Vegetable oils are found in thousands of products, from cosmetics and shampoo to cookies and other food products. They’re also used for cooking by billions of people and, in fact, are the food commodity that’s growing the fastest, with demand consistently higher than supply.
Current disruptions in the worldwide supply caused by weather issues, armed conflict, supply chain disruptions and labor shortages are resulting in higher prices, causing a ripple effect of sticker shock throughout the food economy, according to Amanda Leland of the Environmental Defense Fund.
Biofuels, widely used in Europe and whose demand is increasing, are likewise affected. Businesses with interests in these and other vegetable-oil-related markets need to take notice. With oil products in crisis, there’s an opportunity for new avenues of increasing supply, including indoor farming and replacing certain vegetable oils with other types of oils.
Russia’s invasion of Ukraine exacerbated the shortage of cooking oils, especially sunflower oil. Before the war, Russia and Ukraine produced approximately 75% (subscription required) of the world’s sunflower oil. With countries banning Russian imports and the conflict preventing Ukraine producers from harvesting, the supply predictions plummeted.
The next year’s harvest for Ukraine looks dismal due to the country’s disrupted transportation system, labor shortages and other related factors. This has caused ripple effects around the world where sunflower oil is used, including in the U.K. and Germany.
The supply of vegetable oils is impacted by labor shortages due to Covid and weather issues as well as geopolitical conflicts. For palm oil producers in Malaysia, the second largest market provider, there’s an ongoing shortage of both laborers and fertilizer, hampering production (subscription required).
Meanwhile, in South America, where over 50% of the world’s soybeans are grown, labor problems and ongoing drought are severely impacting production. This will require food producers to adjust as soybean oil prices reach a nine-year high.
The Local Indoor Farming Opportunity
This problem has created an opportunity for traditional farmers. Farmers can fill the current need by starting to produce other vegetable oils such as olive oil, flaxseed oil, coconut oil, avocado oil, grapeseed oil and sesame oil, which can be used as substitutes for vegetable oils.
Controlled Environment Agriculture (CEA) is also a solution. The infrastructure required for a controlled indoor grow environment can be easily built or adapted from existing structures, and it uses far less water than a traditional environment. This can allow for optimal results in places where access to water and fertilizer are limited and as we continue to face issues of drought.
Advanced indoor grow operations use hydroponics and artificial lighting to better control growing conditions and offer plants the nutrients and light levels they require. Automated tools can match energy, water, fertilizer, air flow and other data points to increase yields and profits. (Full disclosure: My company, Pangea, produces software and smart lighting solutions for indoor farming.)
A data-driven approach with centralized controls makes the oil-yielding indoor grow market financially viable, especially in the face of global conflicts and labor shortages. CEA can localize the growing of soybeans, palm or other plants. This will shorten supply chains and provide a long-term answer to regional issues driving price inflation and disruptions for providers and the end consumer.
One form of indoor agriculture is vertical farming, which produces foods in stacked layers instead of a field or greenhouse, allowing for a smaller footprint. This technique is not new but has existed for hundreds of years. Contemporary vertical farming uses LED technology instead of natural sunlight; the integration of light and technology gives precise data to farmers to reduce the human error that comes along with growing crops.
A market report from Technavio, a leading global technology research and advisory company, predicts a compound annual growth rate (CAGR) of nearly 22% from 2021 to 2026 for the global vertical farming market due to increased demand and innovations in farming practices. The report points to the massive opportunity for localized indoor farming production of oil-yielding plants and the chance to address some of the supply issues with vegetable oils.
Techniques like these demonstrate how AgTech is quickly advancing to help secure a better future for farmers and consumers alike.
As the government has been focused on crude oil and gasoline, diesel gas supplies have drastically fallen to dangerously low levels.
With diesel prices going up, it will cost more to transport consumer goods, which means that inflation won’t taper off anytime soon.
See list below for sectors and stocks most impacted by the shortage.
While a lot of attention has been directed toward the prices of crude oil, diesel gas suddenly appears scarce as we head into the winter months. The Energy Information Administration (EIA) has stated that the U.S. now only has 25 days’ worth of diesel supply left, which is a dangerously low level. The Russian invasion of Ukraine has drastically impacted global energy supplies as refinery closures and disruptions in the U.S. have recently caused issues with the supply of diesel gas at a time when demand is surging due to the changing seasons.
With diesel fuel and heating oil inventories running low, inflation will remain high for the foreseeable future. Since diesel is the primary fuel source for trucks, rails and vessels that transport most consumer goods, it’s looking like the prices of these transported goods will also increase.
What’s happening with Diesel right now?
Bloomberg reported that the U.S. diesel crisis is here and will spread across the East Coast, where there are transportation delays. Diesel inventories are at the lowest seasonal level ever, heading into winter. The Energy Information Administration (EIA) announced that U.S. distillate inventory (including heating oil and diesel fuel) had 106.2 million barrels in the week ending October 14, which is about 20% below the 5-year average and a 25-day supply.
