Europe’s ability to cope without Russian gas will be limited by capacity issues and the persistent threat of supply cuts
The EU’s plan to move away from Russian energy exports will notably increase energy prices within the bloc and confirms our expectations that the surge of inflation will complicate pricing strategies and dampen domestic demand. Furthermore, the threat of imminent gas supply cuts from Russia as a retaliatory measure could further exacerbate existing operational tensions and signal a downside growth scenario for European markets. MNCs should monitor upcoming fiscal measures on a market-by-market basis to anticipate the impact on their core customer segments and assess available support for their local supply chains. In the long term, increased spending on energy infrastructure and plans to provide additional support for European industrial sectors in a bid to increase their resilience may provide some new demand opportunities.
Overview
The European Commission revealed plans to drastically reduce the EU’s reliance on Russian energy exports. The EU will focus on diversifying suppliers and boosting the utilization volumes of biomethane and renewable hydrogen, but the plan’s short-term goals will be difficult to achieve and will require substantial fiscal support and a suspension of the EU’s strict budget deficit rule. In addition, both the UK and the US announced they will phase out Russian oil and gas utilization. Oil and gas prices are surging amid Western plans to substantially reduce exposure to Russian energy.
Our View
The announcement of the EU’s overly ambitious plan, which envisions cutting the bloc’s dependence on Russian gas imports by 66% by the end of the year and completely phasing out Russian energy by the year 2030, has further fueled the already-sharp increase in commodity prices. While some of the objectives are unlikely to be met at the projected pace, the plan paves the way for a substantial increase in support spending across Europe, which will be focused on energy infrastructure and renewables. Among the proposed measures are temporary financial aid for affected businesses and the introduction of a new State Aid Temporary Crisis Framework, which will allow member states greater flexibility in freezing energy prices or providing direct support for affected households. As such, despite the projected increase in inflation, there is a silver lining in the fact that the increase in fiscal support and the ability of member states to at least partially regulate domestic utility prices should soften some of the measures’ painful economic impact. Furthermore, Russia’s recent announcement that it will impose export bans on certain commodities, which may include a reduction in gas supply that further complicates the bloc’s ability to break off from Russia’s energy network and severely dampens domestic consumption even further, poses a significant risk of contraction in Q2/Q3 2022.
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