EU better prepared for Russian gas loss but firms in vulnerable sectors need to prepare for rationing

Members of the EU are far better placed to cope with a potential decision by Russia to cut off its gas supplies than at this point last year, but risk managers at European firms that process raw materials such as glass, ceramics, chemicals and metal need to prepare their bosses for potential power shortages later in the year as governments may be forced to ration supplies, according to security intelligence firm Dragonfly. Most EU governments have made it clear that consumers will not be hit by gas rationing and any shortfall will fall upon industry. The problem for risk managers across Europe is that it is not clear which industries would be saved from rationing because they are deemed essential, added Dragonfly, which was launched in 2021 and was the former intelligence and analysis practice of The Risk Advisory Group in London. Henry Wilkinson, chief intelligence officer at the firm, said that while a short-term suspension of Russian gas is possible to pressure the EU into easing sanctions, it is unlikely that Russia will risk losing a crucial revenue stream in the longer term. “With Russia modulating gas flows to Europe as a means to coerce the EU into easing sanctions and to inflict rising inflation, there are growing concerns among European governments that Russia will cut off gas supplies completely. The French government defined it as the ‘most likely scenario’ on 10 July and the European Commission stated it as ‘likely’ on 20 July. However, we assess this to be a reasonable possibility (44%-55% chance) at most, given that a complete shutoff of gas would be against Russia’s interests,” said Wilkinson. The security expert added that the Kremlin’s current plan aims to maintain uncertainty within European governments, while still accruing revenue. “We are certainly not ruling out the possibility of gas supplies being cut off entirely, but a shutdown lasting for more than a few weeks would cause Russia significant damage. Energy revenue represents about 60% of total Russian government revenue, and 83% of total gas exports are bound for Europe, indicating how important the continued sale of gas is to the Kremlin,” said Wilkinson. As a result, Dragonfly believes that a more likely scenario is Russia reducing its gas flows to the lowest possible levels, which might include brief stoppages lasting more than a week or so. “Even if Russia were to cut off gas supplies in their entirety, Europe is far more prepared to cope with this now than it was this time last year. Gas flows from Russia have already fallen quite significantly, with EU data indicating that in June they were less than 30% of the 2016-2021 average,” pointed out Wilkinson. Europe has started to import energy sources from other countries, particularly liquefied natural gas, and has raised storage levels. Therefore, even though countries such as Germany and Hungary, where Russian gas accounted for 50% and 60% of their total gas imports respectively in 2021, would struggle more than others, Europe as a whole is “relatively well placed” to deal with any potential absence of Russian gas compared to last year, said Dragonfly. “It is still likely that governments in EU member states will implement limited energy rationing in the coming months as a precautionary measure. Rationing should not be a direct issue for individual households, as the EU has already stated that ‘in the absence of other unforeseen events, they would not be impacted directly by large-scale disruptions from Russia’. The outlook for industry is more mixed, as there does not appear to be any consensus across the EU as to what is classified as an ‘essential’ industry, and this is likely to be under the discretion of individual states. Vulnerable sectors might include those processing raw materials, particularly metals, glass, ceramics and chemicals. This is a development to keep a close eye on,” concluded Wilkinson.

EU better prepared for Russian gas loss but firms in vulnerable sectors need to prepare for rationing

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