Europe ‘faces recession and financial crisis if Russia turns off gas’ in retaliation for Ukraine sanctions

‘Everything from here on is pain’ as EU, UK and US unveil plans to aggressively cut dependence on Russian fossil fuels, despite Moscow’s threat of retaliation

Europe would be plunged into a deep recession and financial crisis as economic activity collapses if Russia follows through with its threat to halt gas supplies into Europe, experts have warned.

It came as western governments unveiled a co-ordinated barrage of measures aimed at slashing reliance on Russian fossil fuels and cutting off funding to Vladimir Putin’s war machine.

The EU said it aimed to reduce dependence on Russian gas by two thirds before the end of this year and end imports completely by 2030, despite threats from Moscow to retaliate against energy sanctions by cutting off vital supplies more quickly.

"The answer to this concern for our security lies in renewable energy and diversification of supply," said EU climate policy chief Frans Timmermans. "It's hard, bloody hard. But it's possible."

Leaders in Washington and London unveiled bans on Russian oil imports on Tuesday with the UK aiming to phase out purchases by the end of the year. Russian imports account for 8 per cent of UK oil demand, energy secretary Kwasi Kwarteng said, adding that he was “exploring options” for sanctions on Russian gas.

Some analysts questioned whether the oil ban would change Moscow’s decision-making because the UK and US buy a relatively small amount of Russian crude and replacement purchasers can be found, notably China.

It will be much harder for the Kremlin to find alternative buyers for it gas. However, economists said that Europe simply “cannot stop buying Russian gas”, no matter how much western leaders want to apply pressure on Mr Putin over his invasion of Ukraine.

If Russia followed through on its threat to retaliate by halting flows through the Nord Stream 1 pipeline, “gas prices would spike to such an extent that a lot of economic activity would just stop immediately” warned Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

Even if Russian gas supplies were to hold up, “everything from here on is pain,” he added. “Energy prices have been so high for so long that it will undoubtedly drag on the economy.”

President Joe Biden announces a ban on Russian oil imports, toughening the toll on Russia's economy in retaliation for its invasion of Ukraine, Tuesday, March 8, 2022, in the Roosevelt Room at the White House in Washington. (AP Photo/Andrew Harnik) (AP)

The EU’s plan to aggressively cut dependence on Russian gas is likely to come up against problems due to limited capacity for increased production elsewhere. Brussels pointed to gas from countries like the United States and Qatar could this year replace more than a third, 60 billion cubic metres

However, Qatar has a number of long-term contracts with China and more US shale oil and gas is expected to take months to come online.

In the short term, Europe has enough gas to get through the remaining cold months and the Commission is now aiming to fill storage facilities up to 90 per cent capacity by 1 October so the continent can weather next winter without forcing consumers to cut back on energy usage.

The latest sanctions sent further shockwaves through energy markets sending Brent crude surging 7 per cent to $132 a barrel, before dropping back.

Sustained high oil prices signal falling living standards across Europe as Russia steps up its bombardment of Ukrainian cities, with no sign of a ceasefire in sight.

News of the oil embargoes came after Russia’s deputy prime Minister Alexander Novak made an ominous threat on Monday, telling European politicians to “honestly warn their citizens and consumers what to expect” if the Kremlin holds back more gas in retaliation for western sanctions.

"If you want to reject energy supplies from Russia, go ahead. We are ready for it. We know where we could redirect the volumes to," Mr Novak said.

"In connection with ... the imposition of a ban on Nord Stream 2, we have every right to take a matching decision and impose an embargo on gas pumping through the Nord Stream 1 gas pipeline," Novak said.

"So far we are not taking such a decision," he said. "But European politicians with their statements and accusations against Russia push us towards that."

Experts questioned whether China would be a ready buyer for large quantities of Russian gas, pointing to the fact that there is limited infrastructure to transport the commodity which currently runs through multiple pipelines into Europe.

Whatever happens to Russia’s gas reserves, European consumers face a big hit to their real incomes this year as the cost of living surges, with inflation now widely forecast to surpass 8 per cent.

Central banks will be largely powerless to halt the inflationary surge because their key tool - raising interest rates - has little impact on global energy prices.

That puts the onus on governments to turn on the spending taps to lessen the pain felt by households, said Neil Shearing, chief economist at Capital Economics.

“If there is a national security case and indeed a moral case to act, then governments can mitigate this.”

The price tag will be around 1 per cent of gross domestic product (GDP), or 2 per cent in the worst-case scenario, Mr Shearing added.

The news will pile pressure on Rishi Sunak, the UK chancellor, who is due to make his latest spending announcement later this month.