Russia cuts off gas to two European countries. Who’s next?

NOTNOT LONG a while ago, it seemed that the energy poker game being played by Europe and Russia, while dangerous, was under control. Oil and gas was one of the few sectors that Europe had not targeted with sanctions. Russia had maintained the supply. Yes, Europe was considering a ban on energy imports, and Russia demanded at the end of March that “unfriendly” countries pay for their next gas deliveries in rubles (rather than euros or dollars), or that they are cut. But each side thought the other didn’t have the guts to go all-in. After all, Europe imports 40% of its gas from Russia, earning it around 400 million euros ($422 million) a day from its sales.

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On April 27, however, Russia upped the ante. Gazprom, a state-owned energy giant, stopped sending gas to Bulgaria and Poland after it missed deadlines Russia had set for paying in roubles. the EU struggles to respond; Gas prices in Europe jumped by a fifth on the news (although they have since fallen a bit).

The immediate effect of Russia’s latest decision, that the EU described as a breach of contract, has a limited scope. Poland’s imports of 10 billion cubic meters (bcm) per year and Bulgaria’s of 3 bcm together account for only 8% of the total EU imports. Poland’s contract with Russia was due to expire in December anyway, so the revenue Russia loses by breaching it is small. And although Bulgaria and Poland have both relied on Russia for most of their gas imports, they might be able to do without, says Xi Nan of Rystad Energy, a consultancy. Poland is expected to start receiving gas from Norway in October. Nearby regasification terminals could allow it to import more liquefied natural gas (LNG). Bulgaria is expected to start importing Azeri gas via Greece later this year.

Exactly who could be cut next is unclear. Russia’s ruble payment terms partly reflect contract details that are not public. But sources polled by The Economist think they will fall in May. The stakes are high. It’s not that Europe needs gas now: as temperatures rise, consumption falls. But stocks on the block are only at 33% of storage capacity. The European Commission has urged member states to ensure their facilities are 80% full by November, implying a peak in demand ahead.

Yet if Russia were to cut off big importers, it would be missing out on some of the money it needs to fund a costly and protracted war. So who will go to bed first? Most European buyers have already ruled out paying directly in rubles. But Moscow offers a compromise. The buyers would open two accounts with Gazprombank (a lender which is not under sanctions). They poured euros into the first and asked the bank to convert the sum into rubles and deposit the money into the second account, which would then be transferred to Gazprom.

Many European countries do not like the plan, which would look like they are giving in to Russian intimidation and risk creating legal headaches. They will be divided into three groups. One, which includes Belgium, Britain and Spain, imports little or no gas directly from Russia and may refuse to compromise. Another group includes big buyers like Germany and Italy, which will struggle to quickly replace imports; they can take the deal. A third group of hesitants includes countries that are only partially dependent on Russia and may also have contracts that are soon to expire.

Even this situation would create uncertainty. A cut country could have repercussions on the others, for example if the gas transits there towards other places. It is also unclear who will accept the Russian compromise, or whether Russia could possibly turn off the taps anyway.

If Germany, for example, were isolated, gas markets would go haywire. European prices are already six times higher than a year ago. They would soar to new heights, attracting more LNG from the rest of the world and driving up prices elsewhere in turn. Jack Sharples of the Oxford Institute for Energy Studies, a think tank, believes that a complete shutdown of Russian gas to Europe could well trigger a global recession. The game of poker in Russia is getting scarier and scarier – and those who lose their shirts could also include passers-by.

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