There are colossal supply and demand issues with diesel fuel right now. Since diesel fuel is similar to heating oil, the demand will skyrocket as the northern hemisphere enters the winter months where people will need oil to heat their homes. Some speculate that if reserves aren’t built up by the end of November, there could be severe consequences — similar to the European energy crisis. The supply issues are being caused partly due to the embargo on Russian oil and because the refining capacity in the U.S. has dropped over the past few years.
The price of diesel hit a record high of $5.816 per gallon in June, and there’s a chance that it could go higher if we have a cold winter or if the European energy crisis gets worse — both of which are still undetermined as of the time of this writing.
Policymakers have been focusing on crude oil prices to fight inflation, but it appears that the diesel gas shortage could offset this. Goldman Sachs has warned that the government’s focus on fighting higher energy prices has only been on crude prices, even though that has little impact on what customers have to pay for. It’s also believed that refinery closures and disruptions are leading to this shortage of refined products like diesel gas.
What stocks are impacted by a diesel gas shortage?
A diesel gas shortage impacts many companies since the fuel is needed to transport goods across the country.
These are the industries most impacted by a diesel gas shortage:
Trucking and transportation. Since most of our goods are transported by diesel fuel, any company in this industry is facing the potential of low diesel supplies that could drive prices up.
Construction. Many power trucks and excavators use diesel, the increased cost of transporting raw materials, will drive home construction prices even higher when people already have to deal with soaring loan rates. This would also impact the mortgage industry since consumers will think twice about borrowing money, making everything more expensive.
Fresh produce. The prices of fresh produce will continue to increase as it’s becoming more costly to transport the goods promptly.
Other consumer goods. With all of our goods being transported by freight or truck, there could be issues with getting items into stores in time for the holiday season as we reach dangerously low levels of diesel.
It’s fair to say that stocks in any of these industries could be impacted by the diesel gas shortage if they can’t get the goods out on time or if they have to raise prices. Higher prices would only hurt consumer confidence as the threat of a recession looms large.
When we looked at stock market winners, we discovered that many oil companies were doing exceptionally well in 2022. We will be watching to see if limits are imposed on the export of U.S. oil and natural gas, as this would impact earnings.
What stocks are impacted by the diesel gas shortage?
Suncor Energy (SU)
Suncor produces synthetic crude from oil sands, a method that’s unlike conventional oil production. With diesel gas prices going up, Suncor stands to benefit as the stock is up almost 40% for 2022. Suncor has hiked up its dividend recently, making this an attractive stock for investors.
Valero Energy (VLO)
Valero is one of the top oil refineries as they manufacture and market transportation fuels. The company is also the second largest producer of renewable fuels, which means it will stay profitable if the world turns to renewable energy sources. Valero beat the earnings estimate for the third quarter, and the stock is up about 67% for 2022.
PBF Energy Inc. (PBF).
PBF is a petroleum refiner and supplier of transportation fuels, heating oils and other petroleum products. The company is working on producing renewable diesel by 2023 which would be a major game changer in this space. This stock is also up over 200% for the year while the rest of the market has continued to struggle.
Even though there’s a growing concern about switching over to cleaner energy sources, it’s important to note this transition won’t be quick.
What’s the impact of a diesel gas shortage?
While there has been plenty of buzz about the European energy crisis and the growth prospects of electric vehicles, we can’t ignore that diesel is the primary fuel source for power trucks, rails and vessels transporting consumer goods. If diesel prices skyrocket, then the prices of the goods transported will also increase accordingly. With the holiday season approaching, this would mean that we could expect further increases in prices.
Experts also worry that diesel prices could tip the economy into a recession. As the Fed continues to fight inflation by raising interest rates, other factors are causing diesel prices to go up, which would then impact the costs of everything that’s transported. This would mean prices would still go up and cause inflation to soar despite the aggressive rate hikes.
Diesel prices are going up right now due to simple supply and demand issues. There are also disruptions to the global markets being caused by the Russia-Ukraine conflict and the current lockdowns in China.
What’s next for diesel prices?
As the supply of diesel gas dwindles and the demand continues to surge, actions must be taken promptly. The Biden Administration has considered limiting fuel export to help with the supply and prices. President Biden recently announced that they would be releasing 15 million barrels of oil from the strategic reserve in December to increase the supply. However, there’s no clear indication this would solve, or substantively help, us with the diesel gas shortage.
It’s important to note that this fuel is used for heating and trucking, which is generally required to keep the economy going, especially in winter. Diesel keeps commerce and freight going because trucks, excavators, ships and freight trains need the energy source. If there’s a shortage of diesel, we would see higher costs for everything in the economy, from transportation to construction, at a time when the Fed continues its aggressive rate hike campaign.
What does this mean for investors?
With the stubborn inflation numbers causing stock market sell-offs as the Fed continues to raise rates to attempt to cool down the economy, it isn’t clear where to invest your money. With additional concerns of prices going up even higher due to a diesel gas shortage, there’s even more risk involved with investing in individual companies.
