Putin's last chance

21 July, 09:54 AM
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Russian dictator Vladimir Putin (Photo:Pool via REUTERS)

Russian dictator Vladimir Putin (Photo:Pool via REUTERS)

A few thoughts about the recent Nord Stream 1 situation and European gas.

First, no one in the gas industry I have spoken to believes the Kremlin line that gas flows through Nord Stream 1 are being reduced because of turbine issues.

The key Portovaya pumping station has six turbines and I just don’t believe that only two were operational prior to sanctions being imposed and preventing the return of one of those turbines from Canada.

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Second, even if Nord Stream 1 was not operational, Russia still had the option of using gas transit through Ukraine, which has an annual capacity of something like 117 bcm, enough to meet two-thirds of European demand from Russia. It is currently only being used for a fraction of its capacity.

As with NS1, Moscow has cut transit through Ukraine - zero through Yamal - and small change through the other Ukrainian route. 

Third, so this is all about Putin trying to a) limit Europe’s ability to pump gas into storage this winter but trying to create a false impression that Russia is cutting supply due to technical reasons and then sanctions.

But it’s absolutely clear that Moscow is cutting supplies for geopolitical reasons - it wants to create a European gas crisis this winter to bring Europe to its knees to the point where it cuts support to Ukraine and forces Kyiv to concede to Moscow’s demands. b) The drama about the Canadian turbine is about weakening the sanctions regime - showing it does not work - and hoping to break Western unity in the process.

Fourth, as noted, Putin wants a gas crisis in Europe this winter, so he is not going to raise NS1 flow to anything approaching normal levels.

He is doing this as he can and wants to force concessions on Ukraine, but importantly he sees his leverage as now and being time-dependent.

He knows that this winter is likely his last chance to use this card as beyond this year Europe will have significantly diversified away from Russian gas. He won’t have this card to play next year, or it will be much less effective then.

Fifth, even if NS1 flows go back to pre-maintenance levels (40%), Europe does not have enough gas in storage to get thru this winter.

Alternative gas supplies - LNG - are not enough yet (simply a lack of spare LNG globally and technically a shortage of terminals to offload the gas) to meet the demand/supply imbalance.

Europe hence has two options:

a) Massive price hikes for gas to cut demand (something like a 13% cut in demand needed) or;

b) rationing, likely mostly on the industry. Likely we will see a combination of the two but with European industry, rather than retail uses, suffering most. 

Who is most vulnerable? Well who is most dependent on Russian gas, and who is at the end of the pipelines? Think southern Germany, Austria, Czech Republic, Slovakia, and Hungary here.

And that Central European space is a hub of the heavy and manufacturing industry.

I expect an output of cars, chemicals, machines, and capital goods and all sorts of manufacturing products and sub-components in global supply chains to suffer production halts - we could see the imposition of restrictions on the working week (3-4 day weeks).

This all means major global supply chain disruptions - think similar to Covid - and more global stagflation.

We will be surprised where the disruptions fall - some products we rely on might be made in the U.K. but the machine that makes it might be dependent on a part made in Germany or Hungary.

And Putin will do this because for him Ukraine is his number one geopolitical priority. He is obsessed with it and does not care about potential financial losses from stalled gas sales to Europe.

He thinks that revenues herein will be made up by higher global energy prices resulting. But even if energy sales went to zero he still does not care as he just sees his opportunity as now, and what is now clear is that the war in Ukraine is about his place in (Russian) history. This is about legacy. And any economic pain on Russia resulting is a price worth paying in his view.

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