What’s behind Russia cutting off natural gas to Bulgaria and Poland?

Gazprom of Russia says it stops naturally gas supply in Poland and Bulgariaincreasing tensions between the Kremlin and Europe over energy and the Russian invasion of Ukraine, and adding new urgency to plans to reduce and then end dependence on the Russian mainland as a supplier of oil and gas.

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

What did Russia do?

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

European leaders say natural gas contracts indicate payment in euros or dollars and that cannot be suddenly changed on the one hand. Poland has taken long-term measures to isolate itself from a cut, such as the construction of a liquefied gas import terminal arriving by ship, and planned to cancel its import agreement with Gazprom in end of the year anyway. Bulgaria says it has enough gas at the moment.

However, open-ended questions about what the change could mean have shaken energy markets, raising uncertainty about whether natural gas could be cut off in other European countries and have a major impact on the economy.

President Putin’s decree that gas payments made by “unfriendly” countries should be denominated in rubles increases the risk that the supply could be cut off in other European countries when payments have to be made in the coming weeks said Edward Gardner of Capital Economics. report.

The Kremlin warned of this possibility if countries do not pay for the supply of energy in rubles. But Russia also relies on oil and gas sales to fund its government, as sanctions have tightened its financial system.

With the new payment system, the Kremlin has said that importers should set up an account in dollars or euros in 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 order the bank to exchange the money for rubles.

European Commission President Ursula von der Leyen said on Wednesday that paying in rubles violates EU sanctions and that companies with contracts “should not accede to Russian demands”.

What is Putin looking for?

As Putin’s order of payments in rubles is aimed at “hostile countries”, it can be seen as retaliation for the sanctions that have cut off many Russian banks from international financial transactions and led some Western companies to abandon their business in Russia.

“Gazprom’s decision to suspend deliveries to Poland and Bulgaria from today for its refusal to pay for Russian gas in rubles marks an escalation in the use of gas in Russia as a political lever,” Gardner wrote.

The economic reasons for demanding rubles are unclear because Gazprom already has to sell 80% of its foreign revenue for rubles, so the boost to the Russian currency could be minimal. One reason could be political, to show the home audience that Putin can dictate the terms of gas exports. And by demanding payments through Gazprombank, the measure could discourage further sanctions against this bank.

If Putin were looking for a pretext to cut back on countries that have supported Ukraine, this could fulfill that function. Russia is still sending gas to Hungary, whose populist prime minister Viktor Orban has accepted Putin’s payment agreement with the same pipeline system.

Simone Tagliapietra, an energy expert and senior member of the Bruegel think tank in Brussels, said that “in this way, Russia is taking advantage of the fragmentation of the EU: it is a strategy to divide and govern … that’s why we need a coordinated EU response “.

What is the state of gas supply in Europe?

Coordinated US and European Union sanctions exempt oil and gas payments. This is a concession from the White House to Europe’s much more energy-dependent allies in Russia, which supplies 40% of Europe’s gas and 25% of its oil at a cost of $ 850 million a year. day.

Many are unhappy that European companies continue to buy energy in Russia, which averaged 43% of its government’s annual revenue from oil and gas sales between 2011 and 2020, according to the Information Administration of Russia. US energy.

Russia’s decision to cut gas sales off long-term contracts before the war, contributing to a winter energy crisis that pushed up prices, served as a warning that dependence on Europe of Russian energy left her vulnerable. The war has led to a rapid re-evaluation of decades of energy policy in which cheap Russian gas has supported the European economy.

But cutting Europe’s natural gas does not benefit Russia either.

As for oil, Russia could, in theory, send tanker oil to other places, such as India and China, which are energy-hungry and do not participate in sanctions.

But gas is something else. The pipeline system from the main sites on the Yamal Peninsula in northern Russia to Europe is not connected to the pipeline leading to China. And Russia has only limited facilities to export liquefied gas per ship.

Could Europe survive a total gas cut?

Europe’s economy would struggle without Russian natural gas, although the impact would vary depending on how much countries use it. Economists’ estimates vary widely in terms of the loss of growth of the European economy as a whole. Moody’s analysts say in a recent study that a total power outage – gas and oil – would lead Europe to a recession.

Germany, the continent’s largest economy, is heavily dependent on Russian energy. Its central bank said a total cut could mean 5 percentage points of economic output loss and higher inflation.

Inflation is already at record highs, making everything from food to raw materials more expensive driven by rising energy prices.

The Bruegel think tank estimated that Europe would be between 10% and 15% less than normal demand to overcome the next winter heating season, which means that exceptional measures should be taken to reduce energy consumption. gas.

What is Europe doing to reduce its dependence on Russian gas?

European leaders have said the consequences of an immediate boycott cannot be allowed. Instead, they plan to reduce the use of Russian gas as quickly as possible. They demand more liquefied natural gas, which arrives by ship; looking 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 reduce the use 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. There is a limit to the supply of liquefied gas, with the export terminals running at full capacity.

Germany, which has no import terminal, wants to build two, but that will take years. Italy, which obtains 40% of its gas from Russia, has reached agreements to replace about half of that amount in Algeria, Azerbaijan, Angola and Congo and seeks 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 for Germany to declare an early warning of an energy emergency, the first of three stages.