What future for European natural gas during the war?

Russian President Vladimir Putin demands payment in rubles for natural gas – or whatever. Germany speaks of gas rationing in the event of a cut. Prices for fuels used to heat homes, generate electricity and generate electricity are on the rise.

There’s a lot of talk about natural gas in Europe in the context of Russia’s invasion of Ukraine, to say the least.

Here are the key things to know:

WHAT IS PUTIN OFFERING?

Putin said importers of Russian gas now had to pay in rubles. European leaders said no dice – contracts say euros or dollars and one party cannot change that abruptly.


The currency switch would normally follow lengthy negotiations, analysts said, with customers demanding something in exchange for being exposed to the fluctuations that would come with paying the less stable rouble.

Open questions about what the change could mean have sent energy markets shaking, raising uncertainty over whether European natural gas could be cut off and deal a major blow to the economy. But Russia also relies on oil and sales to fund its government, as sanctions have weighed on its financial system.

The Kremlin offered what could be seen as a loophole. Importers would only have to open a dollar or euro account with a designated bank and then a second ruble account. The importer would pay the gas bill in euros or dollars and ask the bank to exchange the money for rubles.

In any case, Kremlin spokesman Dmitry Peskov said on Friday that the change would not happen immediately: “Payments on shipments in progress at the moment must be made not today, but somewhere end of April or even beginning of May.

EU leaders dismissed the proposal as “blackmail” and say payments will continue in dollars and euros.

German officials would not discuss the impact of Putin’s decree other than to say they were reviewing it. Economy Ministry spokeswoman Beate Baron noted that Russian bank Gazprom was given 10 days to explain the procedure, “and of course we will carefully consider this in turn.”

A senior European Commission energy official tweeted that the European Union was coordinating “to establish a common approach”.

WHAT AFTER PUTIN?

The Kremlin says the change is needed because Western sanctions have frozen its foreign currency reserves. Because the measure targets importers from “hostile countries,” it can be seen as retaliation for sanctions that have cut off many Russian banks from international financial transactions and led some Western companies to abandon operations in Russia.

The economic benefits for Russia are unclear. In theory, paying in rubles would increase demand for the currency and help the Kremlin prop up its exchange rate, which has regained ground after its initial plunge after the invasion. But gas exporter Gazprom already has to sell 80% of its foreign revenue for rubles, so the currency boost could be minimal.

The Kremlin says it also wants to extend ruble payments to other commodities, such as metals.

A motive can be political, said Stefan Meister, head of the international order and democracy program at the German Council on Foreign Relations.

“Russia is not interested in stopping the gas, but it wants some sort of political victory,” Meister said. “He wants to show that Putin dictates the terms under which he exports gas.”

The move is partly aimed at the Russian public, Meister said, with Putin telling his people, “Listen, these are enemy states and now they have to pay in a different scheme.”

“So I think it’s also about getting support inside the country, defining who the enemies are,” Meister said.

Another motive could be to shield the designated bank, Gazprombank, from sanctions because it would be the conduit for the payments that keep the gas going, Meister said. It is the third largest bank in Russia and, like Sberbank, the largest, it has not been cut off from the international payment system SWIFT.

WHAT IS THE GAS SUPPLY IN EUROPE?

Coordinated United States and European Union sanctions exempt payments for oil and gas. It 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 its oil.

Gas continued to flow into Europe’s pipeline network from Russia on Friday, according to pipeline operators’ websites.

Many are unhappy that European utilities are still buying power from Russia, which got an average of 43% of its annual government revenue from oil and gas sales between 2011 and 2020, according to US Energy Information. Administration.

This helped pay for the tanks and missiles used in the invasion. But it also means that Russia has good reason not to cut off natural gas.

COULD EUROPE SURVIVE A GAS CUT?

Europe’s economy would struggle without Russian gas, although the impact would vary depending on how much countries use.

Germany, the continent’s largest economy, “is heavily dependent on Russian energy supplies”, said Monika Schnitzer, professor of economics at the University of Munich and member of the government-appointed council of economic experts. from the country.

“A suspension of these supplies carries the risk that the German economy slips into a recession with significantly higher inflation rates,” she said.

Inflation is already at record highs, making everything from groceries to raw materials more expensive. It is driven by soaring energy prices, with Europe facing an energy crisis even before war broke out.

The crisis has sent governments and companies scrambling to source supplies from other sources, but that wouldn’t be enough to cover what’s in use now if Russian gas suddenly stops.

The Bruegel think tank estimated that Europe would be 10-15% short of normal demand to get through the next winter heating season, meaning that exceptional measures would have to be taken to reduce gas consumption.

European leaders said they could not afford the consequences of an immediate boycott. Instead, they plan to reduce Russian gas consumption as quickly as possible. They order more liquefied natural gas, which arrives by ship; seek more gas from pipelines in Norway and Azerbaijan; accelerate the deployment of wind and solar energy; and pushing conservation measures.

The goal is to reduce Russian gas consumption by two-thirds by the end of the year and completely by 2027.

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

In the event of a total emergency, government regulators must decide which companies would have their gas cut off to spare homes and hospitals. Manufacturers of chemicals, glass, ceramics and galvanized metals consume a lot of gas.

The rationing would hit a European economy that is already suffering from the fallout of war and high energy prices that have driven inflation to a record 7.5%.

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