Many experts agree that soaring inflation will invariably worsen if fuel prices continue to rise. Although there has been a lot of attention on crude oil, diesel gas issues could hurt us as much or more. With Q.ai’s Inflation Kit, you could turn those inflation fears around with an Investment Kit that helps you profit from higher inflation. With our unique Portfolio Protection feature, you can protect yourself further against continued volatility and unforgiving downturns.
The bottom line
The diesel gas shortage could pose many challenges if the refineries don’t increase capacity or if we don’t find ways to replenish supplies. If diesel gas prices continue to go up, consumers will feel this impact as the prices of everything will continue to increase. We will continue to monitor the situation with diesel gas as it’s an urgent matter at this time.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.
Russia intends to use its digital ruble, to be introduced early next year, for payments with its key ally, China. Authorities in Moscow hope other nations will be willing to adopt the Russian digital currency in trade, which will allow the country to circumvent sanctions imposed over the Ukraine war.
The Central Bank of Russia is gearing up to launch settlements with the digital ruble, the new incarnation of the Russian fiat currency that’s now being tested, as early as 2023. According to a statement by a prominent member of the lower house of Russian parliament, the sanctioned nation wants to use it in payments with China, which has become Russia’s main trading partner.
Limited access to the global financial system due to financial restrictions introduced in response to its military invasion of Ukraine is forcing Russia to seek alternative means for foreign trade transactions. Alongside cryptocurrencies, the digital ruble is one of the options Moscow is considering in its efforts to bypass the sanctions.
“The topic of digital financial assets, the digital ruble and cryptocurrencies is currently intensifying in the society, as Western countries are imposing sanctions and creating problems for bank transfers, including in international settlements,” the head of the Financial Market Committee at the State Duma, Anatoly Aksakov, recently told the Parlamentskaya Gazeta newspaper.
The high-ranking lawmaker elaborated that the digital direction is key because financial flows can circumvent systems controlled by unfriendly nations. He added the next step for the central bank digital currency (CBDC) issued by the Bank of Russia would be to introduce it in mutual settlements with China. Also quoted by Reuters, Aksakov emphasized:
If we launch this, then other countries will begin to actively use it going forward, and America’s control over the global financial system will effectively end.
With the loss of markets in the West, including for energy exports, the importance of cooperation with China has increased significantly for Russia. Trade between the two countries has expanded and Russian companies have started issuing debt in Chinese yuan. Beijing is currently conducting domestic trials of its digital version, the e-CNY, and plans to use it in cross-border settlements, too.
Russia is preparing to adopt comprehensive regulations for its crypto market in the coming months, including a new bill “On Digital Currency” that will expand the legal framework established last year by the law “on Digital Financial Assets.” Russian regulators are already developing a mechanism for international crypto payments and the respective draft provisions have been already agreed upon by the central bank and the finance ministry.
Lubomir Tassev is a journalist from tech-savvy Eastern Europe who likes Hitchens’s quote: “Being a writer is what I am, rather than what I do.” Besides crypto, blockchain and fintech, international politics and economics are two other sources of inspiration.
The Bank of Russia has announced plans to connect all Russian banks to the digital ruble in 2024, as it fast-tracks plans to circumvent sanctions. Cross-border integration with the digital yuan and the central bank digital currencies (CBDCs) of other “friendly” countries” will remove the need for Swift, a central bank official said. As well as “gradually connecting all credit organisations”, the Bank of Russia will increase the number of “payment options and transactions using smart
The Central Bank of Russia emphasized that the pilot project aims to better understand the regulatory, legal, and technical aspects of CBDCs, and plans to launch an official digital ruble within a few years. Russia’s central bank’s latest monetary policy said the country plans to connect the digital ruble platform to all banks and credit institutions by 2024.
In March 2024, a new round of elections will be held on whether the current Russian President Vladimir Putin will be re-elected. By then, the digital ruble is expected to have completed customer-to-customer transaction trials and customer-to-business and business-to-customer settlements.
To facilitate the rollout of the digital ruble, the Bank of Russia will also conduct a beta test of the digital ruble-based smart contract with a limited number of participants in 2023. At the same time, it is expected that in 2025, the offline mode of the digital ruble will be completed. The Bank of Russia noted that the Russian economy is increasingly digitized, thus requiring an advanced payment system based on a government-backed digital currency.
VTB Factoring, a subsidiary of Russia’s state-owned bank, reported the first major deal with digital finance assets. As part of the deal, the bank subsidiary acquired a tokenized debt pool of the engineering company Metrowagonmash, issued via the fintech platform Lighthouse. On Wednesday, June 29, VTB reported the deal on its webpage, claiming it to be the first issuance and placement of digital financial assets secured by cash in the Russian Federation. In the announcement, the bank compares it with the issue of short-term commercial bonds.
n June 2022, the largest Russian bank Sber announced its first operation with the digital financial assets (DFA) to take place in mid-July, after finally obtaining a license from the country’s central bank. While current legislation on the DFA was put in force in 2020, the head of the Financial Markets Committee of the Russian parliament’s lower chamber introduced a bill that would prohibit the use of DFA as a “monetary surrogate” in June 2022.
