Sanctions bite back at Germany, exposing the country to cold winter

Low cost of living, food, and energy security – most indicators of economic stability have gone bust in Germany over the last few months. 

Sanctions and counter-sanctions, the game played by Germany and Russia, have hit Germany where it hurts the most – its economy. Record-breaking food and energy inflation has exposed Germany to potential social unrest.

 Currently, there is no gas flowing in the NordStream 1 pipeline which has been shut for repairs, but the fear of energy shortage lingers in Berlin as the gas supply might not restart after the maintenance work ends on July 21.

Experts are now voicing concern that Germany might not be able to fill its gas reserves before the winter. Germany's gas tanks are filled to capacity by October 1 every year, allowing a seamless supply of gas for domestic and industrial use during the long winter months. 

That could spell severe political consequences for the coalition government in Berlin, many now believe there are efforts underway to review the sanctions.

The latest flare-up in Germany-Russia tensions came when a turbine used in NordStream1 operations was impounded by the Canadian government, due to sanctions on Russia, while it was being repaired at a Siemens facility in Canada - Russia's Gazprom directly retaliated by cutting the gas supply in the pipeline.

Weeks later that turbine is now back in Germany and likely to return to NordStream1 operations which would contravene sanctions against Russia.

While making a case for returning the turbine, Canada's minister for Natural Resources cited concern for the German economy as well as German citizens, saying they could be left unable to heat their homes during winter.

A study published in June by the economic research institute Prognos said that in case of a complete halt of Russian gas, Germany's gas reserves would deplete after four weeks. 

While private households and social services would continue to receive gas supplies, the stoppage would particularly hit the steel, chemicals, and glass industries – as early forecasts suggest a 50 percent fall in their production volume.

 Gas Shortage

The German Economy Minister, Robert Habeck, has already expressed fears that the country might have to ration gas for the industry. And that has had a political and economic impact.

Following that press conference, the share price at two of Germany's biggest lenders, Commerzbank and Deutsche Bank, fell 12 percent. 

Habeck has been urging Germans to save energy, his ministry is said to have switched off its own air conditioning weeks ago and will be using less heating throughout the winter. 

Ordinary citizens across Germany have begun receiving letters from their landlords and property management companies who are increasing the monthly flat rate for heating costs. In some small towns, there is even talk of hot water rationing in the winter.

To fill the gaseous void, Germany has signed an emergency LNG deal with Qatar. But with much of Qatar's gas locked in long-term contracts, Germany can only get LNG from Qatar's investments in the US. 

Every year 65 percent of Germany's gas comes from Russia, which had recently dropped to below 40 percent. The gas from Qatari investments in the US, will only slightly fill the void left by the departure of Russian gas.

 Lower Exports

But more importantly, energy insecurity and a downward economic outlook have directly contributed to a cost of living crisis in Germany. With inflation at nearly 8 percent and energy prices rising at almost 40 percent, people around Germany are bracing themselves for further shocks this winter.

According to one economist, globalisation, just-in-time supply chains, and cheap energy from Russia, factors that helped Germany's unparalleled economic growth, are changing forever.

German economy prides itself on its 'Exportweltmeister', or the global export champion status, yet in May, Germany imported more than it exported for the first time in 30 years. 

Once the 5th largest market for German goods outside the EU, exports to Russia have dropped by 50 percent due to the sanctions.

And then the overall global economic slowdown means Germany is likely to see its first balance of trade deficit this year, as there are increasingly fewer buyers for German goods. 

China is Germany's 3rd largest export market, but the country's imports fell this year in March due to weakened domestic demand and large-scale logistic disruptions due to the Ukraine conflict. 

That has caused another headache for industry leaders in Germany where China's industrial sector is a revered buyer of German critical engineering and machinery. 

Any long-term Chinese economic recalibration will further push Germany's engineering sector to the edge. 

Sinking Euro

The European Union was already a net food importer before the Ukraine War, but now a critical shortage of wheat and sunflower oil has further exacerbated food security. 

This means higher import bills for countries like Germany, further unsettling its balance of trade. Germans are paying a lot more for food products as a direct result of not being able to buy at preferential prices from their usual Ukrainian farmers.

The economic growth forecast from the European Commission paints a worrying picture, the French and Spanish economies are set to grow by 3 and 4 percent respectively, while the German economy will fare a meager 1.6 percent growth.

Since the start of the war in Ukraine, the Euro has gone down 12 percent against the dollar. Investors are now pricing in a possible Eurozone recession after the zone's single currency hit parity with the US Dollar for the first time in 20 years. 

With every passing day, it becomes more evident that the sanctions are losing clout and perhaps even backfiring on Germany and the rest of Europe.

If Russia's Gazprom doesn't restart its gas supply after July 21, estimates suggest Germany's economic output could drop nearly 13 percent by the end of the year.