Europe’s Minsky Moment Approaches
Russia said late last week that it was cutting off all natural gas to Europe until and unless the EU lifts sanctions against Russia. How very unsporting of Putin to do to the EU what the EU did to Russia! Russia has absorbed the EU's blow; the EU may not be so lucky. Zero Hedge says that a "Minsky moment" is at hand:
Last weekend, Credit Suisse repo guru published what may have been the most insightful snippet of the entire European energy crisis (to date) when he extended the infamous "Minsky Moment" framework to Europe, and specifically Germany, which he said "can’t cover its payments without Russian gas and the government is asking citizens to conserve energy to leave more for industry." He then elaborated that "Minsky moments are triggered by excessive financial leverage, and in the context of supply chains, leverage means excessive operating leverage: in Germany, $2 trillion of value added depends on $20 billion of gas from Russia… …that’s 100-times leverage – much more than Lehman’s." (Zoltan's entire note is a must read for everyone with a passing interest in what comes next).
Don't click through to Zoltan Poszar's note; it's for subscribers only. Zero Hedge points out that Sweden and Finland are now on the edge as the Russian gas cutoff puts utility providers on the verge of default. Keep in mind that it's not yet winter, and this is happening. Putin has Europe by the goolies. This is the economic massacre into which the European governing elites led their countries.
Having come back to the US from Austria last week, it seems clear to me that the American public is not being told by our media how incredibly serious the energy situation is in Europe. The head of Germany's giant gas company Uniper, which was just bailed out by the German government, said today that "the worst is yet to come." Excerpt:
"I have said this a number of times now over this year and I'm educating also policymakers. Look, the worst is still to come," Uniper CEO Klaus-Dieter Maubach told CNBC's Hadley Gamble at Gastech 2022 in Milan, Italy.
"What we see on the wholesale market is 20 times the price that we have seen two years ago — 20 times. That is why I think we need to have really an open discussion with everyone taking responsibility on how to fix that," he added.
Germany is the engine of the EU economy. If Germany can't run its factories because there isn't enough electricity, there goes Europe's economy.
Meanwhile, the oil-producing companies are doing their part to help Russia put the squeeze on the West, and topple the US and its allies from the pole position in the world order:
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Helping Russia and potentially further hindering Europe, the Organization of the Petroleum Exporting Countries and its allies—led by Moscow—agreed to cut oil production for the first time in over a year. The decision boosted crude prices, which are more than 30% higher than they were a year ago even after a recent decline, funneling fossil-fuel revenue to the Kremlin.
American readers, put yourselves in the place of Europeans -- not the leaders, but the ordinary people. Imagine that you were now facing astronomical power bills, and the very real possibility that you and your family were going to deal with blackouts during the cold winter ahead. Imagine that you were facing the closure of your small business, or the loss of your job as national economies tank from the cutoff of gas. What would that make you think about the wisdom of continuing this proxy war with Russia in Ukraine?
To ask the question is not to be pro-Putin. It's simply to live in the real world. To fail to ask the question is to be inexcusably ignorant about the political turmoil about to wash over Europe, of the kind that few people alive today have ever seen.
Germany at least is going to be replacing Russian gas with LNG from abroad. Yes, at a higher price, but insofar as Russia is still selling it natural gas elsewhere the market is still functional and there will be no overall natural gas shortage. The issue is price, not people literally unable heat homes, etc.
To a great degree yes. Should also be said that Russian gas was never the overwhelming majority of the European gas market. Still substantial internal production, and LNG imports which are now significantly ramped up.
Still, LNG itself is more expensive by virtue of the transport costs, and Europe simply doesn't have the processing capacity currently for all of the LNG it needs to replace Russian gas. Thus with supply shortfall, prices must rise and demand must be destroyed. People have to be made financially unable to heat their homes to the same degree, that is how the economics works. We'll see how adept the German state is at distributing that burden now.
There is some irony in seeing Germany economically bullied by Russia though, the way they bullied Greece and others.
I believe Russia indeed is crimping gas production as it cannot divert enough to China and other buyers with existing infrastructure, so there is less natural gas supply now worldwide. The market is "functional" completely depending on one's criteria of "functional". To German industrialists it certainly isn't functional. There is also the prospect that Western sanctions will negatively impact Russia's ability to produce over the long term in coming years as investments need to be made for future production - they have done that for Iran and Venezuela.
Russia also needs to be careful it does not shoot itself in the foot in this business. Back in our Civil War the CSA decided not to sell cotton abroad unless governments like that of Britain would recognize its sovereignty. The British textile industry was indeed devastated for a time (until Egyptian cotton replaced Southern cotton) but the CSA deprived itself of foreign exchange which had ruinous economic consequences.