Moscow opting for energy, its most powerful lever, and threatening to cut off the gas supply to other countries after Poland and Bulgaria, sent shivers through Europe and is all but certain to test the continent's solidarity
After months of sweeping sanctions, Russia has started using its most powerful export as leverage to counterattack and hit Europe where it hurts the most.
The decision to cut the flow of natural gas to two NATO members marks Russia’s toughest response yet to Western sanctions imposed for its invasion of Ukraine – and is all but certain to test Europe’s solidarity.
The halt in gas supplies to Poland and Bulgaria on April 26 after they refused to pay in rubles and Moscow’s threat to cut off other countries as well if they fail to agree to its new payment arrangement has revived Europe’s supply woes.
The move, denounced by European leaders as “blackmail,” has exposed the continent’s weakness and divisions. But whether it will further divide European Union members or will it ensure greater solidarity remains to be seen.
“It’s a classical divide and rule strategy,” said Simone Tagliapietra, a senior fellow at the Bruegel think tank in Brussels.
The decision “is unprecedented and illustrates Russia’s use of gas as a geopolitical weapon,” Tagliapietra told Daily Sabah.
“This ultimately is a key target of Russia’s decision on the ruble payment: To divide European countries and try to leverage this division,” he added.
The escalation follows a decree issued by Russian President Vladimir Putin last month requiring that countries Moscow deems “unfriendly” must pay for gas in rubles under a new payment scheme.
The mechanism obliges buyers to deposit euros or dollars into an account at Gazprombank, which is then converted into rubles, place the proceeds in another account owned by the foreign buyer and transfer the payment in Russian currency to Gazprom.
The situation has left EU member states divided over whether sanctions would be violated if they used Russia’s mechanism.
The difficulty for European buyers is that the decree requires buyers to also open a ruble account at Gazprombank into which their euro or dollar payments would be deposited after conversion into the Russian currency.
The decree would only consider the payment to be complete after the gas-to-rubles conversion is done – a transaction that would involve Russia’s central bank, which is subject to EU sanctions.
EU officials, per news agencies, last week said that if EU buyers declare their payments for gas are completed once the payment has been made in euros and before it is converted into rubles, sanctions would not be breached.
Officials said that opening a ruble account at Gazprombank may breach the EU sanctions.
Europe’s reliance
Poland and Bulgaria “had the right” to oppose the new payment mechanism and stuck to their original contracts to pay for gas, according to Maciej Zaniewicz, an energy policy analyst at the Polish Institute of International Affairs (PISM).
“The contract specifically mentions the currency in which payments are made, and these are dollars or euros,” Zaniewicz told Daily Sabah.
Other EU countries might follow the same fate as Poland and Bulgaria, as their own payment dates will come, depending on their approach, Tagliapietra said.
And this is the key issue, he noted, adding: “Will all European countries follow the EU indication to only pay in euros/dollars as indicated in the contracts? Or will some decide to go their own way, complying with the Russian request?”
Russia supplies about 40% of Europe’s natural gas, mostly by pipeline. Deliveries last year were around 155 billion cubic meters (bcm), 52 bcm of that via Ukraine or nearby routes.
Alternative routes include the Yamal-Europe pipeline, which crosses Belarus and Poland to Germany, and Nord Stream 1, which runs under the Baltic Sea to Germany.
Many European countries have cut their reliance on Russian gas in recent years and the EU has said it wants to slash imports by two-thirds this year and end its reliance on Russian supplies over five years through alternative sources, wind and solar, and conservation.
“The EU countries are quite heavily dependent on Russian gas,” Zaniewicz said. Plans are being prepared but he suggested an embargo on this commodity is not currently under consideration.
‘Winter Putin’s best ally’
The gas halt does not immediately put neither Poland nor Bulgaria into dire trouble, according to Tagliapietra and Zaniewicz.
Poland has been preparing for this scenario for years and Bulgaria uses small quantities of gas, which can be replaced relatively easily, said Zaniewicz.
Add to that the fact that the continent is heading into summer, making gas less essential for households. Also, both Poland and Bulgaria’s contracts were expected to end later this year – and both countries have said they do not want to renew them.
The contract with Gazprom supplies around half of Poland’s annual needs – 10 bcm versus total consumption of over 20 bcm.
It can cope with this thanks to liquefied natural gas (LNG) and storage being 76% full, said Tagliapietra.
Supplies from Russia are to be replaced by imports from Norway through the Baltic Pipe gas pipeline, Zaniewicz noted. “It is scheduled to open in October 2022 and will reach its full capacity of 10 bcm – the same as supplies from Russia – in January 2023,” he said.
“Until then, Poland’s demand will be ensured by imports from the LNG terminal, Germany, Lithuania and Slovakia. Poland also has a very high filling of its storage facilities,” Zaniewicz added.
Bulgaria consumes about 3 bcm of gas per year, about 90% of which comes from Gazprom imports via Turkey. The country also gets small quantities of gas from Azerbaijan.
Bulgaria’s gas storage of 550 million cubic meters is only 17.6% full, according to operator data.
