Russian President Vladimir Putin is demanding payment in rubles for natural gas – or else. Germany is talking about gas rationing in the event of a shutdown. The prices of the fuel used to heat homes, generate electricity and power industry have gone through the roof.
Against the background of the Russian invasion of Ukraine, there is a lot of discussion about natural gas in Europe, to say the least.
Here are the most important things you should know:
WHAT DOES PUTIN PROPOSE?
Putin said importers of Russian gas must now pay in rubles. European leaders said no dice – the treaties say euros or dollars and neither side can change that abruptly.
Analysts say a currency switch would normally follow lengthy negotiations, with customers asking in return for their exposure to the volatility that would accompany paying the less-stable ruble.
The unanswered questions about what the change could mean have rocked energy markets and fueled uncertainty about whether Europe’s natural gas could be shut down and the economy hit hard. But Russia also relies on oil and sales to fund its government as sanctions have strained its financial system.
The Kremlin offered what could be seen as a loophole. Importers would only have to open an account in dollars or euros at a designated bank, and then a second account in rubles. The importer would pay the gas bill in euros or dollars and instruct the bank to exchange the money for rubles.
In any case, Kremlin spokesman Dmitry Peskov said on Friday that the change would not be immediate: “Payments for deliveries currently underway do not have to be made today, but sometime in late April or even early May.”
European leaders have dismissed the proposal as “blackmail” and say payments in dollars and euros will continue.
German officials would not discuss the implications of Putin’s decree other than saying they are looking into it. Economy Ministry spokeswoman Beate Baron said that Russia’s Gazprombank has been given 10 days to explain the procedure, “and of course we will take a close look at it again.”
A senior energy official at the European Commission tweeted that the European Union was coordinating “to set out a common approach.”
WHAT IS PUTIN AFTER?
The Kremlin says the change is necessary because Western sanctions have frozen its foreign exchange reserves. Because the measure targets importers in “unfriendly countries,” it can be seen as retaliation for sanctions that have cut off many Russian banks from international financial transactions and prompted some Western companies to go out of business in Russia.
The economic benefits for Russia are not clear. In theory, paying in rubles would increase demand for the currency and help the Kremlin prop up its exchange rate, which has recovered from its initial post-invasion slump. But gas exporter Gazprom already has to sell 80% of its foreign earnings for rubles, so the boost for the currency could be minimal.
The Kremlin hints that it wants to extend ruble payments to other commodities, such as metals.
One motive could be of a political nature, said Stefan Meister, head of the International Order and Democracy program at the German Society for Foreign Relations.
“Russia is not interested in stopping the gas, but it wants some kind of political victory,” Meister said. “She wants to show that Putin dictates the terms on which she exports gas.”
The move is partly aimed at Russian domestic audiences, Meister said, and Putin told his people, “Look, these are enemy states and now they have to pay under a different system.”
“So I think it’s also about getting support in the country and defining who the enemies are,” Meister said.
Another motive could be to protect the named bank, Gazprombank, from sanctions as it would be the channel for the payments that keep the gas flowing, Meister said. It is the third largest bank in Russia and, like Sberbank, the largest, is not cut off from the SWIFT international payment system.
WHAT IS THE STATUS OF THE GAS SUPPLY TO EUROPE?
Coordinated US and European Union sanctions exempt payments for oil and gas. This is a White House concession to European allies, who are far more dependent on energy from Russia, which supplies 40% of Europe’s gas and 25% of Europe’s oil.
Gas from Russia continued to flow into the European pipeline system on Friday, according to the pipeline operators’ websites.
Many aren’t happy that European utilities are still buying energy from Russia, which, according to the US Energy Information Administration, derived an average of 43% of its annual government revenues from oil and gas sales between 2011 and 2020.
This helped pay for the tanks and missiles used in the invasion. But it also means that Russia has good reasons not to cut off natural gas.
CAN EUROPE SURVIVE A GAS SHUTDOWN?
The European economy would struggle without Russian gas, although the impact would vary depending on countries’ consumption.
Germany, the continent’s largest economy, “is heavily dependent on Russian energy supplies,” said Monika Schnitzer, an economics professor at the University of Munich and a member of the country’s government-appointed council of economic experts.
“Stopping these deliveries carries the risk that the German economy will slide into recession with significantly higher inflation rates,” she said.
Inflation is already at record highs, making everything from food to commodities more expensive. It is being driven by rising energy prices, with Europe already facing an energy crisis before the war broke out.
The crisis has prompted governments and companies to scramble to round up supplies from other sources, but it would not be enough to cover what is now being consumed if Russian gas suddenly shut down.
Think tank Bruegel estimated that Europe would need 10% to 15% below normal demand to survive the next winter heating season, meaning extraordinary measures would need to be put in place to reduce gas consumption.
European leaders have said they cannot afford the consequences of an immediate boycott. Instead, they plan to reduce Russian gas consumption as soon as possible. They are ordering more liquefied natural gas, which comes by ship; Search for more gas from pipelines from Norway and Azerbaijan; accelerated use of wind and solar energy; and to promote conservation measures.
The goal is to reduce consumption of Russian gas by two-thirds by the end of the year and completely by 2027.
The situation is serious enough that Germany has issued an early warning of an energy emergency, the first of three stages.
In a full-blown emergency, state regulators must decide which companies will have their gas shut off to save homes and hospitals. Manufacturers of chemicals, glass, ceramics and galvanized metals use a lot of gas.
Rationing would hit a European economy already suffering from the effects of war and high energy prices, which have pushed inflation to a record 7.5%.