Russia’s Gazprom says it is halting natural gas supplies to Poland and Bulgaria, escalating tensions between the Kremlin and Europe over energy and Russia’s invasion of Ukraine — and lending to plans to reduce and then end the continent’s dependence on Russia as an oil supplier new urgency and natural gas.
Here are the most important things you should know about the natural gas situation in Europe:
What has Russia done?
State-controlled Russian energy giant Gazprom said it was cutting off Poland and Bulgaria for refusing to pay in Russian rubles, as President Vladimir Putin had requested.
European leaders say natural gas contracts require payment in euros or dollars, and that cannot be suddenly changed by one party. Poland has long-term safeguards against a shutdown such as building an import terminal for LNG that comes by ship and had already planned to cancel its import contract with Gazprom by the end of the year. Bulgaria says it has enough gas for now.
Still, the unanswered questions about what the change could mean have rattled energy markets and increased uncertainty over whether natural gas could be cut off to other European countries and the economy hit hard.
“President Putin’s decree that gas payments from ‘unfriendly’ countries must be denominated in rubles increases the risk that supplies to other European countries could be disrupted when payments are due in the next few weeks,” said Edward Gardner Capital Economics in a Review Report.
The Kremlin 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 with Russia’s third-largest bank, Gazprombank, 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.
European Commission President Ursula von der Leyen said on Wednesday that paying in rubles violates European Union sanctions and that companies with contracts “should not give in to Russian demands”.
What does Putin want?
Because Putin’s ruble payment order is aimed at “unfriendly countries,” it can be seen as retaliation for sanctions that have cut off many Russian banks from international financial transactions and forced some Western companies to go out of business in Russia.
“Gazprom’s decision to suspend supplies to Poland and Bulgaria from today over its refusal to pay for Russian gas in rubles marks an escalation in Russia’s use of gas as a political bargaining chip,” Gardner wrote.
The economic motives behind the demand for rubles are not clear, as Gazprom already has to sell 80% of its foreign earnings for rubles, so the boost for the Russian currency could be minimal. One motive could be political, to show the public at home that Putin can dictate the terms of gas exports. And by requiring payments through Gazprombank, the move could prevent further sanctions against that bank.
If Putin was looking for an excuse to cut off countries that have supported Ukraine, it could serve that function. Russia continues to supply gas to Hungary via the same pipeline system, whose populist Prime Minister Viktor Orban approved Putin’s payment agreement.
“The Russian move is almost certainly in response to increasing Western support for Ukraine,” analysts at Eurasia Group, a political risk consultancy, said in a report. “It signals that Putin is now willing to sacrifice revenues in the face of expanded NATO military aid to Ukraine and stronger US commitments to help Ukraine win the war.”
Simone Tagliapietra, energy expert and senior fellow at the Bruegel think tank in Brussels, said: “Russia is exploiting EU fragmentation in this way – it’s a divide and conquer strategy… that’s why we need a coordinated EU response.”
What about the gas supply in Europe?
Coordinated US and European Union sanctions exempt payments for oil and gas. This is a White House concession to European allies, who are much more dependent on energy from Russia, which supplies 40% of Europe’s gas and 25% of Europe’s oil at a cost of $850 million a day.
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.
Russia’s decision to reduce gas sales outside of long-term contracts before the war, contributing to a wintry energy crisis that drove up prices, was a wake-up call that Europe’s dependence on Russian energy left it vulnerable. The war has meant a rapid reassessment of decades of energy policies, in which cheap gas from Russia underpinned the European economy.
MoneyWatch: Europe’s dependence on Russian energy helps finance war in Ukraine 04:25
But even Russia is of no use if Europe is cut off from natural gas.
When it comes to oil, Russia could theoretically ship oil by tanker elsewhere, such as to India and China, countries that are energy-hungry and don’t participate in sanctions.
But gas is another matter. The gas pipeline system from large deposits on the Yamal Peninsula in northern Russia to Europe is not connected to the pipeline leading to China. And Russia has limited ability to export liquefied gas by ship.
Could Europe Survive a Full Gas Shutdown?
The European economy would struggle without Russian natural gas, although the impact would vary depending on countries’ consumption. Economists’ estimates of lost growth for the European economy as a whole vary widely. Analysts at Moody’s said in a recent study that a complete shutdown of energy supplies – gas and oil – would plunge Europe into recession.
Germany, the continent’s largest economy, is heavily dependent on Russian energy. The central bank said a full shutdown could mean 5 percentage points less economic output and higher inflation.
Inflation is already at record highs, making everything from food to commodities more expensive, driven by soaring energy prices.
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.
What is Europe doing to reduce dependence on Russian gas?
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; Finding more gas from pipelines from places like 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. It remains to be seen whether this goal can be achieved in practice. LPG supplies are limited as export terminals are at full capacity.
Germany, which has no import terminal, wants to build two – but that will take years. Italy, which gets 40% of its gas from Russia, has reached agreements to replace about half of that amount from Algeria, Azerbaijan, Angola and Congo, and intends to increase imports from Qatar. And Europe is under pressure to replenish its underground reserves in time for next winter’s heating needs.
The situation is serious enough that Germany has issued an early warning of an energy emergency, the first of three stages.