The Economics of War: Pain for Europe Now, for Russia Later

Across Europe, signs of distress are growing as Russia’s war in Ukraine drags on. Food banks in Italy are feeding more people.

Across Europe, signs of distress are growing as Russia’s war in Ukraine drags on. Food banks in Italy are feeding more people. German authorities are refusing air conditioning as they prepare plans to ration natural gas and restart coal-fired power plants.

A giant utility is asking for a taxpayer bailout, and more could be on the way. Dairies wonder how they will pasteurize the milk. The euro has fallen to its lowest level in 20 years against the dollar and recession forecasts are on the rise.

These pressure points are signs of how the conflict – and the Kremlin gradually choking off the natural gas that powers the industry – has caused an energy crisis in Europe and increased the likelihood of a return to recession just as the economy was rebounding from the COVID-19 pandemic.

Meanwhile, war-fueled high energy costs are benefiting Russia, a major oil and natural gas exporter whose nimble central bank and years of experience with sanctions have stabilized the ruble and the euro. inflation despite economic isolation.

In the long term, however, economists say that Russia, while avoiding complete collapse, will pay a heavy price for the war: the worsening of economic stagnation through the loss of investments and the decline in the incomes of its people.

Europe’s most pressing challenge is in the shorter term: tackling record inflation of 8.6% and weathering the winter without crippling energy shortages. The continent is dependent on Russian natural gas and rising energy prices are impacting factories, food costs and fuel tanks.

Uncertainty hangs over energy-intensive industries like steel and agriculture, which could face natural gas rationing to protect homes if the crisis worsens.

Molkerei Berchtesgadener Land, a large dairy cooperative in the German town of Piding outside Munich, has stored 200,000 liters (44,000 gallons) of fuel oil so it can continue to generate electricity and steam to pasteurize milk and keep it cold if the electricity or natural gas to its turbo-alternator goes out.

This is an essential guarantee for the 1,800 member farmers whose 50,000 cows produce one million liters of milk per day. Dairy cows need to be milked daily, and one stop would leave that ocean of milk with nowhere to go.

“If the dairy isn’t working, the farmers can’t either,” said managing director Bernhard Pointner. “Then the farmers should throw away their milk.”

In one hour, the dairy uses the equivalent of a year’s worth of electricity for a house to keep up to 20,000 pallets of milk cool.

The dairy has also stocked packaging and other supplies to guard against suppliers hit by a power shortage: “We’ve stockpiled a lot…but it will only last a few weeks.”

Economic woes also appear at the table. Consumer groups estimate that a typical Italian family is spending 681 euros (dollars) more this year on food.

“We are really concerned about the situation and the continued increase in the number of families we support,” said Dario Boggio Marzet, president of the Lombardy Food Bank, which brings together dozens of charities that run soup kitchens and provide basic commodities to the needy. Their monthly expenses are up by 5,000 euros this year.

Jessica Lobli, a single mother of two from the Paris suburb of Gennevilliers, is paying close attention to soaring grocery prices. She cut down on her milk and yogurt intake and gave up on Nutella or brand name cookies.

“The situation will get worse, but we have to eat to survive,” said Lobli, who earns between 1,300 and 2,000 euros a month working in a school kitchen.

His monthly food budget of 150 to 200 euros fell to 100 euros in June. She said her family doesn’t eat as much in the summer, but she worries about September when she will have to buy school supplies for her 15-year-old daughter and 8-year-old son, which will further squeeze her budget.

French President Emmanuel Macron said the government was aiming to save energy by turning off public lights at night and taking other measures. Similarly, German authorities are pleading with individuals and businesses to save energy and ordering lower heating and cooling settings in public buildings.

It follows Russia cutting off or reducing natural gas to a dozen European countries. A major gas pipeline was also closed for scheduled maintenance last week, and there are fears that flows via Nord Stream 1 between Russia and Germany could restart.

Germany’s biggest importer of Russian gas, Uniper, has asked for government help after it was caught between soaring gas prices and what it was allowed to charge customers.

Carsten Brzeski, chief eurozone economist at ING Bank, predicts a recession at the end of the year, with high prices undermining purchasing power. Europe’s longer-term economic growth will depend on governments’ ability to tackle the massive investments needed to transition to a renewable energy economy.

“Without investment, without structural change, the only thing left is to hope that everything will work as before – but it won’t,” Brzeski said.

While Europe is suffering, Russia has stabilized its ruble exchange rate, stock market and inflation through massive government intervention. Russian oil is finding more and more buyers in Asia, albeit at reduced prices, as Western customers shrink.

After being hit with sanctions following the seizure of Ukraine’s Crimea region in 2014, the Kremlin has built a fortress economy by keeping debt low and pushing businesses to source parts and food from Russia.

Although foreign companies like IKEA have closed and Russia has defaulted on its foreign debt for the first time in more than a century, there is no sense of impending crisis in downtown Moscow. . Affluent young people are still dining out, even though Uniqlo, Victoria’s Secret and Zara stores are closed in the seven-story Evropeisky mall.

McDonald’s successor, Vkusno-i Tochka, serves more or less identical dishes, while the mall’s former Krispy Kreme has changed its name but sells essentially the same offerings.

In less affluent provinces, Sofya Suvorova, who lives in Nizhny Novgorod, 440 kilometers (273 miles) from Moscow, has felt the pressure on the family budget.

“We hardly order takeout anymore,” she said while shopping at a supermarket. “Before, it was very practical when we had young children. We go to the cafe less often. We have had to reduce some entertainment, such as concerts and theatres; we try to keep this for the kids, but the adults had to cut it.

Economists say the ruble’s exchange rate – stronger against the dollar than before the war – and falling inflation paint a misleading picture.

Rules preventing money from leaving the country and forcing exporters to exchange most of their foreign oil and gas revenues for rubles have rigged the exchange rate.

And the inflation rate “has partially lost its meaning,” wrote Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs, in a recent analysis. Indeed, this does not take into account the disappearance of Western goods, and lower inflation probably reflects the slump in demand.

Some 2.8 million Russians were employed by foreign or mixed companies in 2020, according to political scientist Ilya Matveev. If suppliers are taken into account, no less than 5 million jobs, or 12% of the workforce, depend on foreign investment.

Foreign companies can find Russian owners, and protectionism and a glut of government jobs will prevent mass unemployment.

But the economy will be much less productive, Kluge said, “leading to a significant decline in average real incomes.”

The Associated Press

Lynn A. Saleh