By CounterCurrents Staff, 5/10/22

German officials are quietly preparing for any sudden halt in Russian gas supplies with an emergency package that could include taking control of critical firms.

An exclusive Reuters report said:

The preparations being led by the Ministry for Economic Affairs show the heightened state of alert about supplies of the gas that powers Europe’s biggest economy and is critical for the production of steel, plastics and cars.

Russian gas accounted for 55% of Germany’s imports last year and Berlin has come under pressure to unwind a business relationship that critics says is helping to fund Russia’s war in Ukraine.

Germany has said it wants to wean itself off Russian supplies but expects to be largely reliant on Moscow for gas until the middle of 2024.

It remains unclear whether an abrupt halt would happen and the officials said Germany wanted to avert an escalation, such as by backing a European gas embargo, having already supported sanctions against Moscow on coal and oil.

But they now fear Russia could cut off gas flows unilaterally and want to be able to cope if it does.

While a broad framework is in place and the government is determined to help, the details of how it will put the plan into action are now being thrashed out, the officials said.

The government would back granting further loans and guarantees to prop up energy firms, helping them cope with soaring prices, and could take critical companies, such as refineries, under its wing, the three officials said.

Asked for comment on the measures, Germany’s economy ministry pointed to statements by its head, Vice-Chancellor Robert Habeck, that the country had made “intense efforts” in recent weeks to reduce its use of Russian energy.

Last month, Berlin approved a legal change to allow it take control of energy companies as a last resort.

It is now discussing how it could use the measure in practice, such as by taking control of the PCK refinery operated by Russia’s Rosneft in Schwedt near Poland, two of the people said. It accounts for most of Germany’s remaining Russian oil imports and could be hit by a European Union oil embargo.

Rosneft declined to comment on any possible German action.

Energy Nationalization?

The Reuters report said:

One of the people said the nationalization of energy companies was an option being considered but it would have to be weighed carefully and justified on the grounds of securing energy supplies rather than to punish Russia.

Germany could also take stakes in other companies, said two people familiar with the matter. In 2018, it made a similar move when state development bank KfW bought 20% of energy network operator 50Hertz to fend off an offer from China’s State Grid.

The final government emergency package has not yet been finalized. One of the people cautioned that taking minority stakes in companies and intervention at the Schwedt refinery remained under discussion but had not been decided.

Officials are also examining how KfW can alleviate pressure on critical companies by supporting them with further loans, or emergency credit lines they could use if energy prices soar and trigger costly margin calls on their market positions.

Earlier this year, KfW helped German energy firm Uniper, EnBW’s gas division VNG and coal-fired power plant operator Leag cope with volatility in energy markets.

KfW declined to comment on which companies it had helped.

Germany is also examining how it would ration gas in an emergency. Its regulator is considering whether to give industry priority over households, which would be a reversal of the current policy where businesses would be cut off first.

The discussions are unfolding against the backdrop of war in Ukraine and an increasingly charged stand-off between Moscow and Brussels, which has backed tough sanctions to isolate Russia.

Economic Spiral

The Reuters report added:

Russia’s Gazprom halted gas exports to Poland and Bulgaria last month after they refused to pay in roubles but the Kremlin has rejected accusations by the European Commission that Moscow was using natural gas supplies as blackmail.

The Kremlin and Gazprom have repeatedly said that Russia was a reliable energy supplier.

The Kremlin and Gazprom did not immediately respond to a request for comment about the reliability of supply.

After hesitantly backing sanctions on coal and oil, Berlin also now wants to draw a line, four officials said.

They are concerned that curbing gas as well could send prices rocketing, allowing Moscow to cash in on sales outside the EU and thus still failing to drain its war chest.

The officials said Germany was reaching the limit of sanctions it could impose without triggering an economic spiral, with even those in the governing coalition wholeheartedly behind penalizing Moscow wary of imposing sanctions on gas.

Berlin has also been swayed by captains of German industry, including chief executives of its biggest listed companies and representatives of firms with ties to Russia, who have regularly met and lobbied officials not to ban gas, one person with knowledge of the matter said.

Company executives have told Berlin they are preparing to pare back Russian energy ties in any event, but appealed to the government not to force them to do so immediately, said a second person familiar with those discussions.

Germany Faces Wave Of Bankruptcies

Media reports said:

Germany will be battered with a wave of bankruptcies due to Ukraine-related sanctions against Russia, according to Commerzbank Chief Executive Officer Manfred Knof.

“The energy supply in Germany is at risk, supply chains are breaking down, we have high inflation,” Knof was quoted by the Handelsblatt daily as saying.

According to the executive, almost a third of Germany’s foreign trade has been impacted, forcing companies to navigate complex issues with customers, including surging commodity prices and supply-chain bottlenecks.

“We shouldn’t delude ourselves: the number of insolvencies in our markets will probably increase and the risk provisions of the banks with it,” Knof said.

