The story so far: Russian energy company Gazprom has stopped gas supplies to Bulgaria and Poland citing their failure to pay in roubles. In a statement on April 27, it announced that it has “completely suspended gas supplies” to Poland’s PGNiG and Bulgaria’s Bulgargaz. Poland and Bulgaria have accused Russia of breach of contract, according to which payments were to be made in euros and dollars only. Towards the end of March, Russian President Vladimir Putin had signed a decree that from April 1, “unfriendly foreign buyers” would have to pay for gas supplies in roubles. He had also added that defaults would result in suspension of contracts.
The gas cuts do not immediately put the two countries in any dire trouble. Russian gas deliveries to both Poland and Bulgaria were anyway expected to end later this year. Poland, which gets 40% of its natural gas from Russia, has been working on alternatives for many years. In the immediate scenario, however, it will lose out on the five billion cubic metres of gas it was set to get from Gazprom. It will likely make up for it with supplies from Germany. Bulgaria, which gets 77% of its natural gas from Russia, has a bigger problem. While its energy minister has said that the country has enough reserves for another month, it needs to urgently look for alternatives, with additional supplies via pipelines from Greece being a distinct possibility.
Poland has been a major gateway for supply of military hardware to Ukraine. It also confirmed earlier this week that it will be sending tanks to Ukraine. Just hours before Gazprom’s action, it had announced a fresh set of sanctions against the company and other Russian businesses and oligarchs. As for Bulgaria, after a new liberal government took office last fall, it has cut many of its old ties to Moscow. Not only has it supported the West’s sanctions against Russia, it has also hosted Western fighter jets at a new NATO outpost on its Black Sea coast. It is also a major producer of non-NATO weapons that it’s considering sending to Kyiv.
Russia supplies gas via pipelines to 23 countries in Europe. Among EU members, so far, only Hungary has officially agreed to make rouble payments, with the rest rejecting the demand. However, even if no other country agrees to Russia’s rouble payment mechanism, there won’t be any further cuts in supplies at least until the second half of May, which is when the next tranche of payments are due. Meanwhile, according to reports, four European buyers have already started making gas payments in roubles, while 10 European companies have opened accounts with Gazprombank to make rouble payments.
The 27-member European Union has described Russia’s decision as “blackmail” and accused Moscow of trying to divide the West over its support for Ukraine. “It comes as no surprise that the Kremlin uses fossil fuels to try to blackmail us,” said EU Commission President Ursula von der Leyen, adding, “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.”
Describing Russia’s move as blackmail, Bulgarian Prime Minister Kiril Petkov said, “We will not succumb to such a racket.” The Polish Prime Minister has informed his country's Parliament that he believes Poland’s support for Ukraine — and the new sanctions imposed by Warsaw on Tuesday — were the real reasons behind the gas cutoff.
Europe’s natural gas comes from only three sources: Russia, Norway and Algeria. Until the Ukraine invasion, Russia accounted for almost 40% of Europe’s gas imports.
While the dependence on Russian gas varies from country to country — ranging from 94% for Finland to 11% for the Netherlands — there is little doubt that disruption in supplies would fuel inflation and damage economic activity, with strong possibilities of energy rationing and even a major recession in the continent’s industrial powerhouse, Germany.
Europe’s energy mix comprises of oil (43%), natural gas (24%), nuclear energy (14%), and hydroelectric (4%), with renewables such as wind and solar making up the rest. With climate change a major political issue in Europe, coal — of which there are abundant reserves on the continent — is off the table, and given public hostility to nuclear energy, EU is left with natural gas as the cleanest source of energy. So, for the short-term, the EU is preparing for the heating requirements of the coming winter by tanking up on its gas storage facilities at 80-90% capacity and substituting Russian supplies, as much as possible, with piped gas from Norway and North Africa. But these won’t be adequate to reduce Russian dependence to zero. So, the longer-term strategy is centred on importing liquefied natural gas (LNG) from the U.S. and the Middle East.
It will be tough challenge, primarily because it is easier and cheaper to transport natural gas via pipeline. LNG requires massive facilities and container ships that require huge capital investments. And yet, over the past decade, the EU has beefed up its LNG infrastructure, building several large terminals. Nonetheless, LNG transported from the U.S. by container ships would be much more expensive than Russian gas received via pipeline. Achieving strategic autonomy, as it were, by replacing Russian gas with American LNG would mean higher prices for the average European consumer, who is currently the primary beneficiary of cheap Russian gas that he uses for household heating purposes.
Western analysts believe that Russia has taken a gamble by cutting off supplies to Poland and Bulgaria. The Russian economy is heavily dependent on gas exports, deriving 40% of its revenue coming from it. If the move forces more EU countries to pay for gas in roubles, it will help shore up its currency and offer some relief for its sanction-hit economy. But at the same time, it could also backfire, if it ends up accelerating the decoupling of the energy ‘partnership’ between Europe and Russia. Since it is difficult to reroute piped natural gas to different markets, Russia, which doesn’t have elaborate storage infrastructure, may well find itself desperate for buyers as well as hard currency, let alone buyers ready to pay in roubles.