Prof. ST Hsieh
Director, US-China Energy Industry Forum
June 25, 2022
One senior US official described the dilemma thus: “How do we maximise pain on Putin’s regime? How do we minimise spillbacks back to the rest of the world?” That is quite a circle to square. We hope this Senior US official is not President Biden. President Biden also should fire this senior official immediately. This “dilemma” is caused by inept politicians. Because this “dilemma” is so obvious and should be resolved before the Ukraine war started on February 24, 2022, and the “circle should be squared” before all the hypes of these (manmade) sanctions even in place. It is too late for this “senior US official” to be a smart guy. With this kind of hindsight, there always be “dilemma” all the time! If one does not look before takes the plunge, there is always trouble ahead. Who is to blame?
War in Ukraine is entering the fifth month, Ukraine is the victims of this war and keeps suffering. The US led sanctions against Russia have caused pains in Russia, but Putin shows no sign of succumbing and nowhere is near the lofty goal announced by US Defense Secretary Austin: The west will render Russia not be able to invade any other nation. In contrast, it is the EU being exhausted first and facing immediate energy shortages. The impact on global economy is ominous, recessions could last years.
The case is particularly stressful for President Biden, his approval rating at home has been at historical low. But the US public is now pre-occupied by domestic inflation so Ukraine war is not a major issue anymore. Further, the infights between US progressive vs conservative suddenly flared up when US Supreme Court surprisingly and swiftly reversed the 49 years old decision on abortion rights this week. While Biden attends the G7 in Germany and intends to keep the west unified against Russia, his home base is in disarray. Even though no one would openly discuss any US domestic issues at G7 and NATO meetings, Biden’s weakness is public information. At least limitations of Biden Administration’s “bandwidth” is obvious. It means that US will not be able to offer much supporting Ukraine.
That leaves EU nations, especially the three major economic powers namely German, France and Italy, along with Britain to take the lead solving their own problems. The real challenge for them is not “paying lip service” supporting Ukraine’s war efforts but how to survive the self-made energy crisis:
- The core question is why there is such a terrible war? Was there anyone thought about how to maintain peace first? Is there a lesson to be learned?
- Is there any exit strategy before the war started? Is everybody overconfident in wining? Or even the terms of “wining” are clearly defined or agreed upon in the West? Obviously, Ukraine leaders are holding out a win means kick Putin’s ass! Is it realistic?
- There is no end of Ukraine war insight, cost of war is already mounting. Should a new strategy for closing the war be developed? How can the west “communicate” with Russia on any proposal? Who will be the messenger?
- The Ukraine war so far is limited in Ukraine, but the “collateral damages” or the spillover effects hurt almost everyone badly. It is audacious for G7 to promise: G7 countries are expected to use the summit to show they are acting to help countries round the world – with development aid, debt restructuring, climate finance, help finding alternative sources of energy and, of course, fresh efforts to get grain out of Ukraine’s ports. If the war drags on EU nations would be blessed for a warm winter!
- Climate change? Germany Pushes for G-7 Reversal on Fossil Fuels in Climate Blow! Where is US leadership? Where is John Kerry?
BBC: G7 face battle for unity as cost of Ukraine war mounts
By James Landale
The Russian war against Ukraine will inevitably dominate the summit of G7 nations in Bavaria.
And the leaders of the US, UK, Germany, France, Italy, Canada and Japan face a difficult challenge.
They are aiming to put on a show of unity and resolve over the war. In recent months, the Western alliance has shown signs of strain and fatigue.
Some voices – particularly in France, Germany and Italy – have asked if it might not be better for the war to end, even if it came at the cost of Ukraine having to cede territory. A recent cross-Europe opinion poll suggested some voters put solving the cost-of-living crisis ahead of punishing Russia.
Others argue about the need to salvage some kind of relationship with Russia in the future.
Countries like the UK, Poland and the three Baltic States have been resisting these arguments, saying that any peace deal with Moscow that is not on Ukraine’s terms would lead to further Russian aggression in the future. President Zelensky is likely to reinforce this argument when he addresses the summit virtually on Monday.
So the G7 leaders are expected to try to use the summit to clear these muddy waters, promising more weapons to Ukraine and more sanctions against Russia. The idea will be to send a signal to Russian President Vladimir Putin that the West has the strategic patience to maintain its support for Ukraine, even if it faces domestic political pressure at home from voters concerned about rising prices.
The problem for G7 leaders is they also face growing pressure to show they are tackling the global economic crisis. The soaring price of fuel and food is causing hunger and unrest across the world. And some countries are pointing the finger at the West.
Many countries in the global south do not share Western concerns about Russian aggression. They see the conflict as a European war and seem unmoved by Western arguments that Vladimir Putin is acting as a colonial aggressor. And they blame Western sanctions – as much as Russia’s invasion – for the rising costs of gas and oil, and the massive shortage of wheat and fertiliser.
To try to resist this narrative, G7 countries are expected to use the summit to show they are acting to help countries round the world – with development aid, debt restructuring, climate finance, help finding alternative sources of energy and, of course, fresh efforts to get grain out of Ukraine’s ports. That is why German has invited the leaders of India, Indonesia, Senegal, Argentina and South Africa to the summit, to hear their perspective and show the rest of the world the G7 is listening.
So on the one hand, these Western leaders must show resolve to keep backing Ukraine, and on the other, they must show a readiness to fix the global economic shocks that some blame, in part, on the war.
One senior US official described the dilemma thus: “How do we maximise pain on Putin’s regime? How do we minimise spillbacks back to the rest of the world?”
That is quite a circle to square.
Putin Is Pushing Germany’s Economy to the Breaking Point
William Wilkes, Vanessa Dezem and Alexander Weber
Sat, June 25, 2022, 12:00 AM
(Bloomberg) — In Germany, some industrial furnaces have been running without interruption for decades. If they cool down suddenly, the molten materials harden and the system breaks.
