Explains: The nervous Europe sees Putin’s threat of gas cuts as a bang

Russian President Vladimir Putin leads a meeting on the development of air transport and aircraft production via a video link in the Novo-Ogaryovo state residence outside Moscow, Russia on March 31, 2022. Sputnik / Mikhail Klimentyev / Kremlin via REUTERS

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LONDON / FRANKFURT, April 1 (Reuters) – Russian President Vladimir Putin’s promise to cut off customers from his gas unless they start paying in rubles is more of a ‘bluff’ to stave off further sanctions than a genuine threat to stop supplying energy, according to European officials and analysts.

Gas normally flowed into Europe on Friday, and some experts reckon the new scheme could be broadly the same as the old payment process, with only a slight boost to the struggling Russian currency.

Below is an overview of why, at least now, Putin’s gas ultimatum is considered embarrassing.

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WHAT HAPPENED?

Europe is heavily dependent on Russia for its energy needs, and about 40% of its gas comes from the country. So if Moscow shut down the taps, it could trigger immediate shortages, factory closures and crippling energy costs.

Gas contracts are priced in euros or dollars, but Putin said they should be paid in rubles.

Western countries called Putin’s demands “blackmail” and rejected. Now it seems that they do not have to change much, even though they may change how they pay for their gas, to put money more directly in Russia’s pocket.

According to the decree, which Putin has signed, foreign gas buyers must open accounts in state-controlled Gazprombank from Friday and pay directly – instead of e.g. a German buyer who uses a local bank to transfer the money.

Gazprombank would then use that money to buy rubles and support the currency, a role typically played by the Russian central bank, which has been hampered by the freezing of hundreds of billions of its reserves in response to war.

Putin’s ruble demands confused many European officials and experts, and much remains unclear, making a final assessment difficult.

It will be a while before we know if the new payment scheme can work because the gas bill is paid weeks after delivery. This means that any dispute – or gas cut – is a break, if it happens at all. Read more

There were no signs of immediate interruptions on Friday. The flows remained stable through two of the three main pipelines bringing Russian gas into Europe – Nord Stream 1 across the Baltic Sea and into Slovakia via Ukraine.

Flows through the second main route, the Yamal-Europe pipeline across Belarus, had reversed direction, now bringing gas from Germany to Poland, but this is not uncommon.

IS IT A ‘STORM IN A TEA CUP?’

For now it looks like this. European officials and experts believe that it is mainly aimed at protecting the Russian energy giant Gazprom from future sanctions – if Gazprombank collects the money, Europe could not sanction them without cutting gas.

An Italian minister said that if Russia’s decree to pay for gas in rubles remains as it is “all in all, not much would change”.

“This is similar to a warning from Putin not to tighten economic sanctions further,” said Jeffrey Schott of the Peterson Institute of International Economics, a think tank.

Nor would it be a big boost for the ruble. Prior to the invasion, the Russian central bank demanded that most of the foreign currency from gas be converted into rubles. Now it all had to be converted to the Russian currency.

“What sounded grandiose has turned into a storm in a cup. By making it the main recipient of money for gas, it puts an extra shield against sanctions around Gazprombank,” said Jack Sharples of the Oxford Institute for Energy Studies.

A European official said he believed Putin had demanded the switch to ruble payment to test who would join. But no one did.

“After the setback, he is trying to find a system where he could claim he had won, while actually continuing something close to the status quo,” the official said.

WILL THE LIGHT OFF?

Energy exports are Putin’s most powerful lever when Russia tries to fight back against what it calls an “economic war.” European officials and analysts are reluctant to say that his threats to turn off supplies are really empty.

Doing so would hurt Russia’s Gazprom, as it would struggle to deliver all European-bound gas to alternative buyers, said Dmitry Polevoy, an analyst at Moscow-based brokerage firm Locko-Invest.

Experts believe it is nonetheless symbolically important, and it has shaken confidence in Russia’s reliability in Germany, which this week had to take the extraordinary step of warning of potential rationing ahead.

An EU official said that although he considered the threatened disruption without payment in rubles to be a ‘bluff’, the full implications of Putin’s demands were unclear and that a tougher stance could emerge in the coming days.

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Reporting by Tommy Reggiori Wilkes and John O’Donnell; Further reporting to Francesco Guarascio and Jan Strupczewski in Brussels, Stephen Jewkes and Francesca Landini in Milan and Andreas Rinke and Holger Hansen in Berlin; editing by Philippa Fletcher

Our standards: Thomson Reuters Trust Principles.

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