“As gas is predominantly used for heating (gas makes 60% of heating and only 5% of power), this is not a short-term issue,” Tagliapietra said.
The problem will be the next winter, he noted, but said the country can get gas from Romania and will soon start importing 1 bcm per year from Azerbaijan via a new interconnector linking it with Greece.
“Winter is the best ally of Mr. Putin. The EU cannot arrive in October 2022 unprepared,” Tagliapietra stressed.
Global energy systems avoided a severe crisis during the winter of 2021/22, but mostly because temperatures were far warmer than normal across most of the northern hemisphere, reducing heating demand.
"We need a strong and coordinated EU response on joint gas purchasing, storage refilling, EU energy market design – and of course, smart sanctions on Russian oil and gas flows to Europe," Tagliapietra noted.
‘Each billion important’
Bulgaria and Poland also are transit countries for Russian gas, he said. Gazprom has clarified that in the event of “unauthorized withdrawal” of Russian gas from transit volumes to third countries, supplies for transit will be reduced by this volume.
The gas cutoff and Moscow’s threat that other countries could be next has sent shivers of worry through the EU, whose 27 nations have not been able yet to agree on the full embargo on Russian imports.
Germany, the largest economy on the continent, and Italy are among Europe’s biggest consumers of Russian natural gas. They have though been taking steps to reduce their dependence on Moscow.
Berlin is looking to build LNG import terminals that would take years, and Italy has reached deals with Algeria, Azerbaijan, Angola and Congo for gas supplies.
Germany previously said it could wean itself off Russian oil by the end of the year but had rejected the idea of an immediate full ban on imports. It, however, last week signaled it could join other member states as it hoped to find a way to replace Russian oil with supplies from other sources soon.
“It comes as no surprise that the Kremlin uses fossil fuels to try to blackmail us,” European Commission President Ursula von der Leyen said last week.
“Today, the Kremlin failed once again in his attempt to sow division amongst member states. The era of Russian fossil fuel in Europe is coming to an end,” she stressed.
Russia’s move “only accelerated the process of becoming independent from Russia,” Zaniewicz noted.
"Russia's aim was, therefore, not to hit Poland or Bulgaria. It was to intimidate the EU not to impose an embargo on Russian oil, as in response Russia would cut off the EU's gas supply," he added.
Tagliapietra said European governments now need to deploy all emergency measures they have at their disposal, both on the supply and demand side, to ensure the security of supply.
“Each billion cubic meter of gas not consumed, is now important,” he noted.
The EU has sought a united front in opposing Moscow’s push to adopt its new gas payments system, but Zaniewicz said “some companies got scared and we can already see that they have agreed to pay in rubles for gas.”
“Hungary was the first to take this decision. It is currently the only country in the EU that pursues a pro-Russian policy, including in the field of energy,” he noted.
“However, the peculiarity of Hungary is that it nevertheless supports successive EU sanctions against Russia. The same may be true of the sanctions on Russian oil that are currently under consideration.”
The EU, including Hungary, can relatively quickly replace Russian oil with supplies from other countries, he said, adding that a ban on its imports “would be very painful for Russia.”
‘Shot itself in the foot’
On Europe’s options, Zaniewicz recalled that the European Commission in early March presented a proposal for a plan to reduce dependence on Russian gas.
This involves increasing imports of LNG, boosting shipments from Azerbaijan, but also increasing the production of biomethane, he said. In addition, it is planned to reduce consumption by replacing gas with renewable sources and increasing energy efficiency.
In addition to the commission’s plans, Zaniewicz said the EU may also increase the use of nuclear and coal power plants and use liquid fuels in some gas power plants.
“However, even taking all these steps into account, if Russia were to cut off gas supplies to the EU completely, it would not be possible to replace about one-third of the gas imported from it this year. This would require a reduction in industrial use, for example,” he noted.
But still, Russia would suffer an even greater loss in case it stopped all flows to Europe, Zaniewicz suggested.
“Revenues from gas and oil exports to the EU exceed Russia’s war budget. This would be a huge blow to Russia.”
All in all, from a strategic perspective, he said Russia has shot itself in the foot.
“While it may frighten some EU countries in the short term, it only reinforces their view that Russia is an unreliable partner in the long term,” he noted.
“By canceling the contract with Poland and Bulgaria, Russia has shown that no country can be sure that it will honor its commitments. By doing so, it has ruined the image it had been developing for years in the EU as a reliable gas supplier,” he explained.
Furthermore, he said the cutoff has given a basis for Poland and Bulgaria to seek compensation for the breach of contract through international arbitration.
“Poland already has experience of winning arbitrations with Gazprom, for example, over its abuse of its monopolistic position,” he noted.
In the long term, Zaniewicz said Russia is eliminating itself from the European gas market.
“We must remember that Europe accounts for around 70% of its gas exports. This gas cannot be sent to China, for example, because there is not enough infrastructure for this,” he added.
Ensuring solidarity among EU countries will now on be fundamental, Tagliapietra said, especially as the continent will need to replenish its gas storage, possibly without Russian gas.
“This is key to make sure Russia’s divide and rule strategy fails.”
