Across Europe, signs of distress are mounting as the Russian war in Ukraine continues. Food banks in Italy feed more people. German officials are refusing air-conditioning as they prepare plans to ration natural gas and restart coal-fired power plants.
A giant utility company is calling for a taxpayer bailout, with more to come. Dairy companies are wondering how they will pasteurize milk. The euro has fallen to its 20-year low against the dollar and recession forecasts are mounting.
Those pressure points are signs of how the conflict — and the Kremlin gradually suffocating natural gas that keeps the industry humming — has sparked an energy crisis in Europe and increased the likelihood of a dip back into recession just as the economy begins to pick up. recovered from the COVID-19 pandemic.
Meanwhile, Russia, a major exporter of oil and natural gas, is benefiting from high energy costs from the war, whose nimble central bank and years of experience with sanctions have stabilized the ruble and inflation despite economic isolation.
In the long run, however, economists say that while Russia avoids complete collapse, it will pay a high price for the war: increasing economic stagnation due to lost investment and lower incomes for its people.
Europe’s most urgent challenge is the shorter term: fight record inflation of 8.6% and get through the winter without crippling energy shortages. The continent is dependent on Russian natural gas, and higher energy prices are spilling over into factories, food costs and fuel tanks.
Uncertainty weighs on energy-intensive industries like steel and agriculture, which could face natural gas rationing to protect homes if the crisis worsens.
Molkerei Berchtesgadener Land, a large dairy cooperative in the German town of Piding outside Munich, has 200,000 liters of fuel oil stored so it can continue to produce power and steam to pasteurize milk and keep it cold when electricity or natural gas to its turbine generator is turned off.
It is a crucial guarantee for 1,800 member dairy farmers with 50,000 cows that produce one million liters of milk per day. Dairy cows need to be milked daily, and a shutdown would leave that ocean of milk nowhere to go.
“If the dairy doesn’t function, the farmers can’t do it either,” says director Bernhard Pointner. “Then the farmers would have to throw away their milk.”
In one hour, the dairy uses the equivalent of a year’s electricity for a house to keep up to 20,000 pallets of milk cold.
The dairy has also stockpiled packaging and other supplies to prevent suppliers from being hit by an energy shortage: “We’ve stocked a lot … but that will only last a few weeks.”
The economic woes also appear at the dinner table. Consumer organizations estimate that a typical Italian family will spend 681 euros (dollars) more this year to feed themselves.
“We are really concerned about the situation and the continued increase in the number of families we support,” said Dario Boggio Marzet, president of the Lombardy Food Bank, which groups together dozens of charities that run soup kitchens and supply staples to the needy. Their monthly payments will increase by 5,000 euros this year.
Jessica Lobli, a single mother of two from the Parisian suburb of Gennevilliers, is keeping a close eye on rising supermarket prices. She has reduced her consumption of milk and yogurt and has given up Nutella or branded cookies.
“The situation will get worse, but we have to eat to survive,” said Lobli, who earns between 1,300 and 2,000 euros a month in a school kitchen.
Her monthly food budget from 150 to 200 euros fell to 100 euros in June. She said her family doesn’t eat much in the summer, but she’s worried about September when she has to buy school supplies for her 15-year-old daughter and 8-year-old son, which will cut her budget even further.
French President Emmanuel Macron says the government wants to save energy by turning off public lights at night and taking other measures. Similarly, German officials are begging people and companies to save energy and order lower heating and air conditioning settings in public buildings.
It follows Russia cutting off or reducing natural gas to a dozen European countries. Last week, a major gas pipeline was also shut down for scheduled maintenance and there are fears that flows through Nord Stream 1 between Russia and Germany will not restart.
Germany’s largest importer of Russian gas, Uniper, has asked for help from the government after being squeezed between skyrocketing gas prices and what it could ask customers.
Carsten Brzeski, chief eurozone economist at ING bank, predicts a recession at the end of the year as high prices undermine purchasing power. Europe’s longer-term economic growth will depend on whether governments tackle the massive investments needed to transition to a renewable energy economy.
“Without investment, without structural change, all that remains is to hope that everything will work as before — but it won’t,” Brzeski said.
While Europe suffers, Russia has stabilized the ruble exchange rate, the stock market and inflation through extensive government intervention. Russian oil finds more buyers in Asia, albeit at discounted prices, as Western customers pull out.
After being hit with sanctions over the 2014 seizure of Ukraine’s Crimea region, the Kremlin built a fortress economy by keeping debt low and pushing companies to source parts and food from Russia.
Although foreign companies such as IKEA have closed their doors and Russia has failed to pay its foreign debt for the first time in more than a century, there is no sense of an impending crisis in central Moscow. Affluent young people still go to restaurants, even though Uniqlo, Victoria’s Secret and Zara stores are closed in the seven-storey Evropeisky mall.
McDonald’s successor, Vkusno-i Tochka, serves more or less identical food, while the former Krispy Kreme at the mall has been renamed but sells essentially the same offerings.
In less affluent provinces, Sofya Suvorova, who lives in Nizhny Novgorod, 440 kilometers (273 miles) from Moscow, has felt the strain on the family budget.
“We practically don’t order takeout anymore,” she says while shopping in a supermarket. “It used to be very convenient if you have small children. We go to cafes less often. We had to cut down on some entertainment like concerts and theaters; we try to keep this for kids, but adults had to cut it.”
Economists say the ruble exchange rate – stronger against the dollar than before the war – and falling inflation paint a misleading picture.
Rules preventing money from leaving the country and forcing exporters to exchange most of their foreign oil and gas earnings for rubles have manipulated the exchange rate.
And inflation “has partially lost its meaning,” Janis Kluge, an expert on Russian economics at the German Institute for International and Security Affairs, wrote in a recent analysis. That’s because it doesn’t account for the disappearing western goods, and lower inflation likely reflects declining demand.
According to political scientist Ilya Matveev, in 2020 about 2.8 million Russians were employed by foreign or mixed companies. When suppliers are taken into account, as many as 5 million jobs, or 12% of the workforce, depend on foreign investment.
Foreign companies can find Russian owners, and protectionism and an abundance of government jobs will prevent mass unemployment.
But the economy will be much less productive, Kluge said, “leading to a significant drop in average real income.”