In February 2022, VTB conducted the first successful testing of the operation with “digital rubles,” a central bank digital currency (CBDC) project of the Bank of Russia. Later, the bank announced its first purchase of DFAs in exchange for the digital ruble. At press time, there is no information on whether the aforementioned deal was made via CBDC.
The International Monetary Fund warned on Tuesday of a slowdown in global economic growth as the world economy continues to take a hit from “increasingly gloomy developments in 2022,” including high inflation, a slowdown in China caused by Covid lockdowns and ongoing fallout from Russia’s war in Ukraine.
The IMF slashed its global growth projections, now expecting global GDP to grow 3.2% this year and 2.9% in 2023, down from previous estimates in April of 3.6% GDP growth for both years.
The group cited a slowdown in the world’s three largest economies—the United States, China and the euro area—as a reason for the revised estimates, warning that the risks to the outlook remain “overwhelmingly tilted to the downside.”
Several “shocks” have hit the global economy as it tries to recover from the pandemic, including higher-than-expected inflation worldwide––especially in the United States and Europe, a worse-than-anticipated slowdown in China caused by Covid lockdowns and “further negative spillovers” from the war in Ukraine.
The IMF also said that high inflation remains a “major problem” as prices have continued to rise in 2022, led by soaring food and fuel costs, arguing that “taming inflation should be the first priority for policymakers” worldwide.
The group now expects global inflation to hit 6.6% in advanced economies and 9.5% in developing economies this year, though prices are expected to return to near pre-pandemic levels by the end of 2024.
The IMF also slashed its growth estimates for the U.S. economy, now forecasting GDP to rise 2.3% this year and 1% in 2023, down from previous estimates of 3.7% and 2.3%, respectively, amid the impact of tighter monetary policy and reduced household purchasing power.
“The outlook has darkened significantly since April,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”
“The slowdown in China has global consequences,” the IMF said. “Lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners.” The group now sees China’s economy growing 3.3% in 2022—its lowest pace in four decades and down over 1% from previous estimates.
The World Bank similarly slashed its forecasts for the global economy last month, predicting GDP growth in 2022 of just 2.9%, down from an earlier estimate of 4.1%.
The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize. Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions.
China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year. Under our baseline forecast, growth slows from last year’s 6.1 percent to 3.2 percent this year and 2.9 percent next year, downgrades of 0.4 and 0.7 percentage points from April.
This reflects stalling growth in the world’s three largest economies—the United States, China and the euro area—with important consequences for the global outlook. In the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3 percent this year and 1 percent next year.
In China, further lockdowns, and the deepening real estate crisis pushed growth down to 3.3 percent this year—the slowest in more than four decades, excluding the pandemic. And in the euro area, growth is revised down to 2.6 percent this year and 1.2 percent in 2023, reflecting spillovers from the war in Ukraine and tighter monetary policy.
Despite slowing activity, global inflation has been revised up, in part due to rising food and energy prices. Inflation this year is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies—upward revisions of 0.9 and 0.8 percentage points respectively—and is projected to remain elevated longer. Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains and historically tight labor markets.
On Sunday 1 February 1970, senior politicians and gas executives from Germany and the Soviet Union gathered at the upmarket Hotel Kaiserhof in Essen. They were there to celebrate the signing of a contract for the first major Russia-Germany gas pipeline, which was to run from Siberia to the West German border at Marktredwitz in Bavaria. The contract was the result of nine months of intense bargaining over the price of the gas, the cost of 1.2m tonnes of German pipes to be sold to Russia, and the credit terms offered to Moscow by a consortium of 17 German banks.
Aware of the risk of Russia defaulting, the German banks’ chief financial negotiator, Friedrich Wilhelm Christians, took the precaution of asking for a loan from the federal government, explaining: “I don’t do any somersaults without a net, especially not on a trapeze.”
The relationship would benefit both sides: Germany would supply the machines and high-quality industrial goods; Russia would provide the raw material to fuel German industry. High-pressure pipelines and their supporting infrastructure hold the potential to bind countries together, since they require trust, cooperation and mutual dependence. But this was not just a commercial deal, as the presence at the hotel of the German economic minister Karl Schiller showed.
For the advocates of Ostpolitik – the new “eastern policy” of rapprochement towards the Soviet Union and its allies including East Germany, launched the previous year under chancellor Willy Brandt – this was a moment of supreme political consequence. Schiller, an economist by training, was to describe it as part of an effort at “political and human normalisation with our Eastern neighbours”.
The sentiment was laudable, but for some observers it was a potentially dangerous move. Before the signing, Nato had discreetly written to the German economics ministry to inquire about the security implications. Norbert Plesser, head of the gas department at the ministry, had assured Nato that there was no cause for alarm: Germany would never rely on Russia for even 10% of its gas supplies.
