‘Unacceptable’ Russia Gas Cuts Force EU Energy Reckoning

The EU is “prepared” for a scenario in which Vladimir Putin threatens the bloc’s energy security, Ursula Von Der Leyen said Wednesday, calling the Kremlin’s decision to halt gas flows to Poland and Bulgaria “unjustified and unacceptable.”

As I reminded readers Tuesday, Moscow did develop what some commentators initially suggested was a workable mechanism for European buyers following Putin’s (wholly unworkable) demand that all fuel payments be made in rubles. It wasn’t straightforward, though, and it arguably violated the spirit of the sanctions if not the letter.

A source close to Gazprom reiterated all of that on Wednesday, telling Bloomberg that Moscow’s compromise payment mechanism didn’t run afoul of EU sanctions. Nevertheless, Poland and Bulgaria refused to use it, so when their payments came due on Tuesday, Russia cut off supplies.

Three weeks of conflicting headlines and bellicose brinksmanship emanating from both sides made this inevitable. The standoff was destined to dead-end in confused ultimatums and, ultimately, supply disruptions. The question now is whether this was merely a case of both sides taking risks they can afford to take (Poland and Bulgaria already moved to reduce their reliance on Russian energy, and Moscow can do without that revenue, at least) in order to make a larger point, or the opening salvo in a series of dangerous escalations. Either way, Europe is now compelled to reckon with the prospect of a sudden halt.

Of course, if we’re being honest (and at least some EU lawmakers are) buying any Russian energy in any currency violates the spirit of the sanctions. This entire debate is an absurd charade — a flagrant example of expediency subjugating principle. Europe continues to buy gas from a country which triggered the worst regional security crisis since World War II. And the Kremlin continues to sell gas to a bloc that’s ostensibly determined to impoverish Russia.

According to the same Gazprom source, 10 European gas companies have opened the requisite accounts at Gazprombank, and four have already made payments using the dual-account system. One assumes Brussels is aware of that. On Wednesday, Austrian Chancellor Karl Nehammer said OMV will continue to pay for Russian gas deliveries in euros while adhering to EU sanctions.

The state-backed Austrian Energy Agency said the country can eliminate Russian natural gas imports — in a half-decade. According to a report, efficiency gains, supply diversification and synthetics could help replace equivalent flows of ~34 TWh annually by 2027. For now, Austria depends on Putin for around four-fifths of Austrian demand.

IEA Executive Director Fatih Birol voiced “strong support” for Poland’s and Bulgaria’s response to what he described as the “latest weaponization of energy supplies.” I suppose I’d note the obvious: Moscow doesn’t issue a reserve currency, and it doesn’t control the global financial system. So, when the issuers of reserve currencies and the nations that do control the system weaponize those currencies and that system against Russia, the Kremlin’s only real option (short of nuclear confrontation) is to weaponize energy.

Apparently, additional gas cutoffs aren’t imminent. The Gazprom source said the next payments come due in the latter half of May. Germany is “monitoring the situation very closely,” according to Berlin. It’s not obvious what that means. Either Germany intends to comply or it doesn’t. It sounds as though European countries are indeed using Gazprom’s workaround, but aren’t keen to make big deal of it considering the bad optics.

Meanwhile, the ECB’s Madis Muller told a press conference “the risk of an economic contraction in the euro area is more likely to be small,” even as a halt to Russian gas supplies would have a negative impact. The outlook for the bloc’s economy, he said, is “fragile.”


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8 thoughts on “‘Unacceptable’ Russia Gas Cuts Force EU Energy Reckoning

  1. The message here is clear, find any way to work around the sanctions that you can. If you don’t, you’ll be out in the literal cold while while everyone else continues business as usual.

  2. To “note the obvious” is to fall of the cliff of admitting hard truths, of exercising power sans direct military confrontation. Could futures markets be used to check extremes of ego? Capitalism v ego, a worthy battle? Just what we need, some new derivatives.

  3. Pre-war, Europe bought about 50% of Russian oil and 74% of Russian NG. At today’s prices, that would be about $85BN/yr and $47BN/yr respectively. Hopefully my math is right.

    If Europe entirely bans Russian oil, that will be a bigger financial hit to Russia than a complete ban on Russian NG. Russia cannot replace the European volumes with sales to other regions, because of insufficient pipeline and tanker capacity and sanction impacts on tankers. Russia lacks oil storage, and if oil wells are shut down, some production capacity will be permanently lost.

    Europe seems readier to do without Russian oil than to do without Russian gas (ref yesterday’s comments by Germany). So that is what they should do.

    As for that Russian gas, if Gazprom is willing to unilaterally change terms, Europe should be as well. Suppose Germany and the other large European gas buyers formed a consortium, fill gas storage to the brim while rationing use, then start capping the price they will pay for Russian gas? E.g. not $7.20, but $6.00. Russia would have to choose between $6.00 and $0.00, Europe would have to choose between supply and no supply, it would be interesting to see who blinks first. Best to do this in summer, when heating gas demand is low (Germany’s greatest dependence on Russian gas is for residential heating, not electricity generation).

    Sure, it would be morally righter for Europe to cut off Russian gas, but in the meantime . . .

    1. One of the reasons oil is easier to wean is because it’s easier to launder. Have an intermediary buy it and cut it with nonrussian stock… Essentially, if a cargo contains under 50% Russian oil it ‘counts’ as not being Russian. This also goes for oil products such as Latvian blend diesel. One can claim to be buying no Russian oil but in reality be buying large quantities of 49.9% Russian crude/product.

      As far as I’m aware, no such practice yet exists for natural gas.

      1. That too, but more fundamentally oil is also easier to transport across oceans. The infrastructure for LNG is not as developed. Germany has no LNG import capacity, US LNG export is near capacity. Hence oil price is more similar globally, vs the massive differential between NG price in US vs Europe.

    2. The wells that I have worked around produce oil, gas and water. If the well is shut in due to unavailable oil storage capacity, no gas is produced. Do you know what percentage of Russian wells produce just gas? Not looking for an argument, I just wonder if an oil only embargo might have unintended consequences to gas supply.

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