• Austria's economy is shrinking, with inflation outpacing the EU average
• EU aims to phase out Russian gas by 2027, but Austria still heavily reliant
• Election outcome may influence speed of energy diversification

VIENNA, Sept 23 (Reuters) - The government that takes power in Austria after next Sunday's general election will face growing pressure to diversify its energy supply away from dependence on Russian gas, just as the economy is stuck in reverse gear.

No party is expected to win enough seats to win an outright majority. Opinion polls give a slim lead to the opposition far-right, Russia-friendly Freedom Party (FPO), and the result could influence the speed of the energy transition.

Since Moscow invaded Ukraine in 2022, the European Union has moved to rapidly replace Russian gas imports. Alternative energy sources are generally more expensive, adding to costs already stoked by the inflationary impact of the pandemic and the war.

Austria is among the most reliant on Russian gas within the bloc, and in the past two years its inflation has outstripped the EU average, even as the economy has shrunk, dragged down by a slump in its top trade partner Germany, which is grappling with the energy transition and competition from China.

"Other countries aren't happy Austria is still consuming such large volumes of Russian gas", said Stefan Schiman-Vukan, senior economist at the Austrian Institute of Economic Research.

"The political pressure to withdraw from it is high."

The EU has committed to phasing out Russian gas by 2027, and Austria's Greens-run energy ministry wants to accelerate the process. Nevertheless, in July Austria was still drawing 83% of its imported gas from Russia. By comparison, in 2023 the proportion of EU gas imported from Russia had fallen to 15%.

The Greens, junior players in the government, have led efforts to tap alternative supplies. Their partner, Chancellor Karl Nehammer's conservative Austrian People's Party (OVP), has also pledged to wean the country off Russian gas.

Pointing to supplies from Norway and elsewhere, the energy ministry said it had taken steps to make Austria independent of Russian gas in the long-term, noting the country had sufficient import capacity for non-Russian gas via Germany and Italy, and that its large gas storage facilities were more than 90% full.

"The high dependence on Russian gas supplies is a major economic and security risk for Austria," the ministry said in a statement. "It is therefore essential for our country's security to further reduce gas consumption and stop buying Russian gas."

The FPO says Russian gas must remain part of Austria's energy mix, although its lead is narrowing.

Opinion polls show FPO support at around 27-29%, with its lead slipping to as little as one point more than the OVP, with three more parties forecast to win close to 10% or more.

The other parties have rejected serving under FPO leader Herbert Kickl, which could open the door to coalitions more committed to distancing themselves from Russia. At present, it looks highly likely a post-election coalition will feature the OVP.

Whoever governs will have to grapple with an economy that the central bank has forecast will shrink by 0.7% this year, contracting for a second year running.

DIVERSIFICATION

Efforts to diversify energy supply are gathering pace.

Vienna's main power company Wien Energie said this month it would ditch Russian gas from 2025.

But the risk of an energy crunch has loomed since Ukraine said it would not extend a deal with Gazprom (GAZP.MM) , opens new tab expiring at the end of 2024 that transits Russian gas to Austria.

A sudden stop to Russian supplies would likely push up wholesale gas prices by about 20% for two to six months, said Walter Boltz, former head of utility regulator E-Control.

Austria can manage, officials say, pointing to a recent government-commissioned study that states imports through Italy and Germany, as well as its reserves, could cover its needs.

Politicians are eager to spur demand or find extra resources to lift the economy. The FPO and OVP are pledging tax cuts, with the centre-left Social Democrats, running third in polls, proposing wealth and inheritance taxes.

"Austria is the prime example of what happens if inflation is too high, and of the negative consequences," said Gunter Deuber, chief economist at Raiffeisen Bank International. "If you're uncompetitive in terms of costs and wages, people stop investing, it becomes less attractive to produce in Austria."

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https://www.reuters.com/markets/europe/austria-election-brings-into-focus-russian-gas-habit-sputtering-economy-2024-09-23/