Europe scrambles for a gas fix as Putin restricts supply

European Commission President Ursula von der Leyen said this latest aggressive move by Russia is another reminder that we need to work with trusted partners and build our energy independence.

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The European Union is racing to find alternative natural gas suppliers after Russia’s Gazprom halted flows to two EU nations, raising fears other countries could be cut off as well.

The developments come as Brussels fears that nations and energy companies will circumvent strict international sanctions against Russia, imposed on Moscow in the wake of its unprovoked invasion of Ukraine.

Gazprom, Russia’s state-owned energy company, cut off supplies of natural gas to Poland and Bulgaria earlier this week after both nations refused to pay for the product in rubles, something requested by President Vladimir Putin amid the growing Western support for Ukraine.

The decision puts more pressure on the EU, which imports about 40% of all its natural gas from Moscow, to find alternative solutions.

“It helps to open the eyes of those who still thought that Russia would not use gas as leverage,” an EU official, who did not want to be identified due to the sensitive nature of the situation, told CNBC of Russia’s latest move. .

European Commission President Ursula von der Leyen went further on Wednesday, accusing the Kremlin of blackmailing the bloc.

Kremlin spokesman Dmitry Peskov dismissed accusations that Moscow was using its gas supplies to blackmail European nations Poland and Bulgaria, saying Russia was a reliable energy supplier. He also declined to say how many countries have agreed to pay for gas in rubles, Reuters reported.

But the pressure could increase if Gazprom decides to cut off supplies to other EU nations. The Kremlin warned on Wednesday that other countries will face the same problem if they do not pay in rubles, something the commission, the EU’s executive arm, opposes as it would violate current sanctions.

“Russia’s decision to stop gas flows to Poland followed Berlin’s decision, under intense political pressure, to supply Ukraine with air defense weaponry. The implied threat is that Russia will cut off gas supplies to Germany if Berlin continues to send weapons to Ukraine,” analysts. at Gavekal, a financial research firm, said in a note on Thursday. “The economic effects would be catastrophic,” they added.

Payments in rubles

As such, the commission has been working to become less dependent on Russian gas. It signed an agreement with the United States earlier this year, where the EU will receive at least 15 billion cubic meters of liquefied natural gas in 2022.

“We are working hand in hand with our member states to secure the supply of alternative gas from other partners as well,” von der Leyen said on Wednesday.

Meanwhile, Brussels will have to decide how to continue paying for Russian natural gas without breaking the bloc’s own rules. Russia issued a decree at the end of March saying that European companies will continue to pay for gas in euros to Gazprombank, an institution that is not part of European sanctions, and then this cash will be converted into rubles in a secondary account opened by these gas companies. Energy.

The EU has decided to continue paying for Russian gas in dollars and euros to Gazprombank and then the institution converts it into rubles when sending the money to Gazprom. This is after the Russian gas company decided to cut supplies to Poland and Bulgaria for not paying for the product in rubles.

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But this is where the commission has concerns. The institution wants to make sure that once European companies make the first payment in euros, the contractual obligation is actually fulfilled.

The commission is also wary of European companies that have a second account with Gazprombank and the Russian Central Bank coming into contact with such cash, which could violate European sanctions.

“EU and European officials continue to warn companies that making ruble payments to Gazprom would violate sanctions,” analysts at consultancy Eurasia Group said in a note on Thursday.

The solution that is on the table is for Gazprombank to convert to rubles and deposit that amount in a Gazprom account.

Hungary, for example, said Thursday that it will allow the conversion of its gas payments from euros and dollars to rubles, as Putin has demanded. Media reports said nine other nations are also paying for their gas in euros to Gazprombank, which then converts them.

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German Economy Minister Robert Habeck has said doing so could be compatible with existing sanctions. Either way, the affair further casts a shadow over Europe’s worsening economic outlook.

Speaking to CNBC on Thursday, Italy’s central bank governor Ignazio Visco said that if Russia cut off all gas supplies, his country would enter a recession later this year and next, however modest.

Earlier this week, UBS CEO Ralph Hamers also raised concerns about how changes in natural gas supply could affect the economy.

“Russian gas is different, a much bigger challenge and that’s largely because[s] of industries rely on gas as a base feedstock to make their product…so that’s what could cause the second-order effect specifically in the European economy,” he told CNBC’s Geoff Cutmore.

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