German Industry Reels From Anti-Russian Sanctions

German industrial production dropped more than expected in March, data released on Friday by the country’s statistics office shows. According to Destatis, Covid-related supply chain issues have been exacerbated by the conflict in Ukraine.

Production slid by 3.9% last month following a 0.1% increase in February, far outstripping expectations of a one-percent decline. On an annual basis, industrial output slumped by 3.5% in March following a 3.1% jump the month before.

Manufacturing production lost 4.6% in March and energy production was down 11.4%, while construction output gained 1.1%, according to the data. On Thursday, it was reported that manufacturing orders logged a 4.7% month-on-month decline in March.

The largest drop was recorded for capital goods, used by businesses in production, which tumbled by 8.3%.

“In these politically and economically difficult times, the decrease also shows a growing reluctance to invest,” the statistics office said in a statement.

Foreign orders from outside the eurozone nosedived 13.2% in March, while demand from inside the area strengthened by 5.6%. Domestic orders edged down by 1.8%.

“Many enterprises still have problems completing their orders because of interruptions in supply chains, which is due to continuing Covid-19 crisis restrictions and the war in Ukraine,” Destatis said.

German Industries Struggling To Replace Russian Imports, Finds Poll

German industrial companies are finding it “impossible” or “not economically viable” and “only partially possible” to replace imports from Russia, Belarus and Ukraine, which came to a halt due to the conflict in Ukraine and the introduction of harsh economic sanctions on Moscow and Minsk, a poll by the Ifo Institute has revealed.

When asked if they’ll be able to substitute deliveries from those countries, 13.8% of the German companies polled said that “this was not possible at all,” according to the study published by the Munich-based think-tank on Tuesday.

Another 16.3% pointed out that finding other sources of supplies was “not economically viable” for them.

And a staggering 43.4% of the companies confessed that replacing deliveries from Russia and its neighbors would be “only partially possible,” with just 13.8% saying that the situation won’t cause them problems.

The numbers were even worse in the wholesale sector where 17.3% of firms insisted that coping without the sanctioned import items was impossible, and only 7.4% said that they’ll be able to swiftly find new sources of deliveries, according to the poll.

“Changing sources of supply is a headache for many companies,” Ifo researcher Klaus Wohlrabe said, pointing out that “supply chains and production processes that have been tried and tested for years often cannot be reorganized overnight.”

The UN figures show that German imports from Russia stood at almost $30 billion last year. The German Federal Statistical Office said they spiked by over 54% compared to 2020.

Germany was buying not just gas, oil, and coal from Russia, but also raw materials like nickel, palladium, copper and chromium and many other items.

But those deliveries were affected by the severe sanctions that the EU, the US, and some other countries slapped on Moscow after it launched its military operation in Ukraine in late February. The restrictions also saw the foreign assets of the Russian Central Bank and various other entities and individuals being frozen, effectively cutting Russia off from the dollar- and euro-dominated money markets, and a wide array of foreign businesses stopping doing business with the country.

Volkswagen Chief Calls For Ukraine Deal With Putin

A Telegraph report said:

The chief executive of Volkswagen has called for a negotiated settlement between Russia and Ukraine so that sanctions can be lifted to avoid damaging the German economy.

Herbert Diess said that Brussels should be pushing for a peace deal so that free trade can resume to protect the European Union’s commercial interests.

Speaking at an industry summit organized by the Financial Times, Diess said: “I think we should do the utmost to really stop this war and get back to negotiations and get back to trying to open up the world again.

“I think we should not give up on open markets and free trade and I think we should not give up on negotiating and trying to settle.”

He added that if global trade continues to struggle, “Europe will suffer most, and Germany, but I think it will be bad for the whole world”.

Diess’s statement came a day after German chancellor Olaf Scholz pledged to continue to provide weapons to Ukraine, as Europe would not be “capitulating to brute force”.

However, Brussels scrapped a proposed ban on EU tankers carrying Russian oil following intensive lobbying from Greece, Malta and Cyprus.

The measure would have banned Europeans tankers from carrying Russian crude oil anywhere in the world, potentially allowing non-EU countries to step in and grab market share.

The plan was dropped as G7 allies failed to agree to a similar ban in their plans to end imports of Russian oil.

Industries have been supportive of the sanctions against Russia, even though the war has worsened existing supply chain disruption globally.

Volkswagen, the world’s second largest car manufacturer, has cut production due to a shortage of wiring harnesses made in Ukraine.

It has also sold out all electric models in the US and Europe this year.

Diess has previously caused controversy as he told VW employees in 2019 that “EBIT macht frei”, in what appeared to be a play on “Arbeit macht frei” — work makes you free — a notorious Nazi slogan that was inscribed over the entrance to Auschwitz and other concentration camps.

He apologized following resignation calls.

EBIT is an acronym for Earnings Before Interest and Tax, a key indicator of a company’s profit.