, “is largely a function of the weather.”

As for the Kremlin, RBC’s Helima Croft said Moscow will be keen to dispense with the notion that a full Nord Stream shutoff means Russia is out of leverage. “Putin will endeavor to demonstrate that he hasn’t played his last card and that there are many open windows in his energy war with the West,” she wrote.