EU industries put to test as Russian invasion of Ukraine persists

Fuel prices across the continent have already reached record highs, despite the European Union not yet reaching consensus on a ban of Russian crude oil. Germany gets 55 percent of its gas from Russia, the largest total by volume of any EU member state. Although supply is currently stable, the country is fearful many manufacturing businesses will go bust if the war—and sanctions—continue, especially if giants such as Thyssenkrupp, BASF, and Bayer slow down production or halt it altogether in certain operations.

European auto production is expected to experience significant disruption, according to ratings agency S&P Global. Automakers like Volkswagen and BMW have been among the most impacted since Russia’s invasion of Ukraine. Volkswagen CEO Herbert Diess has warned the war and subsequent disruption to the supply of parts has put the company’s 2022 outlook into question. The company has moved some of its production out of Europe to North America and China in response to war-related supply chain disruptions.

Just seven weeks into the war, many businesses are already questioning whether sanctions will hurt Germany more than Russia. At the end of March, Germany’s main chemical industry association, VCI, warned chemical plants in the country will likely close, possibly for months, if Russia continues to insist on payment for natural gas in rubles—currently a violation under sanctions laws.

Indeed, the pressure to conserve current gas reserves and find new supplies has forced the government to ask German households to turn down the thermostat, a measure that has been dubbed “freezing for Ukraine.”

On March 30, Robert Habeck, the country’s economics minister, set in motion the first part of a three-level emergency plan to prioritize where gas supplies should go if Russia turns off the tap. Hospitals and households would be top of the list. Industry, which accounts for a quarter of Germany’s total gas consumption, would be the first to shut down, according to the plan, unless companies can prove how “system relevant” they are.

The Federal Network Agency, which oversees access to gas, electricity, and other services, has sent a questionnaire to all German businesses asking them to set out their individual arguments for a right to gas.

While the focus has been on oil and gas, many EU heavy goods manufacturers, notably automakers, rely on a steady supply of other Russian exports. Raw materials like nickel, which is an important component for lithium-ion batteries for electric cars, and palladium, a vital component in the production of catalytic converters, are among examples.

Neon gas production, which is critical to the manufacturing of semiconductors, could also plummet as more than half of the world’s neon is produced by a handful of companies in Ukraine. This would come at a time when companies are already struggling with global chip shortages.

Food hikes—already a trend since the start of the Covid-19 pandemic—are likely to increase further, too. Russia and Ukraine, often referred to as the “breadbasket of Europe,” are among the world’s top producers and exporters of wheat, barley, corn, and vegetable oils. Russia is also a major producer of fertilizers.

According to research by Dutch bank Rabobank, 62 percent of Ukraine’s corn fields are in “at risk” war zone areas, which means European supplies—including animal feed—are going to be badly hit. The bank also reported wheat stocks are the lowest since 2006-07.

The European Commission said while the European Union is largely food sufficient, there is no real possibility to replace the imports of sunflower oil, which will negatively impact producers of such processed foods as margarine, biscuits, and canned fish.

Even transporting goods around the Black Sea is getting to a point where it might be prohibitively expensive for shipping companies.

Hikes of up to 10 percent of a vessel’s value for war-risk premiums for cargo ships and tankers traveling the Black Sea have made ships nearly uninsurable due to the increased risk of damage through mines and missile attacks, according to Bloomberg. The additional insurance cost would amount to about $5 million for a standard tanker worth about $50 million, which is 30 percent higher than the cost of hiring the ocean carrier itself.

The crisis has forced the European Commission to relax competition rules to protect companies and maintain supplies. On March 23, it adopted a “temporary crisis framework” to enable member states to use state aid rules to support their national economies.

The new framework will allow member states to grant limited amounts of aid to companies affected by the war or by related sanctions and countersanctions; ensure sufficient liquidity remains available to businesses; and compensate companies for additional costs incurred due to exceptionally high gas and electricity prices (up to a maximum of 2 million euros, or U.S. $2.2 million, at any given point in time).

EU countries will also be able to set up programs to grant up to €35,000 (U.S. $38,000) for companies affected by the crisis active in the agriculture, fisheries, and aquaculture sectors and up to €400,000 (U.S. $433,000) per company affected by the crisis active in all other sectors.

Not all industry sectors are heavily exposed. So far, the European banking sector retains a privileged position of being one of the few industries to have been relatively untouched.

In its latest risk dashboard published April 1, the European Banking Authority found direct exposures to Russia and Ukraine are small (just 0.3 percent of total assets) and concentrated on a few banks. As a result, “first-round” impacts are expected to be manageable. Even banks in those countries which are more greatly exposed, such as Austria and Hungary, say the war has affected less than 3 percent of total assets.