Europe feels the pain as the Kremlin war drags on, but, in the long run, Russia will pay a heavy price
Across Europe, signs of distress multiply as Russia’s war in Ukraine drags on: Food banks in Italy feed more people, German officials turn off air conditioning as they prepare plans to ration natural gas and restart coal plants.
Key points:
- Just as Europe is recovering from the pandemic, its economic future looks uncertain as Russia’s war in Ukraine continues
- Meanwhile, high energy costs, fueled by the war, benefited the Kremlin and kept the ruble
- But in the long run, economists say, Russia will pay a heavy price for its war
A giant utility is asking for a taxpayer bailout, and more to come. Dairy companies wonder how they are going to pasteurize milk. The euro has slumped to a 20-year low against the dollar, and recession predictions are on the rise.
Those pressure points are signs of how the conflict — and the fact that the Kremlin is gradually suffocating the natural gas that keeps industry humming — is provoking an energy crisis in Europe and increasing the likelihood of plunging back into recession just as the economy recovers from the crisis. Covid-19 pandemic.
Meanwhile, war-fueled high energy costs have, for now, benefited Russia, a major oil and natural gas exporter whose agile central bank and years of experience living with sanctions have stabilized the ruble and inflation, despite its economic isolation.
In the longer term, however, economists say Russia, while avoiding total collapse, will pay a heavy price for the war, including deepening economic stagnation through lost investment and lower incomes for its people.
Inflation, winter stalking Europe
Europe’s most pressing challenge is the short term: fighting a record 8.6 percent inflation and getting through the winter without crippling energy shortages.
The continent relies on Russian natural gas, and higher energy prices go into factories, food costs and fuel tanks.
Uncertainty weighs on energy-intensive industries such as steel and agriculture, which could face rationing of natural gas to protect homes if the crisis worsens.
Molkerei Berchtesgadener Land — a large dairy cooperative in the German city of Piding, outside Munich — has stockpiled 200,000 liters of fuel oil so it can continue to generate power and steam to pasteurize milk and keep it cool if electricity or natural gas to its turbine generator cuts out.
This is an important safeguard for the 1,800 member farmers whose 50,000 cows produce 1 million liters of milk per day.
Dairy cows had to be milked every day, and closure would leave that sea of milk aimless.
“If dairy doesn’t work, then neither can farmers,” said managing director Bernhard Pointner.
“Then the farmers have to throw away their milk.”
In one hour, dairy uses the equivalent of one year’s electricity for a house to store up to 20,000 pallets of cold milk.
The dairy has also stockpiled packaging and other supplies to keep suppliers hit by energy shortages: “We have a lot in stock … but it’s only going to last a few weeks.”
Food prices soar
Economic woes also appear at the dinner table. Consumer groups expect the typical Italian family to spend 681 euros ($1,000) more this year feeding themselves.
“We are truly concerned about the situation and the continued increase in the number of families we are supporting,” said Dario Boggio Marzet, president of the Lombardy Food Bank, which brings together dozens of charities that run soup kitchens and provide staples to the needy. Their monthly fees are up 5,000 euros this year.
Jessica Lobli, a single mother of two from Gennevilliers on the outskirts of Paris, is very concerned about the surge in grocery prices. She reduces consumption of milk and yogurt and abandons Nutella or branded cakes.
“The situation will worsen, but we need to eat to survive,” said Lobli, who earns between 1,300 and 2,000 euros a month working in the school’s kitchen.
His monthly food budget from 150 to 200 euros fell to 100 euros in June.
She says her family doesn’t eat much in the summer, but she worries about September, when she has to buy school supplies for her 15-year-old daughter and 8-year-old son, further reducing her budget.
Energy saving
French President Emmanuel Macron said the government aims to conserve energy by turning off public lights at night and taking other steps.
Similarly, German officials are pleading with people and businesses to conserve energy and order lower heat and air conditioning settings in public buildings.
This follows Russia cutting off, or reducing, natural gas to a dozen European countries. A main gas pipeline also closed for scheduled maintenance last week, and there are concerns that flow through the Nord Stream 1 pipeline between Russia and Germany may not restart.
Germany’s biggest importer of Russian gas, Uniper, has turned to the government for help after being caught between skyrocketing gas prices and what customers are allowed to charge.
Carsten Brzeski – chief eurozone economist at bank ING – expects a recession by the end of the year as high prices weaken purchasing power.
Europe’s long-term economic growth will depend on whether the government handles the massive investments needed to transition to a renewable energy-based economy.
“Without investment, without structural change, the only thing left is to hope that things will go as before – but it won’t happen,” Brzeski said.
The economy of the Kremlin fortress
While Europe has suffered, Russia has stabilized the ruble exchange rate, stock market and inflation through extensive government intervention.
Russian oil found more buyers in Asia, albeit at a discount, as Western customers pulled back.
After being sanctioned over the seizure of Ukraine’s Crimea region in 2014, the Kremlin built a stronghold economy by keeping debt low and encouraging companies to source parts and food in Russia.
Even though foreign-owned businesses like IKEA have closed and Russia has defaulted on its foreign debt for the first time in more than a century, there is no sense of imminent crisis in downtown Moscow.
Rich young people still go to restaurants, even if Uniqlo, Victoria’s Secret and Zara stores close in the seven-story Evropeisky mall.
McDonald’s successor, Vkusno-i Tochka, serves more or less identical food, while the former Krispy Kreme in the mall has changed names but sells essentially the same offerings.
In underprivileged provinces, the story is different.
Sofya Suvorova — who lives in Nizhny Novgorod, 440 kilometers from Moscow — has felt the pressure on the family budget.
“We practically don’t order takeaway food anymore,” he said while shopping at the supermarket.
“It used to be very comfortable when you had small children. We rarely went to cafes.
Misleading image
Economists say the ruble exchange rate – stronger against the dollar than it was before the war – and declining inflation present a misleading picture.
Rules preventing money from leaving the country and forcing exporters to exchange most of their foreign income from oil and gas into rubles have rigged the exchange rate.
And the inflation rate has “partially lost its meaning”, Janis Kluge – a Russian economist at the German Institute for International and Security Affairs – wrote in a recent analysis.
That’s because it doesn’t account for the loss of Western goods, and lower inflation may reflect declining demand.
About 2.8 million Russians were employed by foreign or joint-ownership companies in 2020, according to political scientist Ilya Matveev.
Taking into account suppliers, as many as 5 million jobs, or 12 percent of the workforce, depend on foreign investment.
Foreign companies may find Russian owners, protectionism and a lot of government jobs, will prevent mass unemployment.
But the economy would be much less productive, Kluge said, “resulting in a significant decline in average real income”.
AFP
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