Economy of war: Europe in pain now, Russia will pay the price later

Across Europe, signs of stress are multiplying as Russia's war in Ukraine continues. An increasing number of Italians are turning to food banks for help. German officials are turning off the air conditioners as they prepare plans to save natural gas and restart coal-fired power plants and extend the operation of nuclear power plants.

A major utility company is asking for taxpayer help, the first in a series of such cases. Dairies are looking for ways to pasteurize flour. The euro fell to the lowest level in the last 20 years against the dollar, and forecasts point to a recession.

All of these are indicators of how the conflict - and the Kremlin's decision to phase out supplies of natural gas that powers European industry - is causing an energy crisis in Europe and raising the possibility of a relapse into recession at a time when the economy has begun to recover from the pandemic, according to the Associated Press agency.

After the blow of sanctions imposed in 2014 over the annexation of Crimea, the Kremlin has built a fortress economy by keeping debt low and forcing companies to source parts and food inside Russia.

Meanwhile, high energy prices are playing into the hands of Russia, a major oil and gas exporter whose resourceful central bank and experience of living under sanctions have stabilized the ruble and inflation despite economic isolation.

Economists, however, predict that in the long run, although Russia will avoid a complete collapse, it will pay a high price for the war. Deepening economic stagnation through lost investment and reduced income for its citizens.

The most urgent challenges facing Europe in the short term are the fight against record inflation of 8,6 percent and how to get through the winter without energy shortages. The continent relies on Russian natural gas, and higher energy prices are reflected in factories, food and fuel costs.

Energy-intensive industries such as agriculture and metal processing face uncertainty, as they could face gas shortages that would be diverted to households if the crisis worsens, according to the AP.

The large German dairy "Molkerai berhtesgdner land", located in the city of Piding, not far from Munich, has stockpiled 200 liters of fuel to be able to continue the milk pasteurization and cooling process in case there is an interruption in the supply of electricity or natural gas.

It is a key safety measure for 1800 farmers who are members of the dairy and who, with 50 cows, produce a million liters of milk a day. Cows need to be milked on a daily basis, and a power outage would mean that the entire ocean of milk has nowhere to go.

"If the dairy doesn't work, then the farmers don't either," said executive director Bernhard Pointner. "Then the milkmen would have to throw away the milk".

During one hour, this dairy for cooling milk consumes as much electricity as one household for an entire year.

The dairy has also stocked up on packaging and other materials to protect suppliers if they are hit by power shortages: "We have a lot in stock... but it may only last a few weeks."

Economic problems can also be seen on the dining table. Research has shown that a typical Italian family spends 681 euros more this year to feed themselves.

"We are really worried about the situation and the constant increase in the number of families who turn to us for help," said Dario Bođi Marzet, president of the Lombardy Food Bank, which brings together dozens of humanitarian organizations that manage soup kitchens. Their monthly expenses increased by five thousand euros this year.

Žesika Lobli, a single mother of two children from the Paris suburb of Genevilliers, carefully monitors the increase in food prices. She reduced her consumption of milk and yogurt and gave up Nutella and sweets.

"The situation will get worse, but we have to eat to survive," said Lobli, who earns between 1300 and 2000 euros a month working in the school kitchen.

French President Emmanuel Macron said that the government aims to save energy by turning off public lights at night and other measures. Similarly, German officials are urging citizens and businesses to save energy and have ordered a reduction in the use of air conditioners in public buildings.

These measures came after Russia cut natural gas supplies to dozens of European countries. Yesterday, Russia's Gazprom declared "force majeure" in the delivery of gas to at least one major customer, which further increased fears that there will be a complete interruption of deliveries via the Nord Stream 1 gas pipeline.

Germany's biggest importer of Russian gas, Uniper, has asked the government for help after facing huge gas prices it cannot charge consumers.

Karsten Krzeski, chief economist for the Eurozone at ING Bank, predicts a recession at the end of the year when high prices further limit purchasing power. Europe's long-term economic growth will depend on whether governments succeed in making the massive investments needed to transition to a renewable energy economy.

"Without investments, without structural change, the only thing left is to hope that everything will work - but it won't," said Brzeski.

While Europe suffers, Russia has stabilized the value of the ruble, the stock market and inflation thanks to massive government interventions. Russian oil found buyers in Asia, albeit at significantly lower prices, while Western buyers withdrew.

The AP agency reminds that after the impact of sanctions introduced in 2014 due to the annexation of Crimea, the Kremlin built a fortress economy by keeping debt low and forcing companies to procure parts and food within Russia.

Although foreign companies like IKEA have pulled out, and Russia has defaulted on its debt obligations for the first time in a century, there is no impression of a crisis in central Moscow. Well-to-do young people still go to restaurants, even though "Zara", "Juniklo" and "Viktoria's Secret" have left the seven-story shopping center "Evropejski".

McDonald's successor, Vkusno i Točka, serves almost identical food, while the former Krispy Kreme in the shopping center has changed its name but still has essentially the same offering.

In a poorer part of the country, Sofia Suvorova, who lives in Nizhny Novgorod 440 kilometers from Moscow, felt the pressure on the family budget.

"We don't order food anymore," she said. “That was very convenient, especially when you have small children. We go to cafes less. We had to cut back on entertainment, such as going to theaters and cinemas. We try to give the children as much as possible, but we adults save money".

Economists say the value of the ruble - which is stronger against the dollar than before the war - and falling inflation do not paint a realistic picture.

Rules that prevent money from leaving the country and force exporters to exchange most of their foreign oil and gas earnings into rubles have boosted the currency's value.

The inflation rate "has partially lost its meaning," said Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs. This is because the disappearance of Western products is not taken into account, and the lower inflation probably reflects the drop in demand.

About 2,8 million Russians were employed in foreign or mixed-owned companies in 2020, political scientist Ilya Matveyev said. If we include suppliers, we are talking about as many as 5 million jobs, or 12 percent of the workforce that depends on foreign investments.

Foreign companies can find Russian owners, and protectionism and oversaturation in public administration will prevent mass unemployment. But the economy will be far less productive, Kluge believes, "leading to a significant drop in income."