Russia’s Gazprom says it stops working normallyEscalating tensions between the Kremlin and Europe over energy and the Russian invasion of Ukraine — adding new urgency to plans to reduce and then end the continent’s dependence on Russia as a supplier of oil and gas.
Here are key things to know about the natural gas situation in Europe:
What did Russia do?
Russia’s state-controlled energy giant Gazprom said it had decided to cut off Poland and Bulgaria because they refused to pay in Russian rubles, as demanded by President Vladimir Putin.
European leaders say natural gas contracts provide for payment in euros or dollars and that cannot be suddenly changed unilaterally. Poland has taken long-term steps to insulate itself from the disruption, such as building an import terminal for ship-based LNG, and planned to cancel the import deal with Gazprom at the end of the year anyway. Bulgaria says it has enough gas for now.
However, open questions about what the change could mean has sent energy markets reeling, adding to the uncertainty over whether natural gas could be cut off from other European countries and causing a major blow to the economy.
“President Putin’s decision that gas payments by ‘unfriendly’ countries must be denominated in rubles increases the risk of cutting off supplies to other European countries when payments are due in the next few weeks,” Edward Gardner of Capital Economics said in a statement.
The Kremlin has warned of this possibility if countries do not pay for energy supplies in rubles. But Russia also relies on oil and gas sales to fund its government as sanctions have strained its financial system.
Under the new payment system, the Kremlin said importers would have to open an account in dollars or euros at Russia’s third largest bank, Gazprombank, and then a second account in rubles. The importer will pay the gas bill in euros or dollars and instruct the bank to exchange money for rubles.
European Commission President Ursula von der Leyen said on Wednesday that paying in rubles violated European Union sanctions and that companies with contracts “should not respond to Russian demands”.
What next for Putin?
Since Putin’s demand for ruble payments is aimed at “unfriendly countries”, it can be seen as retaliation for the sanctions that have prevented many Russian banks from international financial transactions and prompted some Western companies to abandon their business in Russia.
“Gazprom’s decision to suspend deliveries to Poland and Bulgaria as of today for their refusal to pay for Russian gas in rubles represents an escalation in Russia’s use of gas as political leverage,” Gardner wrote.
The economic motives for the ruble claim are not clear because Gazprom already has to sell 80% of its foreign earnings for the ruble, so the strengthening of the Russian currency may be minimal. One of the motives may be political, to show the public at home that Putin can dictate the terms of gas exports. And by claiming payments through Gazprombank, this move could discourage further sanctions against this bank.
If Putin is looking for an excuse to isolate the countries that have supported Ukraine, it could do the job. Russia still sends gas to Hungary – whose populist Prime Minister Viktor Orban has approved Putin’s payment arrangements – on the same pipeline system.
“The Russian move is certainly a reaction to increased levels of Western support for Ukraine,” analysts at Eurasia Group, a political risk consultancy, said in a report. “It indicates that Putin is now ready to put revenue on the line amid expanding NATO’s military aid to Ukraine and amid stronger US rhetoric about helping Ukraine win the war.”
“In this way, Russia is benefiting from the fragmentation of the EU – it is a divide-and-conquer strategy … which is why we need a coordinated response from the EU,” said Simone Tagliapietra, an energy expert and senior fellow at the Bruegel Research Center in Brussels.
What is the state of Europe’s gas supply?
Coordinated US and EU sanctions exempted from oil and gas payments. This is a concession by the White House to European allies that rely more on energy than Russia, which provides 40% of European gas and 25% of its oil at a cost of $850 million a day.
Not many are happy that European utilities are still buying energy from Russia, which on average got 43% of its annual government revenue from oil and gas sales between 2011 and 2020, according to the US Energy Information Administration.
Russia’s decision to cut gas sales outside of long-term contracts before the war, which contributed to a winter energy crisis that sent prices higher, was a wake-up call as Europe’s dependence on Russian energy left it vulnerable. The war meant a rapid reassessment of decades of energy policy in which cheap gas from Russia supported the European economy.
But cutting off natural gas from Europe does not benefit Russia either.
When it comes to oil, Russia could theoretically ship the oil by tankers in other places, such as India and China, energy-hungry countries that don’t participate in the sanctions.
But gas is another matter. The gas pipeline system from the main deposits of the Yamal Peninsula in northern Russia to Europe is not connected to the pipeline to China. Russia has limited facilities to export LNG by ship.
Can Europe survive a total gas cut?
The European economy would struggle without Russian natural gas, although the effect could vary based on how many countries use it. Economists’ estimates differ significantly from the lost growth of the European economy as a whole. Analysts at Moody’s said in a recent study that a total energy cut – gas and oil – would push Europe into recession.
Germany, the continent’s largest economy, is highly dependent on Russian energy. Its central bank said a full cut could mean 5 percentage points of lost economic output and higher inflation.
Inflation is already at record levels, making everything from groceries to raw materials more expensive, driven by higher energy prices.
The Bruegel think tank has estimated that Europe will be 10% to 15% below normal demand to get through the next winter heating season, which means that extraordinary measures will have to be taken to reduce gas use.
“Even the most ambitious plan envisages that the EU will remain dependent on gas from Russia for at least another two or three years,” analysts at Gavekal Research said in a report. “If these supplies are cut off tomorrow, the economies of Western Europe including Germany and Italy will face severe energy deficits.”
Gavikal added that Russia’s move to abruptly shut down the gas tap would lead to industrial shutdowns in Europe, supply chain disruptions, and the risk of mass layoffs.
What is Europe doing to reduce dependence on Russian gas?
European leaders said they could not afford the immediate consequences of a boycott. Instead, they plan to reduce the use of Russian gas as quickly as possible. They are asking for more LNG that comes by ship; searching for more gas from pipelines from places like Norway and Azerbaijan; accelerating the deployment of wind and solar energy; and pay conservation measures.
The goal is to reduce Russian gas use by two-thirds by the end of the year and completely by 2027. It remains to be seen whether this goal can be achieved in practice. There is a limit to the supply of liquefied gas, as the export terminals are operating at full capacity.
Germany, which does not have an import terminal, is looking to build two – but that will take years. Italy, which gets 40% of its gas needs from Russia, has reached deals to offset about half of that amount from Algeria, Azerbaijan, Angola and Congo and is looking to increase imports from Qatar. Europe is under pressure to restock its underground reserves in time for heating demand next winter.
The situation is so serious that Germany has declared an early warning of an energy emergency, the first of three phases.