Half a century later, in 2020, Russia would supply more than half of Germany’s natural gas and about a third of all the oil that Germans burned to heat homes, power factories and fuel vehicles. Roughly half of Germany’s coal imports, which are essential to its steel manufacturing, came from Russia.
An arrangement that began as a peacetime opening to a former foe has turned into an instrument of aggression. Germany is now funding Russia’s war. In the first two months after the start of Russia’s assault on Ukraine, Germany is estimated to have paid nearly €8.3bn for Russian energy – money used by Moscow to prop up the rouble and buy the artillery shells firing at Ukrainian positions in Donetsk.
In that time, EU countries are estimated to have paid a total of €39bn for Russian energy, more than double the sum they have given to help Ukraine defend itself. The irony is painful. “For thirty years, Germans lectured Ukrainians about fascism,” the historian Timothy Snyder wrote recently. “When fascism actually arrived, Germans funded it, and Ukrainians died fighting it.”
When Putin invaded Ukraine in February, Germany faced a particular problem. Its rejection of nuclear power and its transition away from coal meant that Germany had very few alternatives to Russian gas. Berlin has been forced to accept that it was a cataclysmic error to have made itself so dependent on Russian energy – whatever the motives behind it. The foreign minister, Annalena Baerbock, says Germany failed to listen to the warnings from countries that had once suffered under Russia’s occupation, such as Poland and the Baltic states. For Norbert Röttgen, a former environment minister and member of Angela Merkel’s Christian Democrat Union (CDU), the German government bowed to industry forces pressing for cheap gas “all too easily”, while “completely ignoring the geopolitical risks”.
In February this year, German Green economic affairs and climate action minister Robert Habeck said that gas storage facilities owned by Gazprom in Germany had been “systematically emptied” over the winter, to drive up prices and exert political pressure. It was a staggering admission of Russia’s power to disrupt energy supplies.“I was wrong,” the former German finance minister, Wolfgang Schäuble, says, simply. “We were all wrong.”
In recent weeks even Frank-Walter Steinmeier, the German president, a totemic figure of the Social Democrats and greatest German advocate of the trade “bridge” between east and west, has recanted. He admits he misread Russia’s intentions as he pursued the construction of a new undersea gas pipeline. “My adherence to Nord Stream 2 was clearly a mistake,” he told German media in April. “We held on to bridges that Russia no longer believed in, and that our partners warned us about.”
This is an extraordinary admission for a man who acted as chief of staff to Gerhard Schröder, the Social Democratic chancellor from 1998 to 2005 and thereafter a lavishly rewarded, and much reviled, lobbyist for Vladimir Putin. Steinmeier was also foreign minister under Chancellor Merkel, and a great evangelist for Wandel durch Handel, the concept that trade and dialogue can bring about social and political change.
How did Germany end up making such a blunder? Some argue that Merkel should have seen that Putin was taking Russia in an authoritarian direction when he announced his return to the presidency in 2011. After Russia’s invasion of Ukraine in 2014, Germany made no move to stop importing Russian gas, and although Merkel threatened to introduce crippling trade sanctions, German industry convinced her to hold back. But some blame a more persistent misjudgment stretching back 50 years, based on a fallacy that authoritarian countries can be transformed through trade.
The Social Democrats have now set up a review into whether the policy of Ostpolitik – first laid out in a landmark speech in July 1963 by Egon Bahr, then the closest adviser to West Berlin’s mayor and chancellor-to-be, Willy Brandt – became deformed over time, especially after securing its great achievement, the fall of the Berlin Wall.
What is extraordinary, retracing the history through memoirs and contemporary records, is how frequently and determinedly Germany was warned, by everyone from Henry Kissinger onwards, that it was making a pact it might live to regret. Kissinger wrote to Richard Nixon on 9 April 1970: “Few people, either inside Germany or abroad, see Brandt as selling out to the East; what worries people is whether he can control what he has started.” Over 50 years, Germany fought numerous battles with a series of US presidents over its growing dependence on Russian energy. In the process, Germany’s foreign office developed a view of American anti-communism as naive, and a belief that only Germany truly understood the Soviet Union.
From the late 1960s, the Federal Republic of Germany tried to open its own direct line of communication with the Soviet leadership, even though its interest in reunification created tensions with the US. When it faced criticism from the US, Germany was wont to cite its unique status. “I cannot imagine there is anyone more interested in being allowed to continue working for detente and balance in Europe than the German people who are forced to live in two states,” Hans-Dietrich Genscher, then the foreign minister, told the German Bundestag in January 1980, to great applause.
But after the fall of the Berlin Wall in 1989, why was Germany still so reluctant to listen to others? A sense of guilt for the atrocities committed against the Soviet Union during the second world war may have played a role. Pride, too, that – through Ostpolitik – it had mended its relations with Moscow. Germany, in a sense, became a double prisoner of its past – bound both to the horrors it had committed, and to its belief that its response to those horrors was correct.
