Europe Turns Chaotic As Kremlin Follows Familiar Playbook

Regional equities were under pressure, the euro sank below 0.99 and benchmark gas prices jumped as much as 30% on Monday, as European markets grappled with the prospect of a deep recession in Germany amid a worsening energy crisis.

The tumult was a delayed reaction to the Kremlin’s latest broadside. Late Friday, Gazprom, citing an oil leak, said flows won’t resume through the Nord Stream following three days of maintenance. The “work” which preceded the announcement was widely seen as a pretext for the indefinite cessation of supplies.

Germany on Sunday unveiled a €65 billion package of measures aimed at shielding households from spiraling energy costs. The new program brought the total support pledged under Olaf Scholz’s government to nearly €100 billion, but ING analysts said it’s “hardly enough.” “While the announced package will indeed bring some relief for [low-income households], it’s doubtful [to] be enough to offset the impact from higher energy bills entirely,” the bank’s Carsten Brzeski wrote. “Don’t forget that €65 billion is less than 2% of German GDP [and] German fiscal stimulus during the pandemic, excluding guarantees, amounted to roughly 15% of GDP.”

Monday’s surge in benchmark prices (figure below) was an unwelcome development following a brief respite tied to European leaders’ plans to intervene with price caps and designs on de-linking gas and power costs.

Commerzbank wasn’t particularly generous, calling the Scholz government’s plan an “illusion.” It’s far fetched, the bank suggested, to believe “large parts of the population can be shielded from the fallout of rising energy prices.”

I’d note (again) that persistent euro weakness has the potential to make things worse. The weaker the currency, the more pass-through to prices, and a deteriorating trade balance could pile more pressure on the currency risking a self-fulfilling prophecy.

Austria is set to cap power prices in a bid to save households €500 — at a cost to the government of €2.5 billion. Households will pay a lower electricity price for 80% of the average annual consumption of the previous year, Der Standard reported. “For everything beyond that, the current market price must be paid,” the paper said.

The idea, obviously, is to incentivize power saving, but the same article went on to note that “the government was unable to dispel a criticism that was voiced in advance — the regulation applies equally to every household and no distinction was made as to whether it’s a single household or a household with a family of five.” Considerations of expediency prevented the government from conducting the sort of laborious analysis required to tailor the plan, the paper’s reporting suggested. Austrian regulators on Monday said supply to end users won’t be disrupted absent additional curbs. Austria’s storage is 68% full.

Meanwhile, Sweden and Finland were set to establish some $30 billion in liquidity backstops for utilities amid extreme volatility in power markets. Finnish Economy Minister Mika Lintila warned of “an energy-industry Lehman Brothers.”

Power prices surged Monday. The closely-watched German year-ahead benchmark catapulted more than 30% higher, but remained well below nosebleed levels reached during the peak of last month’s panic. The threat to German industry is all too real. If winter proves unforgiving, businesses could face “mandatory gas curtailment or even ‘rolling gasouts,'” JPMorgan said.

Unsurprisingly, the European electorate is weary of the crisis. A poll published over the weekend suggested more than half of Italians think sanctions on Russia should be lifted, for example. Matteo Salvini, who’s been questioned over the years about purported ties to Moscow, wants the sanctions reconsidered. During remarks at a conference in Lake Como, Salvini said he wouldn’t shift Italy’s alliances if a right-wing coalition takes power following elections later this month, but he did parrot Kremlin talking points.

Despite being “deeply, proudly and firmly rooted in a free and democratic West that opposes war and aggression,” as he put it, Salvini said it’s “legitimate” to question the sanctions if, “after seven months of war,” they “haven’t hurt the aggressor.” “Are the sanctions working? No,” Salvini mused, in a video uploaded to his social media accounts. “To date, those who have been sanctioned are earning, while those who have imposed the sanctions are on their knees,” he added. “I don’t think Putin could have said it better,” Enrico Letta, who heads Italy’s center-left Democratic Party, chided. Longtime readers know I harbor profound reservations about Salvini. He has all the traits of an authoritarian. There’s deep suspicion in Italy that Putin was behind Mario Draghi’s ouster.

It’s important to understand the context. The Kremlin’s strategy is always the same: Sow doubt among the electorate across Western democracies in an effort to create division and, ultimately, empower leaders predisposed to a more conciliatory stance vis-à-vis the Putin government. The rising tide of populism across the West was encouraged, facilitated and amplified by Kremlin propaganda, which seized on Europe’s refugee crisis in 2015. That crisis was exacerbated by Putin’s intervention in Syria. It’s the same playbook in 2022. Six years ago it was the visceral fear of terrorism and the notion that European culture itself was under siege from an influx of “outsiders.” Today, it’s the fear of economic collapse, freezing winters and spiraling food costs.