What is behind Putin’s decision to cut off natural gas to some European countries?

Russia’s Gazprom says it is halting natural gas supplies to Poland and Bulgaria, heightening tensions between the Kremlin and Europe over energy and Russia’s invasion of Ukraine, and adding new urgency to plans to cut and then end the dependence of the continent on Russia as a supplier of oil. and gasoline

Here are key things to know about the natural gas situation in Europe:

What did Russia do?

State-controlled Russian energy giant Gazprom said it was cutting off Poland and Bulgaria because they refused to pay in Russian rubles, as President Vladimir Putin demanded.

European leaders say that natural gas contracts stipulate payment in euros or dollars and that cannot be suddenly changed on the one hand. Poland has taken long-term measures to protect itself from a cut, such as building an import terminal for liquefied gas that arrives by ship, and had planned to cancel its import deal with Gazprom at the end of the year anyway. Bulgaria says it has enough gas for now.

Russia cuts gas supplies to Poland and Bulgaria in escalation of war against Ukraine

Still, open questions about what the switch could mean have sent chills down the spine of energy markets, raising uncertainty over whether natural gas could be cut off to other European countries and deal a major hit to the economy.

The Kremlin has warned of that possibility if countries do not pay for energy supplies in rubles. But Russia also relies on oil and gas sales to finance its government, as sanctions have hit its financial system.

Under the new payment system, the Kremlin has said importers would have to open a dollar or euro account at Russia’s third-largest bank, Gazprombank, and then a second ruble account. The importer would pay the gas bill in euros or dollars and order 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 agree to Russian demands.”

What is Putin looking for?

Because Putin’s ruble payment order is aimed at “hostile 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 rationale for demanding rubles is unclear because Gazprom already has to sell 80 percent of its foreign revenue for rubles, so the boost to 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 discourage further sanctions against that bank.

If Putin was looking for a pretext to isolate the countries that have supported Ukraine, this could fill that role. Russia is still sending gas to Hungary, whose populist Prime Minister Viktor Orban accepted Putin’s payment deal, on the same pipeline system.

Simone Tagliapietra, an energy expert and senior fellow at the Bruegel think tank in Brussels, said: “By moving in this way, Russia is taking advantage of the fragmentation of the EU: it’s a divide and rule strategy… so we need a response. EU coordination.

What is the state of gas supply to Europe?

Coordinated US and European Union sanctions exempt payments for oil and gas. That’s a White House concession to European allies who rely much more on energy from Russia, which provides 40 percent of Europe’s gas and 25 percent of its oil at a cost of $850 million a day.

Many are unhappy that European utilities continue to buy power from Russia, which on average earned 43 percent of its annual government revenue from oil and gas sales between 2011 and 2020, according to the Energy Information Administration. from USA

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 soaring, served as a wake-up call that Europe’s reliance on Russian energy left her vulnerable. The war has meant a swift reassessment of decades of energy policy in which cheap gas from Russia supported Europe’s economy.

But cutting off Europe’s natural gas doesn’t benefit Russia either.

When it comes to oil, Russia could, in theory, ship oil in tankers to other places, such as India and China, countries that are energy-hungry and not participating in the sanctions.

But gas is something else. The gas pipeline system from the main deposits on the Yamal Peninsula in northern Russia to Europe does not connect with the gas pipeline leading to China. And Russia only has limited facilities to export liquefied gas by ship.

Could Europe Survive a Total Gas Cut?

Europe’s economy would struggle without Russian natural gas, though the impact would vary depending on how much countries use. Economists’ estimates vary widely as to the loss of growth for the European economy as a whole. Moody’s analysts said in a recent study that a complete power cut (oil and gas) would push Europe into a recession.

Germany, the continent’s largest economy, relies heavily 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 highs, making everything from groceries to raw materials more expensive, fueled by rising energy prices.

Bruegel’s think tank estimated that Europe would be 10% to 15% below normal demand to get through the upcoming winter heating season, meaning exceptional measures would have to be taken to reduce gas usage. .

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 cut Russian gas use as quickly as possible. They are asking for more liquefied natural gas, which arrives by ship; look for more gas from pipelines in places like Norway and Azerbaijan; accelerate the deployment of wind and solar energy; and promote conservation measures.

The goal is to cut Russian gas use by two-thirds by the end of the year and completely by 2027. Whether that goal can be met in practice remains to be seen. There is a limit to the supply of liquefied gas, with export terminals 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 percent of its gas from Russia, has struck deals to replace about half that amount from Algeria, Azerbaijan, Angola and Congo and is looking to increase imports from Qatar. And Europe is under pressure to replenish its underground reserves in time for next winter’s heating demand.

The situation is serious enough that Germany has declared an energy emergency early warning, the first of three stages.

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