That’s the kind of concern sweeping through Europe’s largest economy as it faces an unprecedented energy crisis.
What started as vague foreboding over reduced supplies of Russian gas is now very real. After President Vladimir Putin slashed flows on the main link to Europe by 60%, experts in Chancellor Olaf Scholz’s administration this week worked out the scenarios and none of them led to sufficient reserves to make it through the winter.
“That was the sobering moment,” Klaus Mueller, who heads Germany’s network regulator known as BNetzA, said Friday in an interview with Deutschlandfunk radio. “If we have a very, very cold winter, if we’re careless and far too generous with gas, then it won’t be pretty.”
The risks extend beyond beyond a recession, and a winter of freezing homes and shuttered factories. For decades, Germany has prospered off the back of cheap gas. The answer to the growing economy’s needs more often than not was a new pipeline to Russia.
That era is now over, and companies from BASF SE to Volkswagen AG are coming to terms with the new reality.
There will be quick fixes — like reviving polluting coal plants and switching fuels in industrial processes — but structural issues loom as the transition to affordable renewable power will still take years.
Firms making metals, paper and even food could be forced to downscale or close German production sites, accelerating a steady exodus of manufacturing jobs and leaving lasting damage to the country’s economic landscape.
“Companies will move production to where there’s competitive pipeline gas, and this won’t be in Germany,” said Wolfgang Hahn, managing director of Energy Consulting Group GmbH. “You can’t correct 20 years of policy errors in two or three years.”
The latest figures show that it would take 115 days to reach the government’s target of filling gas reserves to 90% capacity by November. That time frame assumes flows remain at the current level, which is unlikely given the Kremlin’s increasingly aggressive posture toward Europe in retaliation for sanctions imposed over Russia’s war in Ukraine.
In response to the grim prospects, Germany — which still relies on Russia for more than a third of its gas supplies — elevated its threat level to the second-highest “alarm” stage on Thursday. If the squeeze gets tighter, Germany could start rationing supplies.
The moment of truth is likely to come next month, when the Nord Stream pipeline goes down for scheduled maintenance. Germany worries it may never come back.
“I would have to lie if I said I didn’t fear that,” Economy Minister Robert Habeck said Thursday in an interview with public broadcaster ZDF.
Germany’s vice chancellor drew a parallel between the gas squeeze and the role of Lehman Brothers in triggering the financial crisis. If energy suppliers continue to pile up losses by being forced to cover missing Russian supplies at high prices, there’s a risk of a broader collapse.
Uniper SE, Germany’s largest Russian gas importer, has already warned it may face difficulties fulfilling supply contracts to local utilities and manufacturers if Moscow prolongs or increases gas cuts.
The crisis has already spilled far beyond Germany, with 12 European Union member states affected and 10 issuing an early warning under gas security regulation. Europe’s increased demand for liquefied natural gas will also hit poorer nations around the world as they struggle to compete for cargoes.
“We are worried” that Russia will cut off gas supplies to Europe, Estonian President Kaja Kallas said at the EU summit in Brussels on Friday. “We need to be prepared to have different energy mixes, united purchases of liquefied gas and do these things together.”
Scenarios from BNetzA, which would manage Germany’s gas distribution in the event of rationing, take into account a series of emergency measures, including two floating LNG terminals that will come online this winter, auctions of excess fuel for industry and a 15 billion-euro ($15.8 billion) government program to buy gas on the spot market.
“But then we have to carry the energy cost while we have nothing to sell, so this is not really an option,” Chief Executive Officer Oliver Wiegand said in an interview. If the highly-specialized furnaces break, rebuilding would be time-consuming and expensive. “It would take a decade to build up to normal production again,” he added.
Economists are trying to pin down the scope of the risk, but it’s a challenge. European Central Bank President Christine Lagarde said 75% of what the bank got wrong in its inflation prediction last year was due to energy prices.
German economic institutes warned in April that an immediate halt to Russian imports of oil and natural gas would cause a 220 billion-euro hit to output over the next two years. While it could be more benign now as storage levels tick up, predicting the outcome of an unprecedented situation is difficult, said Stefan Kooths, an economist at the Kiel Institute for the World Economy, who was involved in the forecast.
The Bundesbank estimates that Germany’s economy will shrink more than 3% in 2023 if Russian energy supplies stop. That would be the worst slump outside of the recessions sparked by the Covid-19 pandemic and the global financial crisis.
The outlook is already grim. Manufacturing orders at factories have fallen for the past three months, costs are rising and confidence is crumbling. The Ifo Institute’s closely watched measure of business expectations unexpectedly dropped this month.
“We could switch some production from gas to oil if needed, but it would be five-times less efficient,” Hagen Pfundner, head of the German operations of Swiss drugmaker Roche Holding AG. “That would not be a durable solution.”
Germany is preparing consumers and businesses for tough times ahead. BNetzA’s Mueller warned that households could face doubling or tripling of their gas bills and called on people to save money and energy. Habeck appealed to Germans sense of solidarity to fend off Putin’s energy attacks.
Germany Pushes for G-7 Reversal on Fossil Fuels in Climate Blow
- Europe faces energy fallout from Russia’s war in Ukraine
- Pledge to end public financing of such fuels came recently
Germany is pushing for Group of Seven nations to walk back a commitment that would halt the financing of overseas fossil fuel projects by the end of the year, according to people familiar with the matter. That would be a major reversal on tackling climate change as Russia’s war in Ukraine upends access to energy supplies.
A draft text shared with Bloomberg would see the G-7 “acknowledge that publicly supported investment in the gas sector is necessary as a temporary response to the current energy crisis.”