The conflicts between Germany and the US in the 70s and 80s, involving two very different presidents, Jimmy Carter and Ronald Reagan, were some of the most rancorous transatlantic battles since the second world war. “The disputes were all part of West Germany showing independence in foreign policy during the cold war, and that became uncomfortable for some American leaders,” the historian Mary Elise Sarotte said to me.
Carter and the German chancellor Helmut Schmidt had little respect for each other. Carter found Schmidt moody, while the chancellor, in his autobiography, dismissed Carter as an idealistic preacher, who knew nothing of Europe and was “just not big enough for the game”. The two leaders did not just grate personally, they disagreed on issues of substance – including how to protect human rights in Russia. In 1979 Schmidt and Carter came together to jointly adopt the so-called dual track decision, by which Nato would upgrade its nuclear weapons based in Europe, while actively seeking an arms control agreement with Russia. But in other ways their approach was very different.
Schmidt never lacked self-confidence, but like many Germans of that era he carried a deep sense of shame arising from painful war memories. He also believed that the stability of the eastern bloc was in the interest of West Germany, given Russia’s nuclear capability. In his autobiography he wrote that he had wanted to develop trading relations with Russia, in order to foster “a greater Soviet dependence upon European supplies”, in turn leading to “more European influence” on Moscow’s policies. And following the 1973 oil crisis, Schmidt became convinced that the Soviet Union represented a more reliable supplier of energy for Germany than the Gulf states.
Carter, by contrast, saw withholding trade as the better way to influence the Soviets. In July 1978, responding to Moscow’s imprisonment of two Soviet dissidents, Aleksandr Ginzburg and Anatoly Shcharansky, Carter restricted US exports of technology for the exploration and development of the Soviet oil and natural-gas industries.
Yet, collectively, European business went in the opposite direction. Even after the Soviet invasion of Afghanistan in 1979, a large German business delegation went ahead with a visit to Moscow. The Soviets (Soyuzgazexport) and western Europeans (chiefly Ruhrgas and Gaz de France) completed negotiations on a new giant gas project, a 4,500km dedicated pipeline from the giant Urengoy field in West Siberia in late 1980. This deal was projected to increase Germany’s dependence on Russian gas from 15% to 30%. When German ministers reviewed the security implications, they concluded there was no danger of Russia misusing its potential stranglehold. Their reasoning was simple. “Long-term disruption would be against the self-interest of the Soviet Union,” the ministry decided.
In a phone call with Carter on 5 March, Schmidt explained his support for the pipeline by telling the US president, “Those engaging in trade with each other do not shoot at one another.” It was a restatement of Norman Angell’s famous pre-first world war theory that the new interdependence of economies made war unprofitable and thus irrational. According to a note in his diary, Carter responded: “It is not beneficial for the Europeans to expect us to provide the stick and for them to compete with one another about providing the biggest carrot.”
In 1980, Schmidt wrote: “To speak of the Federal Republic’s economic dependence on Moscow to a degree large enough to affect foreign policy indicates ignorance or malice.” Given Germany’s plight now, those words look hopelessly misjudged.
Schmidt faced a more challenging opponent in Carter’s successor, the traditional anti-communist Ronald Reagan. In Reagan’s eyes, German trade with Russia was in direct conflict with western security. Reagan’s view was informed by a CIA assessment submitted in July 1981, which noted a clear trend: from 1970 to 1980, Soviet gas exports to western Europe had risen from 1 billion cubic metres (bcm) a year to 26.5bcm annually.
The CIA warned Reagan that the Urengoy gas project would not only accelerate Soviet economic growth, but provide the Soviets with $8bn in hard currency, facilitating a further military buildup. Far from giving Germany sway over Soviet thinking, “it would provide the Soviets one additional pressure point they could use as part of a broader diplomatic offensive to persuade the West Europeans to accept their viewpoint on East-West issues”.
In arguments that echo today’s debates, the US ambassador to the UN, Jeane Kirkpatrick, complained: “We consistently find in our talks the allies are already significantly dependent: France for 15% [of its] gas, Germany for 30%.” Schmidt assured the Americans that Germany “can go six months in the event of a Soviet cut-off”. The forecast now is that, in such an eventuality, Germany would have to go straight to a form of energy rationing.
Despite various US efforts to persuade Europe to adopt a voluntary ban, including offering alternative sources of energy, in 1981 Ruhrgas AG and Soyusgazexport went ahead and signed a contract for annual imports of 10.5bcm of Soviet gas over a 25-year period. Unemployment in Europe was close to 9% at the time, and European industry needed to boost its energy supplies. At the same time, the US argument about security was dismissed as a veiled way of promoting the US oil industry.
When Moscow backed the imposition of martial law in Poland on 13 December 1981, Reagan thought such a shocking event might persuade Germany to put the pipeline on hold. In a private note to Margaret Thatcher, sent on 19 December 1981, he urged her to back tough sanctions against the Soviets, stating that “this may well be a watershed in the history of mankind. A challenge to tyranny from within.” Unusually for her, Thatcher vacillated, advising Reagan that the Germans “cannot and will not give up the gas pipeline project”.
