Germany Hopes to Outrace a Russian Gas Cutoff and Bone Cold Winter

on Jul17
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Russian natural gas has fired the furnaces that create molten stainless steel at Clemens Schmees’s family foundry since 1961, when his father set up shop in a garage in the western part of Germany.

It never crossed Clemens’s mind that this energy flow could one day become unaffordable or cease altogether. Now Mr. Schmees, like thousands of other chieftains at companies across Germany, is scrambling to prepare for the possibility that his operations could face stringent rationing this winter if Russia turns off the gas.

“We’ve had many crises,” he said, sitting in the company’s branch office in the eastern city of Pirna, overlooking the Elbe River valley. “But we have never before had such instability and uncertainty, all at once.”

Such sentiments are reverberating this week in executive suites, at kitchen tables and in government offices as Nord Stream 1, the direct gas pipeline between Russia and Europe, was shut down for 10 days of scheduled maintenance.

Germany, the pipeline’s terminus and a gas transit hub for the rest of Europe, is the largest and most important economy on the continent. And anxiety that President Vladimir V. Putin may not switch the gas back on — as a display of brinkmanship with countries that oppose Russia’s invasion of Ukraine — is particularly sharp.

Still, “Germany is worse off than the eurozone as a whole,” said Jacob Kirkegaard, a senior fellow at the German Marshall Fund in Brussels.

More than any other economy in the region, Germany’s is built on industrial giants — mighty chemical, auto, glass and steel producers — that consume enormous amounts of fuel, two-thirds of it imported. The chemical and pharmaceutical industries alone use 27 percent of the country’s gas supply.

Most of it came from Russia. Before Mr. Putin invaded Ukraine five months ago and set off retaliatory sanctions from Europe, the United States and their allies, Russia delivered 40 percent of Germany’s imported oil and more than 55 percent of its imported gas.

Gazprom, Russia’s gas monopoly, cut deliveries in June, and if they are reduced further, German industries may soon confront fuel shortages that will compel them to scale back production, Mr. Kirkegaard said. “I don’t think there are that many other European countries that have to do that,” he said.

Over the next five to eight years, until more of an ongoing transition to renewable energy is completed, the country will be “under acute pressure,” he added. “That is the time period when Germany’s economy is still basically going to be fueled by fossil fuels.”

High oil and gas prices and a difficult energy transition are not the only challenges.

Mr. Scholz gathered the leaders of big German companies in Berlin this week to discuss how the Ukraine war and economic sanctions against Russia are affecting their businesses.

Industry has long had an outsize voice in Germany’s policymaking, enjoying a relationship that has come under criticism from some quarters.

“Industry will pretty much have a big role in dictating how things are going and which measures will be taken and which won’t,” said Matthias Breuer, an associate professor at Columbia University’s Graduate School of Business. Influential business and political figures will argue that it will be more important to “keep people employed than keep them warm.”

“The best case is stagnation with high inflation,” he said. But over the longer term, he argued, Germany could come out more competitive if it manages the energy transition well and provides speedy and significant public investment to create the requisite infrastructure.

Marcel Fratzscher, president of the German Institute for Economic Research, agreed. Germany’s industrial success is based on added value more than cheap energy, he said. Most German exports, he said, are “highly specialized products — that gives them an advantage and makes them competitive.”

Labor policy, too, will have an impact.

Wage negotiations for the industrial sector are scheduled to begin in September. The powerful I.G. Metall union will seek an 8 percent wage increase for its 3.9 million members. And starting Oct. 1, a new minimum wage law will establish for the first time a single national rate — 12 euros an hour.

For now, supply chain breakdowns are still causing headaches, and businesses that were only beginning to recover from the Covid-19 pandemic are busy devising contingency plans for gas shortages.

Beiersdorf, maker of skin care products including Nivea, has had a crisis team in place since May to draw up backup plans — including readying diesel generators — to ensure production keeps running.

At Schmees, high costs have already forced the shutdown of one furnace, cutting into the foundry’s ability to meet deadlines. Customers waiting for deliveries of stainless steel include companies that run massive turbines used in icebreaker ships and artists who use it in their sculptures.

Mr. Schmees, an energetic man who prides himself on having nurtured a strong company culture, is planning to ask his employees to work a six-day week through the end of the year, to ensure that he can fill all of the firm’s orders by December. That is how long he’s betting that Germany’s natural gas supplies will hold if Russia cuts off the flow entirely.

“The tragedy,” Mr. Schmees said, “is that we have only now realized what we’ve gambled away with this cheap gas from Russia.”

Katrin Bennhold contributed reporting from Berlin.



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