By sanctioning Russia, Germany has destroyed its business model. Now it faces an possible economic catastrophe
Germany just posted its first monthly trade deficit in three decades, and the head of the German Federation of Trade Unions has warned that key industries in the country may collapse permanently as a result of high energy prices and shortages. The golden era of the European Union’s economic locomotive has already come to an end.
For three decades, the competitiveness of German industries was enhanced by the import of cheap Russian energy, while Europe’s largest country also became a key export market for German technologies and manufactured goods. Over the previous centuries, a key theme of European politics was that the productive power of Germany and the immense resources of Russia could create the main pillar of power on the European continent.
The relationship between Germany and Russia has subsequently always presented a dilemma: A partnership between the two giants would create a challenge to rival powers such as Britain and the US, while German-Russian conflicts have previously turned Central and Eastern Europe into what the British geographer James Fairgrieve referred to as the “crush zone.”
The current NATO-Russia proxy war in Ukraine demonstrates that this dilemma from the 19th and 20th centuries remains relevant. Although the 21st century presents a key difference in that the world is no longer Europe-centric.
Moscow’s objective for a Russian-German partnership was to construct an inclusive Greater Europe, although this initiative has now been replaced with a Russian-Chinese partnership to construct a Greater Eurasia. The export of Russian energy and other natural resources is being redirected to the East, while Russia increasingly imports vital technologies and industrial products from that source as well.
A case study of self-harm
The economic crisis in Germany is a fascinating case study of self-harm. After Moscow supported German reunification in the early 1990s, there was a lack of reciprocation as Bonn, then Berlin, abandoned the agreements with Moscow for a pan-European security architecture based on “sovereign equality” and “indivisible security.” Instead, Germany supported NATO expansionism to create a pan-European system, without the continent’s largest state.
As a result, the centuries-long historical rivalry for influence in Central and Eastern Europe was revived between Germany/NATO and Russia over where the new European dividing lines would be drawn. After Berlin supported the Orange Revolution in 2004 and the Kiev Maidan in 2014 to install pro-West/anti-Russian governments, Ukraine became a less reliable transit corridor for Russian energy. Yet, Germany undermined its own energy security by opposing several Russian initiatives to diversify transit routes. Berlin repeatedly threatened to cut reliance on Russian energy and thus incentivised Russia to search for export markets in the East.
The Minsk-2 agreement in February 2015 represented a compromise to resolve the conflict that followed the Western-backed coup in Ukraine the year before. Berlin negotiated the peace agreement, although it then played along with American efforts to sabotage or “renegotiate” the agreement for the next seven years. As NATO Secretary-General Jens Stoltenberg publicly admitted recently, the military bloc was using this time to prepare for conflict with Russia.
When Moscow responded by recognising the independence of Donbass and attacking Ukraine in February 2022, Germany cancelled the Nord Stream 2 pipeline, seized control of Gazprom’s subsidiaries on its territory, and announced sanctions on Russian energy. For years, there has been speculation that Russia would use the feared “energy weapon” by cutting energy supplies to Germany, although in the end there was no need to do so as Germany inflicted this economic pain on itself.
Escalation control in the multipolar era
Escalation control entails the ability to raise tensions to impose costs on adversaries and de-escalate them when the desired concessions have been obtained. In the unipolar era, when there was solely one centre of power, the collective West largely enjoyed escalation dominance as it could raise the pressure until its adversaries were compelled to capitulate. NATO expansionism, strategic missile defence and asymmetrical economic interdependence enhanced this power against Russia.
However, in a multipolar world, it is not possible to base European security on the principle of expanding a hostile military bloc toward Russian borders and then expect that Moscow will simply adapt to these new realities.
In the emerging world order, sanctioning Russia merely entails surrendering an immense market share to states such as China and India as opposed to forcing Moscow into submission. While Germany is scrambling to find expensive energy to replace cheap Russian fuels, Moscow is now selling its output at a discount to China and India as it transitions from Greater Europe to Greater Eurasia.
Consequently, German industries will lose competitiveness vis-à-vis their Asian counterparts.
While Russia can diversify its energy exports, the West’s ability to diversify its energy imports has been undermined by other policies during the unipolar era. Western sanctions against Venezuela and Iran have reduced their ability and willingness to support the West in its time of need. Similarly, the invasion of Libya and subsequent destabilisation of countries such as Nigeria has reduced the ability of African states to fill the gap.
Meanwhile, the US has been confiscating Syrian oil, although Syrian energy exports would be much higher if the US would end its illegal occupation of the country’s territory.
Doubling down on failure
The collective West is facing an economic calamity, driven by unsustainable debt, runaway inflation, declining competitiveness, and now also an energy crisis on top. As escalation hurts Germany more than Russia, logic would suggest Germany might pursue de-escalation by revisiting and reconsidering the decision to abandon the pan-European security agreements that were made in the early stages of the unipolar era.
Instead, reason has gone out the window as leaders in Berlin, consumed by ideological fervor, double down on failed policies.