Explainer: What will happen to natural gas in Europe during the war?

Russian President Vladimir Putin demands to pay for natural gas in rubles – one way or another. Germany is talking about gas rationing in the event of a shutdown. Fuel prices used for heating homes, generating electricity and the energy industry through the roof.

Against the background of Russia’s invasion of Ukraine in Europe, there are many discussions about natural gasto put it mildly.

Here are the key things to know:

WHAT DOES PUTIN OFFER?

Putin said that importers of Russian gas now have to pay in rubles. European leaders said boneless – Euros or dollars are written in contracts, and one party cannot change it drastically.

According to analysts, the change of currency usually occurs after long negotiations, when customers demand something in exchange for fluctuations that occur when paying in a less stable ruble.

Open questions about what the change could mean have caused a stir in energy markets, raising uncertainty about whether natural gas could be cut off in Europe. and deal a serious blow to the economy. But Russia is also counting on oil and sales to fund its government as sanctions have strained its financial system.

The Kremlin has proposed what could be seen as a loophole. Importers would just have to open an account in dollars or euros in a certain bank, then a second account in rubles. The importer paid the gas bill in euros or dollars and directed the bank to exchange money for rubles.

In any case, Kremlin spokesman Dmitry Peskov said on Friday that the changes would not happen immediately: “Payments for shipments that are currently being made should not be made today, but somewhere in late April or even early May.”

European leaders rejected the offer as “blackmail” and said payments would continue in dollars and euros.

German officials have not discussed the impact of Putin’s decree, except to say they are considering it. Spokeswoman for the Ministry of Economy Beate Baron noted that Russia’s Gazprombank was given 10 days to explain the procedure, “and, of course, we will in turn consider it carefully.”

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

WHAT ABOUT PUTIN?

The Kremlin says changes are needed because Western sanctions have frozen its foreign exchange reserves. As the measure is aimed at importers in “unfriendly countries”, it can be seen as revenge for sanctions that have cut off many Russian banks from international financial transactions and forced some Western companies to leave their businesses in Russia..

The economic benefits for Russia are not obvious. Theoretically, payment in rubles will increase demand for the currency and help the Kremlin maintain its exchange rate, which has recovered after the initial fall after the invasion. But gas exporter Gazprom already has to sell 80% of its foreign revenue in rubles, so the increase in currency may be minimal.

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

One of the motives may be political, said Stefan Meister, head of the program on international order and democracy of the German Council on Foreign Relations.

“Russia is not interested in stopping gas, but it wants a kind of political victory,” Master said. “It wants to show that Putin is dictating the terms on which he exports gas.”

The move is aimed in part at Russia’s domestic audience, Master said, and Putin told his people, “Look, these are hostile states, and now they have to pay under a different scheme.”

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

Another motive could be to protect a certain bank, Gazprombank, from sanctions, because it will become a channel for payments that provide gas, said the Master. It is the third largest bank in Russia, and, like the largest Sberbank, it is not disconnected from the international payment system SWIFT.

WHAT IS THE STATE OF GAS SUPPLY TO EUROPE?

Agreed US and EU sanctions exempt from oil and gas payments. This is a concession of the White House to European allies, who are much more dependent on energy from Russiawhich provides 40% of gas in Europe and 25% of oil.

Gas continued to flow into the European pipeline system from Russia on Friday, according to the websites of the pipeline operators.

Many are not happy that European utilities continue to buy energy from Russia, which averaged 43% of the government’s annual revenue from oil and gas sales between 2011 and 2020, according to the U.S. Energy Information Administration.

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

CAN EUROPE SURVIVE THE GAS DISCONNECTION?

Europe’s economy will struggle without Russian gas, although the impact will vary depending on how much the country uses.

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

“The suspension of these supplies carries the risk that the German economy will fall into recession with much higher inflation,” she said.

Inflation is already at a record highthat makes everything from food to raw materials more expensive. This is due to rising energy pricesEurope is facing an energy crisis even before the war.

The crisis has forced governments and companies to collect supplies from other sourcesbut that would not be enough to cover what is now in use if Russian gas suddenly stopped.

According to the Bruegel think tank, Europe will be 10% to 15% short of normal demand to pass the next winter heating season, which means that to reduce gas use will need to take exceptional measures.

European leaders have said they cannot afford the consequences of an immediate boycott. Instead, they plan to reduce the use of Russian gas as soon as possible. They order more liquefied natural gas that comes on the ship; search for more gas from pipelines from Norway and Azerbaijan; accelerating the deployment of wind and solar energy; and promoting conservation measures.

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

The situation is so serious that Germany has issued an early warning of an energy emergencythe first of three stages.

In a full-scale emergency, government regulators must decide which companies will be cut off from gas spare homes and hospitals. Manufacturers of chemicals, glass, ceramics and galvanized metals use a lot of gas.

The rationale will hit the European economy, which is already suffering from the effects of war and high energy prices which increased inflation to a record 7.5%.

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