How worried should Europe be as Russia starts cutting off gas supplies?

Analysis: Putin is determined to use resource as a weapon, as shown in move to cut off Poland and Bulgaria

The unavoidable truth looming over Europe’s response to the invasion of Ukraine is that Russian gas heats the continent’s homes and powers its industries.

While European leaders have vowed to wean themselves off Kremlin-controlled supplies, both of gas and oil, the reality is that this is very hard to do in short order. There will be at least one more cold winter to come before major energy-hungry economies that rely heavily on Russia, such as Germany and Italy, can tap other sources.

Knowing this, Vladimir Putin fired a shot across the bows this week. Having issued a decree that foreign buyers must start paying for their gas in roubles, he made Poland and Bulgaria the laboratory mice for the experiment.

Both countries, the Kremlin announced, would no longer be receiving Russian gas through the Yamal pipeline from Siberia after they refused to accede to the demand. The decision could usher in a new phase of the war, with Russia making good on Putin’s threat to use its vast gas reserves as a weapon against Europe.

Why Poland and Bulgaria?

The two countries appear to have been chosen carefully. Poland gets about 45% of its natural gas from Russia, according to 2020 figures from Eurostat. That’s not sky-high by European standards but Poland happens to be among the countries that have been most politically and militarily supportive of Ukraine.

Bulgaria poses less of a threat to the Russian war effort but is more reliant on its gas, which accounts for about 73% of Bulgarian demand.

Targeting these two countries allows Putin to test the power of his resource weapon on two different types of opponents – one that poses a genuine threat and another that looks more vulnerable and could serve as a salutary lesson to others in a similar position.

Can they cope?

Both have said they can and the facts appear to bear that out. Poland’s contract with Gazprom is up at the end of the year anyway and it has been investing in alternative sources for some time.

“Poland is right next to Germany and can import from there,” said Tom Marzec-Manser, the lead European gas analyst at the energy consultancy ICIS. “It has its own liquefied natural gas (LNG) import terminal and has a new pipeline coming indirectly from Norway online later this year. It has also built up storage, half-expecting that this might happen.”

Bulgaria’s situation is slightly less favourable but it does have a second pipeline connection to Greece coming on stream later this year. A Bulgarian entity recently booked an LNG cargo to arrive at a Greek port, one analyst told the Guardian. This could signal a plan to source supply from elsewhere.

What will other countries do?

As Marzec-Manser points out, Putin has made it clear his threat to cut off gas supplies to “unfriendly” countries, unless they pay in roubles, was not totally empty. “There is proof it wasn’t a bluff,” he said.

The move means countries and companies that buy Russia’s gas have a decision to make about whether they agree to pay in its currency. Hungary, which has proved a rare European friend to the Kremlin, has already said it will toe the Russian line. At least four private companies have agreed to the Kremlin’s demands, according to Bloomberg.

Latvia, which got 100% of its gas from Russia in 2020, has vowed along with Lithuania and Estonia to stop buying any. An LNG import terminal in Lithuania is a key alternative, particularly for these relatively small economies – the first in Europe to end Russian imports.

The European Commission has said countries should not pay in roubles, and that complying with Russia’s request could breach EU sanctions. However, under Russia’s demands, payments would be made to Gazprombank in euros or dollars, before being converted. In theory, this would still breach sanctions. But last week the commission indicated contracts could be tweaked to make them compliant.

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This could be good news for major economies such as Italy and Germany. The latter gets 60% of its gas from Russia and has said it will take a while to reduce that to zero.

Will gas prices go up yet again?

A lot will depend on whether Russia escalates. The Dutch TTF price for gas delivery in May, a benchmark for Europe, began the week at €92 and touched €115 on Wednesday, a rise of 20%, in response to the Kremlin cutting off Poland and Bulgaria. The price settled back to €107 as of Wednesday afternoon, still 15% above the level at the start of the week.

While UK energy suppliers buy on the British wholesale market, over time any rise in European prices will hit UK companies too, which could lead to higher prices for UK consumers.

However, for a much greater shock wave to go through Europe, huge gas buyers such as Italy’s Eni and Germany’s Uniper would have to be cut off. That would have a huge impact on Russian revenues and it seems likely that some form of compromise on payments, like the EC has hinted at, is more likely.

Contributor

Rob Davies

The GuardianTramp

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