Germany Warns of Lehman Like Moment, Gas Rationing and Rise of Ruble
We Are Making Sure We End Up In A Recession
The news of the week has been that of the gas rationing in Germany as they have been warned by the IEA that Russia might cut its gas supplies to the country in winters. This has alarmed the authorities in Germany and the country is now moving close to rationing gas. This is the second stage of its emergency plan in which the government will provide about 15 bn euros in order to fill up its storage tanks. The rationing part will actually happen when there is a complete disruption of gas. The state will then step in and firstly restrict access of gas to the industry.
Russia has cut its flow through Nord Stream 1 which is now running at 40 percent capacity as some problems with the equipment were cited. This equipment (a turbine), interestingly, was sent to Canada to be repaired but due to Canadian sanctions against Russia, its return has been delayed. This was revealed in a LinkedIn post by Tom Kirkman, who gave the following link:
You can hear Irina Slav talking about it (at 13:00). She and Tom both have some extremely insightful thought-processes.
As the energy crisis unfolds, Germany has warned of a “Lehman like” crisis. Gas futures have jumped 85 percent YTD (year to date). The increase in prices, in accordance with the rules of a second stage emergency, can be passed onto consumers. This is almost becoming a certainty as prices seem to get no reprieve - energy suppliers are accumulating losses and there will come a point when these might threaten their closure. Germany is considering floating LNG terminals in a bid to make a quick shift to other producers which by the way might not be able to completely replace the 155 billion cubic metres of Russian gas exports to Europe. It is important to note here that EU has also banned majority of oil imports from Russia as well.
Germany ordered its gas storage facilities back in April to be filled by 90 percent however, the levels are under 60 percent.
Russia, on the other hand, has been doing pretty well, or so it seems. Country’s oil revenue increased by $1.7 bn in May to $20 bn which is significantly above $15bn in 2021. Not only that but ruble became the best performing currency this year. It has jumped 40 percent versus the US dollar. However, some say it might not depcit the true picture of the economy nor does it supports the claim that the Western sanctions have failed to do what it wanted to. (Albeit, that seems to be the case: Russian oil has found a home in Asia as almost all the barrels lost to Europe have been replaced by the continent).
Many companies have left the country after the sanctions an stigma and their assets were either sold cheap or taken over by the state resulting in lower inflation. Furthermore, as the time for paying taxes nears, the country’s exporters and other businesses have been converting their foreign currencies in rubles, another reason for its strengthening. Lastly, the government there has taken a lot of measures such as caps on money transfers and stopping payments on external debt.
This is a very good article that provide some point of view on this: https://www.newsweek.com/fact-check-does-russian-ruble-rise-prove-western-sanctions-dont-work-1718387
Today (27th June, Monday) Russia defaulted on a $100 million bond payment. I will try to write about it during the week.
For now let’s try to digest the huge impact that a gas rationing will have on Germany triggering what might be a cascading effect all across Europe.