Putin’s weapon: Everyone loses if Russia carries out its gas threat
Russia is attempting to use its energy to blackmail the EU – but if it turns off its tap there’ll be no winners.
Both Russia’s President Vladimir Putin and German Chancellor Olaf Scholz knew each had a lot to lose when they spoke one-to-one last week.
Russia receives an estimated $US350 million per day in payments from EU countries for gas.Credit:Bloomberg
The call followed days of escalating tensions over gas supplies, with Russia threatening to cut off buyers who did not start to pay in roubles, and Germany hitting back with accusations of blackmail.
But the uncomfortable reality is that a cut-off from Russian energy exports suits neither side – depriving Russia of an estimated $US350 million ($467 million) per day in payments from EU countries for gas alone, and depriving Europe of the source of more than 40 per cent of its gas.
The decree Putin finally came out with on Thursday appears to recognise that reality, allowing European buyers to continue to make payments in euros or dollars to be transferred into roubles through Russia’s Gazprombank.
“Our take is that the decree limits the risk of a complete halt to Russian flows. It’s the compromise we have been expecting. It’s a way for both parties to save face,” says Leon Izbicki, a natural gas analyst at Energy Aspects.
Yet while an immediate cut off has been avoided for now, the implications and response are still being digested by traders and governments across Europe, and expose the extent to which gas has become a powerful political tool for the Kremlin as Putin tries to fight back against sanctions.
He has used that threat to a considerable degree this week, forcing Germany to implement the first stage of its emergency gas supply plan in the case of supply disruption – and keeping traders and politicians on edge from Frankfurt to London.
Germany’s triggering of its emergency gas supply plan raised the prospect of gas rationing in Europe’s largest economy and the severe consequences that would involve, with Deutsche Bank warning it could ultimately pose a “risk of structural damage to Germany as an industrial location”.
“Particularly in energy-intensive industries, the long-term propensity to invest would likely decline even more, because until now security of supply has been an asset in Germany,” they warned in a note.
Analysts also caution that the new arrangements strengthen Russia’s position by exploiting other holes in the sanctions regime.
As the German government prepared for the worst, major European Gazprom customers such as Uniper and OMV were left studying Putin’s announcements, with Gazprom notifying clients about the new payment arrangements.
Under the decree, foreign buyers need to transfer foreign currency to a special account at Gazprombank, which will then buy roubles on behalf of the gas buyer to transfer to another account used to pay for the gas.
The moves do not go as far as some had feared. “If it were a change to payment terms then there is a risk you would be reopening contracts and people would probably use it to extract something in return, which can create disruption,” says Trevor Sikorski, the head of natural gas at Energy Aspects. “It feels like there is less chance of that now.”
Yet many also interpret the order as handing an advantage to Putin by strengthening Gazprombank’s role, helping to further protect Russia’s third-largest lender from widening sanctions against Russia’s financial sector. The EU gets as much as 40 per cent of its gas from Russia, and has so far exempted Gazprombank from sanctions due to its widespread key existing role in energy trades and risk of affecting gas supplies.
Under the decree, foreign buyers need to transfer foreign currency to a special account at Gazprombank, which will then buy roubles on behalf of the gas buyer to transfer to another account used to pay for the gas.Credit:Bloomberg
The bank has become a key link to the outside world which Moscow is keen to maintain, having expanded its role in foreign gas export contracts after the Russian financial crisis of 1998. Analysts also caution that the new arrangements strengthen Russia’s position by exploiting other holes in the sanctions regime.
“This is a political question, not commercial, and seems to be designed to return some of the discomfort from the restrictions imposed on the central bank to European companies, and to partially subvert those restrictions,” Ron Smith, senior oil and gas analyst at BCS in Moscow, told the Financial Times.
Buyers now have a few weeks to work out how to respond to the new arrangements, as payments for gas delivered from April 1, when the decree came into force, are not due until May. The situation remains volatile, however, and traders appear to be pricing in some risk to supplies after the payments are due in late May.
“The June price clearly gained [on Thursday] more than all the other forward months around it,” says Tom Marzec-Manser, head of gas analytics at ICIS. “So the risk is in June supply, if anything.
Yet he also claimed Russia was witnessing “gangster actions” following reports in the German press about Germany possibly nationalising some Gazprom subsidiaries in Germany. It came as European governments and companies said they were working on a common approach to changes to gas payments, in an effort to continue to show a united front against the Kremlin.
As ever throughout the war so far, gas flows to Europe have remained as normal, despite the tensions. Flows came in slightly more than average on Friday, in fact, as prices meant it made sense for buyers to maximise what they can take under their long-term contracts. Wholesale prices have been volatile as the tensions played out during the week. The European TTF benchmark whipsawed between €108 ($159) per MWh and €126 per MWh on Thursday, climbing as high as €133 per MWh yesterday before falling back to €123. Following months of turmoil on gas markets, however, there is little that surprises traders now.
“Two years ago if prices shifted by five or six euros that would have been enormous news,” says Sikorski. “It isn’t nowadays.”
Telegraph, London
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