Explained: The Consequences Of Russia Closing Down Nord Stream 1 Pipeline

Russia has cut its main natural-gas pipeline to Europe.

Russian energy giant, Gazprom suspended Nord Stream 1 deliveries on 31 August for what it said would be three days of routine maintenance but failed to restart the flow, citing a purported leak in a pump at a turbine.

Power prices have surged, European currencies are hitting multi-decade lows and governments are scrambling to contain the economic hit.

The Kremlin has stated that 'the West' deciding to go ahead with a price cap is the reason behind this cut.

President Vladimir Putin said that EU discussions of a possible price cap on Russian gas were "stupid."

Since the war in Ukraine began, Europe has been at the front lines of economic war with Russia. When the first tranche of sanctions were announced months ago, the goal was to punish Russia economically.

The opposite seems to be happening. Electricity prices are soaring in Europe and there is a shortage of natural gas, meanwhile life in Russia continues as it did prior to 24th February.

The European economy is being hammered and there is a deep rooted concern about what this winter will look like in Europe. There is a worry that there will be blackouts and shortages this winter. Factories are already struggling due to high energy costs.

Ursula Von Der Leyen has announced that EU will propose a "mandatory target for reducing electricity use at peak hours" in order to "flatten the curve."

Currently, Germany is relying on highly polluting coal for almost a third of its electricity, as the impact of government policies and the war in Ukraine leads producers in Europe’s largest economy to use less gas.

The news of Nord Stream 1 (which flows to Germany) pipeline's closure broke, after the announcement by state-controlled Gazprom.

As soon as the news broke, natural gas and electricity prices initially leapt by a third before settling up more than 10 per cent.

Traders braced for an expected recession in the eurozone as the euro briefly slid to its lowest level in 20 years. Stocks fell in Germany, France, Italy and other markets, as per a report from the Journal.

European governments and energy executives believe that Russia is weaponising gas to hurt European economies and undermine their support for Ukraine.

Moscow maintains that Western sanctions have hindered the maintenance of key pieces of equipment on the Nord Stream pipeline. Gazprom, on its part, has refused to reroute gas through functioning pipelines.

Germany’s energy regulator believes that the technical reasons given by Russia are mere excuses.

The historically high prices stands are accentuating inflation, pushing consumers into poverty and piling up pressure on energy-intensive industries experiencing a wave of factory closures.

Many European utilities backed by their respective governments are working to replace Russian gas with alternative sources.

Unsurprisingly, countries are being forced to reconsider their short-sighted energy policies. Germany has finally announced that it will keep open two nuclear power plants. These plants were slated for closure.

Some analysts think that Europe will will survive the winter without state-directed rationing. The reason behind this assessment is the fact that gas storage levels have apparently risen ahead of European targets.

Europe may survive the winter without state-direct rationing but it will be at the cost of extraordinary damage to the economy and to the daily life of ordinary Europeans.

Much to Europe's chagrin, the OPEC+ has decided to cut oil production for the first time in over a year. This decision was taken to boost crude oil prices, which are 30 per cent higher than they were a year ago.

This move is ensuring that Russia's fossil fuel revenue makes up for loss of revenue in any other sector.

Governments in Europe are now spending billions of dollars to save businesses and vulnerable households. Few days ago, Germany announced a $65 billion plan.

As if things weren't complicated enough, expect European central bank to go ahead with a jumbo rate hike to control inflation fueled by high energy prices.

Europe's primary goal is to make sure it can get through this winter without running out of gas. Gazprom has stated clearly that the shut down of Nord Stream 1 will last 'indefinitely'.

The sense of urgency in Europe is palpable. On Friday (9 September), European energy ministers will meet to design a plan. The objective of the plan will be to limit the severity of a likely recession.

One of the moves that are aimed at limiting the severity of the impending crisis is France unlocking a key bottleneck in European gas flows that will allow it to export gas to Germany.

Few days ago, President Emmanuel Macron had a video conference with his German counterpart. After the meeting, Macron said, “Germany needs our gas and we need electricity produced in the rest of Europe, notably Germany.”

According to a report by the Journal, "A key goal is to tame wild moves in electricity markets that have driven Europe’s power-hungry factories to shut down.

Options circulated by the Czech Republic, which holds the rotating EU presidency, include measures to temporarily cap prices for gas imports and gas used for electricity generation, and to put a limit on revenues earned by renewable, nuclear and hydropower companies with low running costs.

Revenues beyond a certain point would be skimmed and redistributed to customers."

The trouble is that haywire moves in the price of electricity have saddled utilities with massive cash payments they are required to make to trade on energy exchanges.

Governments in some countries fear that failed payments could undermine the financial stability, and that the cash squeeze might contribute to a vicious cycle of volatility.

According to the report by Journal, the list of possible solutions include:

1. A pan-European credit line which can be handled by the European Central Bank, from which companies with large margin calls could borrow to keep trading.

2. A temporary suspension of trading on European power derivative markets.

All these solutions and other possible solutions aimed at mitigating the energy crisis will be discussed during Friday's ministerial meeting.

Until recently, Nord Stream 1 was the main transit route for Russian gas flowing to Europe.

It met around 40 per cent of the EU demand, before President Vladimir Putin invaded Ukraine.

Also Read: Explained: The G7 Price Cap On Russian Oil