Eurasia note #61 – Europe Stranded As Gas Pipeline Blown Up

Germany is being sacrificed, like Ukraine, in a messianic feud with Russia

Nord Stream is out, Western Europe can’t retreat; someone nailed shut the barn doors.
Accounts of whodunit can be found elsewhere. We focus on the impact.
If Europe wanted to bankrupt Russia and get gas on the cheap, it’s out of its hands.

Strategic outcome is to leave Germany more dependent than ever on the U.S..
BASF warns it may shut down chemical cracker now that gas is scarce at any price.
German citizens may escape rationing; corporations are considering relocation.

Bad news for Kremlin: as Europe reels, Moscow is ever more dependent on China.
Voters complete referendum to join Russia, as U.S. missiles rain from Ukraine.
Movement on the line of contact drags, as autumn rainy season approaches.

(2,300 words or 11 minutes of your time)

Leaking gas bubbles to the surface near the Danish island of Bornholm

Tbilisi, Sep 29, 2022

The sensational news was the destruction of three of the four legs of the Nord Stream pipelines that link Russian gas to Europe across the Baltic sea.

There is a war on the ground and the war online. Often they tell a different story. The headlines play the blame game and the narrative may shift by the day; the tectonic or geopolitical shift is slower, with consequences that may last for decades.

As pressure dropped in the Nord Stream pipeline on Monday, three leaks were noted within hours on two legs — first in Nord Stream 2 close to the Danish island of Bornholm. Two further leaks were found in the original Nord Stream.

Western and Ukrainian media were quick to blame Russia. The European Commission, Sweden and Denmark said it was sabotage as did Germany’s Federal Intelligence Service (Bundesnachrichtendienst, or BND). Der Tagesspiegel pointed (or had its finger pointed) at Russia. The New York Times head-scratched: “Sabotaged Pipelines and a Mystery: Who Did It?”

Two months ago president Joe Biden said in Jan, “If Russia invades... there will no longer be a Nord Stream 2. We will bring and end to it” and in Feb, deputy secretary of state Victoria Nuland said, “If Russia invades… Nord Stream 2 will not move forward.”

On Twitter, Germans had no doubt: #Kriegserkläerung is trending. The military implications of the sabotage are plain: it is an act of war. For information on whodunit search “USS Kearsarge's Sikorsky MH-60.” This article is concerned with the consequences.

Last month U.S. Sen Lindsey Graham called for Russia to be declared a state sponsor of terrorism, it smacked of projection at the time. The Federal Security Service of Russia, the FSB, said it was considering the attack “an act of international terrorism.”

Always listen to approved, fact-checked news sources. They'll tell you what to think.

Risks for Russia

Disregarding the noise online, the facts change on the ground: Western Europe will see no Russian gas for years. Somebody has nailed shut the barn doors during a fire. Alternatively, they’ve locked the passengers in steerage as the ship goes down.

Even if Europe grinds to a halt — while industrialists and citizens bang on the doors for the pipelines be turned back on — there is nothing politicians can do (it is a different story in Denmark and Poland, see below).

Secondly, this is very bad news for Russia. It’s easy to forget, as Western Europe reels, that Moscow wanted access to its lucrative market to offset China, lest it become overly dependent on the giant eastern neighbour.

Already the yuan is beginning to supplant the dollar in the Russian economy. Moscow Exchange, the country’s biggest bourse, this week said it expects yuan-rouble trade to exceed the volume of dollar-rouble trade next year.

President Vladimir Putin stated that full “de-dollarization” of the Russian economy is only a matter of time, given the extent of Western sanctions. The trouble is, he has also lost access to the euro markets.

The yuan market is much less liquid than dollars, however, and putting more of its reserves in “friendly countries” means Russia may struggle to get its hands on cash as and when it needs it. [1]

This is not such a problem for business conglomerates who do lots of business with China — aluminium firm Rusal, oil giant Rosneft or Polyus gold — but it’s not so convenient for that part of the Russian economy which has always struggled to diversify away from raw materials.

Furthermore the yuan is a managed currency, manipulated by the Chinese state.

Pipeline sniping

The Nord Stream 2 gas pipeline was complete, and filled with gas, but not yet certified and the first Nord Stream was operating at 22 per cent of capacity as turbine engine repairs were hindered by European and North American sanctions.

If the pipeline legs are not repaired quickly, salt water will pour in, corroding them.

In a tweet Polish ex-foreign minister and European Parliament member, Radoslaw Sikorski, thanked the US for damaging the Nord Stream gas pipelines. Russia has requested an emergency session of the UN Security Council today over the act of sabotage.

This may have been long in the planning. In 2015 during a routine safety survey, the Swedish navy found a remote operated vehicle (drone) rigged with explosives near Line 2 of the Nord Stream about 120 km from the island of Gotland. [2]

Who benefits? On the day of the explosion an opening ceremony was held for the brand new Baltic Pipe. It can supply up to 10 billion cubic meters (bcm) of Norwegian gas to Poland, annually, and three from Poland to Denmark. By comparison, Nord Stream had a capacity of 55 billion bcm and Nord Stream 2 was to have doubled that.

Mateusz Morawiecki, prime minister of Poland, said at the ceremony that along with liquefied natural gas from the U.S. and Qatar, the country’s energy needs were secure. In May, Poland ended its contracts with Gazprom for gas through the Yamal pipeline.

So who is stuck without gas, now? The International Monetary Fund estimated in July that those most vulnerable were Central and Eastern Europe — Hungary, Slovak Republic and Czechia. Hungary has addressed that. Russia still has the Turkstream pipeline, a joint venture between Gazprom and Turkey’s BOTAŞ. The government of Viktor Orbán is topping that up with extra Russian gas via Serbia and Austria.

France had managed to largely fill gas reserves before Nord Stream was cut off, Germany and Italy less so, according to Rabobank. As gas stores are drained going into next year, the challenge will be to refill them. The LNG market has little spare capacity – and that is only due to Asian production suppressed by the Covid response. [3]

Europe cannot easily shunt gas between countries as it could with coal, yet its economies are co-dependent and the knock-on effect of industrial shortages is huge.

Germany sacrificed

Rabobank last month said Germany would be “in a dire situation if Russia were to cut off its gas supply entirely.” That has now happened.

Did Europe plan to bankrupt Russia and obtain its resources on the cheap — in other words, it never counted on to abandoning Russian gas — or has the U.S. cornered Germany, whose business classes always saw their destiny in the East, with Russia, possessing some of the richest natural resources on Earth, a captive market for German exports. It would have rivaled the U.S. for dominance.

Whatever. That’s not happening now.

In Germany, consumer price inflation rose 7.9 per cent in August alone. When people start chasing white goods or equipment to lock in the falling value of currency, hyperinflation will strike. It won’t have to wait for official statistics. It is a mentality, a cultural rather than monetary phenomenon, as Rafi Farber points out. The government seems to have known this was coming. In 2016 Ursula von der Leyen, as defence minister, decided that German troops should be returned to the streets. That will happens from next month.

Whether or not the U.S. planned to “take down” Germany, it is being sacrificed, like Ukraine, on the altar of defeating Russia.

In Italy energy prices were held down before the election. Now that it’s out of the way, the pain is coming. Southern Europe gets much of its gas from Algeria, so it is north Europe’s industrial heartland that is facing the music. Forget learning to code; learn to busk.

Wall St and Germany

This is a strategy; the only question is which one. If the U.S. wanted to reverse its de-industrialization, and end its reliance on Chinese goods, one way to do that would be to attract German companies to the U.S. Many German companies are considering relocating some of their units abroad due to the energy crunch.