Picture Alliance | Picture Alliance | Getty Images Europe is facing an unprecedented energy crisis that is pushing the economy closer to recession and raising serious questions about the region’s ambitions on climate change. CNBC takes a look at how Russia, led by President Vladimir Putin, is squeezing gas supplies to Europe and what that means for the future.

Russia cuts supplies

Russia has significantly cut gas flows to Europe since Western countries imposed tough sanctions on the Kremlin following its February 24 unprovoked invasion of Ukraine. Moscow denies using natural gas as a weapon, but Europeans complain that Gazprom, Russia’s state energy company, is no longer a reliable supplier. Reduced gas supplies from Russia are a problem for EU states, as it used to import around 40% of its natural gas reserves from the country. Data from Nord Stream, the responsible operator of a pipeline [Nord Stream 1] connecting Russia to Germany, confirm that there is less gas to the West. Last week alone, supplies through Nord Stream 1 fell to 20% from 40% with Gazprom citing maintenance issues German Economy Minister Robert Habeck said Gazprom’s technical justification was a “hoax”. Supplies had been interrupted for a short time prior to the latest reduction, with maintenance completed between July 11 and July 21. According to the European Commission, the EU’s executive arm, 12 member states are already suffering from reduced gas flows and a handful of others have been completely cut off. Top EU officials say Russia is “blackmailing” Europe and “rigging” its gas supplies. Moscow has repeatedly denied the accusations. “We have to be ready, there could be complete disruption nearby [the] future, and that means we have to have a plan in place,” Kadri Simson, Europe’s energy commissioner, told CNBC last week. European leaders are concerned about a complete disruption of supplies, especially since many industries use the commodity as a raw material in their production process. In this context, efforts have been made to search for alternative suppliers and different sources of energy. However, this transition is a difficult task that is impossible to do in a short period of time. The Commission has asked EU nations to have a minimum storage target of 80% by November. In June, gas fill levels were just above 56%, according to the same institution.

Gas prices are skyrocketing

Natural gas prices rose dramatically in the wake of Russia’s invasion of Ukraine and even earlier when Russia began to cut flows. There are renewed price pressures whenever Russia cuts supplies to Europe given how important the commodity is to several sectors and given the lack of alternatives to Russian fossil fuels. Salomon Fiedler, an economist at Berenberg, noted that gas prices in Europe are “excessively more expensive” now compared to the 2015-2019 average price. “In a normal year, the EU can use around 4.3 billion megawatt hours (MWh) worth of natural gas. So if prices are 100 euros higher per MWh for a year and the EU had to pay those prices instead of benefiting from some long-term fixed-price contracts, costs would increase by around 430 billion euros ($437 billion) – which corresponds to 3% of EU GDP for 2021,” he said. The higher prices then naturally trickle down to the energy bills of companies and individuals across the block. “European benchmark natural gas prices on the Dutch Transfer Facility (TTF) rose 15% to nearly €200 per megawatt hour as utilities bid for alternative supplies, raising concerns that consumers and industry will struggle to pay energy bills and that there will be a winter recession,” analysts at consultancy Eurasia Group said in a research note on Tuesday.

Growth expectations were dashed

With supplies tight and prices higher, the gas crisis is shaking Europe’s economic outlook. The latest gauge of eurozone growth on Friday showed GDP at 0.7% in the second quarter — above market expectations. But more and more economists are pricing in a recession by 2023. The European Commission said earlier this month that the economy would grow 2.7% this year and 1.5% next year. However, the institution also said that a complete stoppage of gas supplies from Russia could trigger a recession later in 2022. “Higher gas prices are raising costs for businesses and squeezing consumer budgets, leaving them with less money to spend on other goods and services. As a result, we expect the eurozone to slip into recession this autumn with still high inflation ” said Fiedler.