The US responded to the Soviet intervention by banning US companies from helping with the pipeline. In the summer of 1982 Reagan tried to force European firms to stop working on the pipeline by imposing secondary sanctions on them. Such sanctions are now a commonplace in the US foreign policy armoury, particularly over Iran, but then, they were seen as an incursion into European sovereignty. Thatcher bridled, telling the Commons “it is wrong” for “one very powerful nation [to] prevent existing contracts being fulfilled”.
By November, Reagan had abandoned the attempt to impose sanctions. In a trial of strength in which Europe sided with Germany, the world’s superpower had lost. The new pipeline started pumping on 1 January 1984.
The German advocates of change through trade had won. The US position on Russia was further weakened when the Berlin Wall fell in 1989. The peaceful collapse of communism was trumpeted as a vindication for those that had championed dialogue, and engagement through trade. In a speech to the Brandt Foundation in March 2008, Steinmeier gave full vent to this view: “What Ostpolitik in fact achieved – as is now recognised also by those who criticised it at the time,” he said, “was to make peace in Europe, despite the difficulties, a degree more secure. For the democracy movements in eastern Europe it created new possibilities, new scope for action. It was a key factor, too, in finally ending the confrontation between the two blocs.”
Olaf Scholz, Germany’s current chancellor, remains an adherent of this view, arguing last year that it contributed to the fall of the Soviet Union and laid the basis for democracy and EU membership for much of eastern Europe. The SPD co-leader, Lars Klingbeil, has also insisted that Ostpolitik “was the basis for reunification and the end of the cold war. As a result, there has been a consensus in the federal republic for decades that conflicts can be defused through dialogue. We won’t let that be bad-mouthed.”
Yet a number of historians and writers believe that this rosy picture of Ostpolitik is misleading. “The idea that Willy Brandt’s policy of detente towards Moscow led in a straight line to the fall of the iron curtain and German unity is at least an over-simplification,” says the historian Jan Behrends. German journalist Thomas Urban, author of a new book critiquing Ostpolitik, believes its role in the fall of the wall and German reunification has been exaggerated:
“It was military buildup by Reagan and the flooding of the market with cheap oil that led to the collapse of the Soviet Union,” he told me. The Russian government budget had grown so dependent on energy for its revenue, he said, that when the price of oil plummeted in the mid-1980s, Russia’s lifeline to external capital dried up. “Gorbachev could no longer fund the overseas wars and the Soviet Republics,” he said. “But this argument was entirely missing in the German debate, especially on the left.”
Urban argued that Ostpolitik’s theory of change suffered from two basic misconceptions: the belief that political change in eastern Europe could only come from engaging with the elite in power, rather than from civilian movements, and second, that “security must be the key to everything”. By the turn of the century, the advocates of change through trade were in their pomp. Chancellor Schröder, with growing confidence, promoted the idea of a strategic partnership with Russia. He invited the new Russian president, Vladimir Putin, to address the Bundestag in 2001, where he won over his audience by giving the speech in fluent German and declaring “the cold war is over”.
Schröder, at the time of Putin’s address, saw a perfect confluence of interests between Europe, Germany and Russia: peace, stability, multilateralism and economic growth. Putin, Schröder was convinced, “wants to transform Russia into a democracy”.
In this favourable political climate, pro-Russian German lobbyists such as Klaus Mangold, chairman of the powerful German Committee on Eastern European Economic Relations, pursued the construction of yet another gas pipeline, this time taking gas from Vyborg under the Baltic Sea to Germany – the first Nord Stream. The scheme was especially controversial since it would bypass Poland, Belarus and Ukraine, reducing those countries’ incomes, weakening their bargaining power and depriving them of badly needed transit fees. The €7.4bn pipeline construction costs were to be borne by the private German companies BASF and E.ON, and the majority Russian state-owned Gazprom.
This time, protests against the pipeline did not just come from the US, but from the states that had recently emerged from Soviet rule, such as Poland and Lithuania. Radosław Sikorski, then Poland’s defence minister, notoriously compared the plan to the 1939 Molotov-Ribbentrop non-aggression pact between Nazi Germany and the Soviet Union, which paved the way for the invasion of Poland.
Yet on 8 September 2005, 10 days before the election in which Schröder’s Social Democrats lost to Angela Merkel’s conservatives, the Nord Stream 1 contract was signed in Berlin by representatives of Gazprom, E.ON and BASF. Putin stood alongside Schröder at the signing ceremony.
Schröder has since been singled out for his role in creating Germany’s dependence on Russian energy, and getting very rich in the process. But the distinguished former German diplomat Wolfgang Ischinger recently argued that Schröder should not take the blame for giving the go-ahead to Nord Stream 20 years ago: most German politicians, he told the New York Times in April, did not question whether they were getting into an unhealthy dependence on Russian energy. In the article, Schröder made the same case: “It never occurred to anyone that this could become a problem. It was just a way of procuring gas for Germans, for Germany’s heavy industry, and also for the chemical industry, with fewer problems and disruptions.”
