Germany is preparing for the day of judgment in the confrontation with Russia

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(Bloomberg) – If the worst-case scenario for Germany were to occur, BMW AG, Mercedes-Benz AG and Volkswagen AG would struggle to paint their cars and the air across the country would become dirtier.

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Europe’s largest economy is bracing for the prospect of a sudden Russian natural gas cut, a shock that would trigger a form of energy martial law and affect 80 million residents and businesses, from bakers to chemical producers.

Auto plants may be forced to switch to more expensive propane or butane to generate steam and heat for paint shops. Utilities are likely to generate more electricity from lignite – an even dirtier form of coal that is dug up by giant diggers at surface mines from Düsseldorf to the Polish border. Economists have forecast the damage at 220 billion euros ($230 billion), more than enough to tip the country into recession.

That possibility came closer this week after Moscow limited natural gas deliveries to Germany. While the action was just a warning – hitting around 3% of the country’s Russian gas imports, or around 1% of overall supply – the Kremlin showed it was ready to squeeze its biggest client in the back and forth of economic retaliation over the war in Ukraine.

Chancellor Olaf Scholz’s government has accused Moscow of weaponizing energy while insisting Germany can cope with the cut. Yet the country’s vulnerability is clear, and every little turn of the tap unsettles politicians, boardrooms and markets – gas prices in Europe jumped 22% on Thursday due to supply jitters.

Robert Habeck, Germany’s economy minister and vice-chancellor, acknowledged the country’s exposure in a speech to lawmakers hours after Moscow unveiled sanctions against 31 European entities, including a Gazprom PJSC unit that Berlin seized to secure supplies.

“Energy can be used powerfully in economic conflict,” he said in Berlin on Thursday. “It shows that confrontation over energy is a weapon.”

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Germany’s three-stage crisis plan is currently in the first stage. Habeck delayed upgrading to the next stage, saying an escalation is not necessary due to the impact of measures taken by Russia so far, which include banning Gazprom shipments to Europe via a key section of the Yamal pipeline, cutting off deliveries to Poland and Bulgaria. , and a simmering dispute over payment terms with European customers.

Transport through Ukraine has also been reduced after a key cross-border entry point was shut down due to troop activity on the ground, according to Kyiv.

German policymakers are considering a combination of factors that would trigger higher alert levels, including a sharp reduction in gas flows and signs that Russian President Vladimir Putin is ready to completely cut off supplies, according to people familiar with the talks. .

The highest stage, which would involve state control over gas distribution in Germany, is expected to follow soon after an escalation to the second “alarm” stage, the people said, who asked not to be identified as the talks are private.

On Monday, Germany’s grid regulator, known as BNetzA, will compile the results of a survey in which more than 2,500 businesses detailed consumption patterns and energy options. It is among the building blocks of the potential rationing that the Bonn-based agency would implement if the government declares a national gas emergency.

The regulator has appointed 65 staff members who will work around the clock in shifts to help out in the event of a major outage. Operating from an annex of its headquarters near the Rhine, the teams will be responsible for making decisions that could determine the fate of some of Europe’s largest industrial companies and hundreds of thousands of jobs.

Fuel is a crucial part of Germany’s energy mix and more difficult to replace than Russian coal and oil, which will be phased out by the end of the year. Around 15% of Germany’s electricity is produced from gas, compared to less than 9% in 2000, as the country gradually reduces its use of coal and nuclear energy.

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But more importantly, gas is essential for heating homes and for industrial processes in the chemical, pharmaceutical and metals sectors. It is also widely used in German bakers’ ovens and for glassmaking.

“It will be very difficult,” Roland Busch, a board member of German engineering giant Siemens AG, said in an interview with Bloomberg TV this week. “A gas embargo would hit German industry hard and really have a huge effect, in terms of site closures, on employment. And of course an impact on our economy.

Details of a rationing plan are evolving behind closed doors as the regulator gathers information on use and assesses replacement options, but the outlines are clear: protect consumers, essential services like hospitals and businesses of systemic importance.

With the threat to its energy security looming, Germany took advantage of the warm spring weather to fill up its storage facilities. They are now at around 40% capacity – still well below what would be needed to get through the winter without big reductions in usage.

BNetzA spent much of April and May establishing a digital platform for what will effectively serve as a war room. Fueled by company and market data, the system will allow managers to decide who gets gas and who doesn’t.

The regulator aims to have a model ready by June that provides a static snapshot of gas usage. From there, he will create a dynamic system that will allow him to track the fallout of rationing in particular regions, industries, and businesses.

“If it is a decision in the fall, we are confident that we will be able to take the least damaging decision,” BNetzA President Klaus Mueller said on a podcast titled Lage der Nation – German for “state of the nation”. .”

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Preparations go beyond information gathering. The agency has a stockpile of food rations for the crisis team and 5,000 liters (1,300 gallons) of diesel to power generators if rationing leads to the shutdown of commercial buildings, including its own headquarters.

The agency has already decided that the food and pharmaceutical industries will be high on the priority list. This means that supplies to certain businesses of gas-intensive paper and glass packaging would also be protected. For example, Mainz-based Schott AG produced around 90% of the glass vials used to transport Covid-19 vaccines last year. But other companies are in the dark and frustration is mounting.

Germany’s VIK association of industrial energy users has complained that the BNetzA does not provide information on what companies should do in an emergency, leaving them little scope for planning. Christian Seyfert, chief executive of VIK, said an uncoordinated shutdown could lead to “failures and the destruction of value chains”.

Businesses all over Germany are trying to prepare. Chemicals giant BASF SE has determined that its main plant in Ludwigshafen cannot operate if its gas deliveries fall below 50% of normal levels. This could disrupt the flow of basic chemicals and send shockwaves beyond Europe.

Mercedes is studying the impacts of a gasoline shortage on production. A plant adjacent to its Stuttgart headquarters operates a gas-fired foundry that melts steel and magnesium for gears, crankshafts and cylinders in luxury sedan and S-Class vehicles. is looking for alternatives for his paint shops, he has no substitute for the foundry.

The scale of the challenge is evident in BMW’s plans to create the world’s first gasoline-free car factory in Hungary, a project CEO Oliver Zipse has called a “revolution” in car production. But it won’t be ready until 2025, long after Germany aims to be independent of Russian gas.

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