How dangerous would a supply failure of Russian gas be for the German economy, Prof. Kooths?

Created: 2022-03-28Updated: 2022-03-28 4:16 PM

By: Thomas Schmidtutz

Prof. Stefan Kooths: The head of economics at the Kiel Institute for the World Economy (IfW) expects far-reaching consequences for the German economy in the event of a possible stop in the supply of Russian gas.

© Stefan Boness/Imago

After the G7 announced that they would not pay for Russian gas in rubles either, the scenario of a possible supply failure is getting closer and closer.

Prof. Stefan Kooths explains how this would affect the German economy.

Munich – Prof. Stefan Kooths, head of economic activity at the renowned Kiel Institute for the World Economy (IfW), has warned of the far-reaching economic consequences of a supply embargo on Russian energy imports.

"From one day to the next it is not possible to replace Russian deliveries without economic activity in this country suffering significantly," Kooths told

.

Above all, the chemical industry, which is plagued by the Ukraine war, could suffer from a stop in Russian gas supplies.

Only on Monday did the G7 countries reject Russian President Vladimir Putin's demands for payment in rubles.

That was a "one-sided and clear breach of the existing contracts," said Federal Minister of Economics Robert Habeck. 

Prof. Kooths, the discussion about a possible embargo for Russian energy storage is picking up speed.

The mood in the top floors of German companies is already in the basement because of the Ukraine war.

Can the German economy get by without Russian gas at all at the moment?

It is not possible to replace the Russian deliveries overnight without severely affecting economic activity in this country.

The exact extent is difficult to estimate because such fractures are difficult to model.

The spring report of the joint diagnosis will deal with this in more detail shortly.

The Kiel Institute for the World Economy has just halved its forecast for economic growth in Germany for the current year - to 2.1 percent.

Would this forecast still be true if the supply of Russian oil and gas as well as coal were to be stopped now?

No, because the forecast is explicitly based on the assumption that deliveries will continue.

The main focus here is on the gas flows.

Alternatives to oil and coal are likely to be found on the world markets in the short term.

Is Germany even threatened with a recession in 2022?

A slump in economic output is then actually possible.

We are still working on how low it could go.

Which sectors would be hit hardest by a potential ban on Russian gas imports?

The chemical industry worries us the most because it is at the beginning of many industrial value chains.

Therefore, not only the local production is in the fire, but also on the downstream levels.

The extent to which chemical precursors can be procured from other parts of the world at short notice therefore plays an important role.

Such imports would help us to maintain the remaining added value and thus cushion the loss of production in the chemical industry.

Ukraine-News: IfW economic chief - need EU-wide coordinated behavior for state aid

In view of the high energy prices, the traffic light coalition agreed a few days ago on a comprehensive relief package for private households.

BDI boss Siegfried Russwurm also called for help for German industry on Friday.

Because of the development in energy prices, many companies are now in "existential difficulties".

Is that just alarmism or do you share this assessment?

Instead of going it alone at national level, coordinated behavior across the EU would be urgently required.

A race for help for the energy-intensive industry is of no use to anyone and ultimately misses the mark.

Because: It's about dealing with an intensified scarcity.

This is exactly why you have to let the price signals work.

Energy price subsidies or energy tax cuts do not eliminate the scarcity, but only keep demand high.

As a result, the net prices for energy rise.

This does not relieve the energy consumers, but feeds the energy producers.

The EU Commission should therefore put a stop to the rampant subsidization so that counterproductive distortions of competition between the member states do not occur in the internal market.

This is exactly what the competition and internal market supervision is there for.

When conditions are similar for businesses affected by higher energy costs, they can also more easily pass them on to their customers.

That would be the market-based solution that keeps the overall economic damage as low as possible.

The EU showed itself to be very united in the decision on sanctions.

This unity is now also important in the reaction to the consequences of the sanctions.

Unfortunately, a lot is going in the wrong direction here at the moment.