Thereafter it seemed, whatever the setbacks in German-Russian relations, nothing could shift the faith in trade – not Russia’s “peace enforcement operation” in Georgia in August 2008, not the Russian disruption of the gas pipelines in a dispute with Ukraine in January 2009, nor the news that Putin was planning to return to the presidency in 2012, replacing Dmitry Medvedev, in whom Frank-Walter Steinmeier had placed his faith. In 2011, the year Nord Stream finally opened, German total trade exports to Russia rose 34% to €27bn.
Then came the Russian invasion of Ukraine in February 2014. Initially, Russia’s incursion seemed to mark a turning point. Merkel’s condemnation was clear: the annexation of Crimea was contrary to international law. Sanctions were duly imposed, and German exports to Russia fell.
Following the 2014 invasion, serious German media such as Frankfurter Allgemeine Zeitung published lengthy articles looking at the options for how Germany could wean itself off its dangerous dependency on Russian energy. Many of the proposals, such as new liquid gas terminals to allow Germany to import gas from other countries such as Qatar and the US, are the same ones under discussion now, which shows how little actual diversification was achieved. When I spoke to a Qatari energy official last month, he recounted how they spent five years trying to break into the German energy market, only to find their route blocked at every turn.
Some German sanctions on Russia continued for many years, but the advocates of change through trade gradually re-established their ground. It seemed nothing Russia could do would shake their confidence. On 4 September 2015, at the Vladivostok economic forum, with Putin in attendance, an agreement was signed for the construction of the Nord Stream 2 gas pipeline on the Baltic seabed, which would vastly increase Germany’s reliance on Russian natural gas. Gazprom would also take over Germany’s gas storage business, thereby handing control of German energy reserves to a foreign power.
Various theories – some grubby, some metaphysical – have been proposed to explain Germany’s dogged refusal to see the dangers in its dependency on Russia. One argument places the blame on SPD politicians and civil servants who were allowed to move seamlessly between public office and Putin’s employment, and worked hard to manipulate the EU and German regulatory environment to suit Gazprom.
Then there is the question of the German-Russian industrial lobby, as symbolised by the German-Russian Forum, which was closely linked with, and partly funded by, German companies active in Russia. (The Forum was suspended after the invasion of Ukraine.) Its board of trustees consisted mainly of business people, often with economic interests in Russia. Its chairman, Matthias Platzeck, the former SPD minister president of Brandenburg, seemed genuinely shocked by Putin’s invasion: “I was wrong because until recently I thought what happened was unthinkable.”
The historian Sarotte said there is no clear evidence that business had exerted greater influence in politics in Germany than in other countries. Nevertheless, over the years, Russia showed an ability to suborn, and in some cases corrupt, the German political class. The Polish foreign minister, Zbigniew Rau, on a visit to Berlin in late May, called German Ostpolitik a “fiasco”. German rhetoric around the political value of interdependence, he said, crudely boiled down to gaining a competitive advantage through cheap energy.
Thomas Urban, examining the psychological roots of Ostpolitik, pinpoints two emotions in Germany’s relationship with Russia: nostalgia and guilt. He described to me “the memory of Bismarck, who saw the alliance with Russia as an anchor of stability in Europe. But then there was also the feeling of guilt because of the German attack on the Soviet Union in 1941, with millions of dead. It meant it was difficult to criticise the Red Army or the Soviet repression since to do so means you do not recognise the greatest crimes in history. It makes Germany blind to the black side of the Soviet Union. It also permits Putin’s propaganda by talking only of the Russian war dead, and not those that were killed in Ukraine and Belarus.”
Much of Germany’s belief in trade with Russia was born of wishful thinking. It led Steinmeier as foreign minister, for instance, to look constantly for signs of reform, ignoring foreign office advice that he needed a plan B in case Germany’s faith in Russia turned out to be ill-founded. In 2016, Steinmeier gave a deeply sincere, almost elegiac speech at Yekaterinburg University asking whether Germany and Russia were still capable of listening to one another. He admitted the annexation of Crimea had been a low point, but hoped dialogue was still possible, urging both sides not to turn their backs on one another.
It was the speech of a man who sensed the tide was going out, and who feared his belief in dialogue no longer matched the spirit of harsher times: “In political discussions, we sometimes hear opinions expressed by people who are not interested in the slightest in understanding others; people who have already made up their minds about the other side; people who don’t even bother reading because they think they already know the answer.” What he described as the “supposed antagonism” between the west and Russia, he feared was becoming entrenched and ideologically driven, running counter to the pursuit of diplomacy and peace.
Now, as Germany’s president and head of state, Steinmeier has been told by Ukrainian officials that his record as the promoter of Russian interests in Germany means he is not welcome in Kyiv at this time. It seems a shame. There would be no need for him to fall to his knees – as Willy Brandt did in Warsaw in 1970, apologising for his nation’s wartime crimes – but he could give a sober reflection on what precisely went wrong with Germany’s eastern policy for so long. For, one way or another, a reckoning is still needed.