‘Pure Blackmail’: Russia Escalates Energy War

The energy wars were above the fold again on Wednesday. Not that they ever retreated to the back page.

Gazprom cut flows to Denmark as the country voted on dropping a 30-year-old EU security and defense opt-out in response to Russia’s actions in Ukraine.

“Gazprom has maintained its demand that [we] pay for gas supplies in rubles,” Denmark’s Orsted said, adding that it’s “under no obligation to do so under the contract, and the company will continue to pay in euros.”

In a statement, Gazprom said it “completely halted” supplies to Orsted after the company refused to participate in the new settlement scheme the Kremlin created to facilitate payments. Gazprom reiterated that fuel payments must be made “in line with the presidential decree.”

The payment mechanism, you’re reminded, is a ridiculous charade. It’s structured in such a way that European buyers can claim they made payments in euros, while Vladimir Putin can simultaneously say the same payments were remitted in rubles. One of those two claims can be true, but not both. Although major European buyers begrudgingly acquiesced, some small-volume buyers and those with expiring contracts decided to walk away with their dignity intact.

“We’ve been preparing for this,” Orsted CEO Mads Nipper sighed. “We still expect to be able to supply gas to our customers.” Danish Prime Minister Mette Frederiksen took to Instagram to accuse Putin of “pure blackmail.”

Dutch gas trader GasTerra likewise decided not to participate in the dual-account system at Gazprombank, which I’ve (aptly) described as a case study in absurdity. “There are too many financial and operational risks associated with the required payment route,” GasTerra said this week. “In particular, opening accounts in Moscow under Russian law and their control by the Russian regime pose too great a risk.”

Like Orsted, GasTerra said it planned for a cutoff, but conceded the impossibility of predicting how the situation will ultimately unfold given current supply-demand realities. “GasTerra has repeatedly urged Gazprom to respect the contractually agreed payment structure and supply obligations, but to no avail,” the company remarked.

As long as the likes of Uniper and Eni are still buying, it’s not a crisis. Well, let me rephrase. It is a crisis, it’s just not anymore of a crisis than it was last month or the month before that. “Like other German and European companies before it, Uniper has changed the payment method for gas deliveries from Russia,” a spokesman said Tuesday. “Uniper pays in euros in line with the new payment mechanism [and] can continue to ensure timely fulfillment of the contracts.” The company cleared purchases with Berlin.

Notably, Gazprom also cut supplies to Shell Energy Europe, which had a contract for gas supplies to Germany. Apparently, Shell didn’t like the ruble account idea either. The company “continues to work on a phased withdrawal from Russian hydrocarbons, in compliance with applicable laws and regulations,” it said, in a media statement.

Europe is currently working to finalize the details of a plan to phase out 90% of Russian oil imports by year-end, but, as RBC’s Helima Croft wrote, “the EU has assiduously avoided discussion of a gas embargo, and the European Commission’s decision to walk back its hard opposition to the ruble payments mechanism reflects enduring anxiety about severing the gas link given the absence of alternative suppliers.”

Eventually, Brussels will have to face reality. While it may seem politically and economically impossible to implement a hard stop on Russian gas flows, that’s where things are going. I’ve called the current situation a semi-coordinated decoupling. Neither Europe nor Moscow is excited about the economic cost of cutting off the gas entirely, but the situation isn’t tenable. And given his plainly impaired emotional state, Putin might decide to push the issue. “Moscow could always opt for another rule change at a later stage to make an example of one of the bigger gas importers in order to achieve an even more outsized price impact,” Croft went on to say.

The US could cripple Putin by imposing secondary sanctions on companies and countries buying commodities from Russia, and Europe could effectively make it illegal to insure seaborne cargos, but the associated risks are myriad. A move to target vessels is underway and it “could have a serious impact given the lack of alternatives, and a likely Western backlash if other insurance actors step in to provide insurance,” Rabobank’s Michael Every wrote.

All of this is highly inflationary and risks pushing the whole of Europe into recession. The ECB is between a rock and hard place. Raising rates aggressively to combat inflation born of wartime distortions in energy and food costs may be an exercise in futility. But they have to try, especially given the farcical juxtaposition between 8% annual inflation and a negative policy rate.

“It’s the responsibility of the European Central Bank to take, progressively and without brutality, the necessary measures to bring inflation back down to a more reasonable level,” French Finance Minister Bruno Le Maire told France Inter radio on Wednesday.

Arch-hawk Robert Holzman, meanwhile, reiterated his call for an outsized hike next month. “A 50 basis-point rise would send the necessary clear signal that the ECB is serious about fighting inflation,” he said, in an email to Bloomberg. “A clear interest-rate signal would also help to support the euro’s exchange rate. The weak euro is not helpful on the inflation front.”