This unity is now also important in the reaction to the consequences of the sanctions.

Unfortunately, a lot is going in the wrong direction here at the moment.

This unity is now also important in the reaction to the consequences of the sanctions.

Unfortunately, a lot is going in the wrong direction here at the moment.

But in this country, because of the high energy prices, the demands for state aid are getting louder, keyword reduction in VAT for electricity or fuel.

How could the federal government specifically help companies?

Aid that is directly linked to the use of energy makes no sense.

Because if less energy is available in the short term, it has to be saved somewhere.

You should therefore keep your hands off energy subsidies and tax cuts.

Rather, aid must be designed in such a way that it helps companies to shoulder the energy price hike in the short term and provides incentives to look for alternatives.

And only those companies that can be trusted to have a viable business model should be kept afloat.

This speaks in favor of loan assistance, in which private lenders also have to participate.

Short-time allowance can also play an important role, but it should be graduated on a degressive basis so that structural change is not unnecessarily held up.

What do you think of proposals to allow companies that have slipped into the red because of high energy prices to carry back tax losses?

That's a good suggestion, but it should apply to all companies.

Because higher energy prices gradually make other goods more expensive.

It is also good because it leaves maximum flexibility for those affected and only helps those companies that were previously profitable.

This is not a guarantee for future viable business models, but at least zombie companies will not benefit from state aid.

Russian President Vladimir Putin wants to accept only rubles for gas deliveries from this week.

What is the calculation behind it?

There are two readings.

The following applies to both: the West only gets rubles from Russia.

One reading is that this is just to get Russia's central bank back in the game, having western gas buyers turn to them to get rubles for euros.

In material terms, that would change little, especially since the gas sellers have already had to deliver 80 percent of their foreign exchange earnings to the central bank.

The other reading is that the central bank will not stand by for this swap.

Then the West would only have the option of delivering goods to Russia again in order to get rubles and thus let the sanctions come to nothing.

So what should the West do: accept the ruble demand or insist on the contractually agreed payment in dollars or euros?

Basically, you should always insist on compliance with contracts.

However, this is pointless in relation to a contractual partner who is willing to gamble away the trust that has been built up over decades in a breathtakingly short time.

If it were just a matter of interposing the central bank, I think it's more a matter of prestige than economic logic.

If the second reading is the issue, the sanctions regime would collapse if ruble payments were accepted.

This would not only give up the West's credibility, but also promote Russia's ability to go to war.

But as long as Germany gets Russian gas, we'll help finance the war in Ukraine.

Isn't stopping the supply of Russian coal, oil and gas a particularly efficient economic approach to finally getting Putin to give in?

You cannot wage war with foreign currency alone.

The decisive factor is whether the Kremlin can buy something in the rest of the world with the income from raw materials - only then would we finance the war by buying raw materials.

For Western companies, doing business in Russia has become largely toxic.

As a result, the flow of goods from the West to Russia should almost dry up.

This significantly weakens the Russian economy, which also reduces the war capability.

The trade blockade is therefore still crucial.

This also includes secondary sanctions, i.e. telling companies from the rest of the world that they have a choice between trade with Russia and trade with the West.

Anyone who then still wants to trade with Russia will also be able to be paid by Russia, regardless of whether we buy raw materials from Russia or not.

Because Russia could simply get its imports in exchange for oil or fall back on its substantial gold reserves.

If you want to get in the way of Putin economically, then do it by embargoing goods deliveries to Russia, not by stopping raw material deliveries from Russia.

However, this can also include a gas boycott if Putin insists on ruble payments and the Russian central bank does not issue rubles against euros.

That would be a de facto Russian delivery stop anyway.

if Putin insists on ruble payments and the Russian central bank does not issue rubles against euros.

That would be a de facto Russian delivery stop anyway.

if Putin insists on ruble payments and the Russian central bank does not issue rubles against euros.

That would be a de facto Russian delivery stop anyway.

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