European Union's (EU) gas importers have to take a hard decision to either agree to pay in Russian currency rubles or risk facing potential supply cuts.
On March 31, Russian President Vladimir Putin said “unfriendly countries” must pay for gas supplies in rubles after they froze Russian Central Bank's currency assets over the Ukraine war, which began on Feb. 24.
Putin said that by freezing Russia's assets in dollars and euros, the West had effectively seized payments for fuel deliveries. He said Russia could not take the risk of continuing trade in euros and dollars as new payments could be frozen as well.
The EU imported 155 billion cubic meters of natural gas in 2021 from Russia, which also included liquefied natural gas (LNG). Russia accounted for around 45% of the EU’s gas imports and almost 40% of its total gas consumption as the biggest exporter to the continent, according to International Energy Agency data.
The new mechanism requires clients from “unfriendly countries” to open two special accounts with the authorized bank, Gazprombank.
After opening the account, the payment process involves four steps.
The buyers will transfer funds into the special currency account in foreign currency, which is in euros or dollars.
Gazprombank will sell the foreign currency at the Moscow Exchange MICEX-RTS and transfer the ruble proceeds to the buyer’s ruble-denominated special account.
Gazprombank will then transfer the ruble funds from the buyer’s account to Gazprom’s account in Gazprombank.
Poland and Bulgaria already face supply cuts as they did not agree to pay according to the new system. Poland’s imports from Russia stood at around 10 billion cubic meters, while Bulgaria’s at 3 billion cubic meters.
- Decree to test unity among EU importers
The new payment system appears at first to acknowledge the position of a buyer unwilling to pay for gas in rubles since it allows for the first transfer to be made by the buyer in a foreign currency, Agnieszka Ason, visiting research fellow at the Oxford Institute for Energy Studies, said in a recent analysis.
"However, as soon as the funds are credited to the buyer’s first acount, (foreign currency) the subsequent transactions are executed by Gazprombank. This, in turn, translates into various risks for the buyer, including its exposure concerning the fulfillment of its payment obligation. With the first transfer in euros or dollars, the buyer does not pay for gas," she wrote in her analysis.
Ason said the buyer's payment obligation is fulfilled only with the last transfer when the ruble funds are credited to Gazprom's account.
“As a result, the complex process under the decree leading to the fulfillment of the buyer's payment obligation will have been executed beyond the buyer's control. Effectively, the decree forces the buyer to transfer its obligation to pay to another person which is Gazprombank," Ason said in the analysis.
Responding to Anadolu Agency's questions on the new mechanism, Ason said that it is for the buyers to decide how they wish to respond to the mechanism but there is no uniform recommendation from the EU which leaves room for diverging responses from the EU buyers to the new payment system.
Ursula von der Leyen, head of the European Commission, warned in a press conference after Russia halted gas flows to Poland and Bulgaria that if companies agree to pay with the new mechanism, they would breach sanctions.
However, there are reports that some companies from Germany, Austria, Hungary, and Slovakia would advance with the new mechanism as the decree could be a test of unity among EU importers.
"All affected EU buyers risk the supply cut if they do not comply with the new ruble gas payment mechanism. The stakes are highest for large and heavily-reliant importers of Russian gas. This includes both German and Austrian gas buyers," she said.
Ason explained that as most payments of the gas delivered in April will become due shortly, either compliance with the new payment mechanism or a refusal to do so could be expected.
"The latter translates into the exposure to the severe sanction of a delivery ban," she noted.
Ana Maria Jaller-Makarewicz, energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), said the EU is likely to interfere in companies agreeing to make payments in rubles.
"This is a double-sided process. Russia still needs that money from selling the gas and halting the gas to the countries is more like putting pressure. The only way to be able to withstand this is that all (EU) countries keep together and unified and not to panic,” she added.
Jaller-Makarewicz noted that those who buy more gas are more worried about the process.
- Bigger clients unlikely to see gas cut
Poland and Bulgaria are “smaller” Gazprom customers compared with countries like Germany, which is importing around 40 billion cubic meters of natural gas from Russia, said Maria Pastukhova, a senior policy adviser at E3G, an independent climate change think tank.
"They (Poland and Bulgaria) are an easier target of Gazprom to test the no ruble-no gas mechanism. Germany, Italy, and Austria are among the largest customers of Gazprom and it is highly unlikely they will be denied Russian gas in the same way as Poland or Bulgaria," she said.
Pastukhova said despite this being unlikely, these countries cannot count on Russia as a reliable supplier anymore and the key action for them to take now is to cut their dependency on Russia as soon as possible and on gas imports altogether within the next years.
Accelerating transition and particularly targeting sectors most vulnerable to gas price and supply shocks like heating in residential and industrial sectors must become the priority in this context, she pointed out.
Referring to a recent analysis produced by E3G with think tanks Ember, RAP, and Bellona, she said clean energy solutions can help European countries replace two-thirds of Russian gas imports by 2025.
"The EU has already been preparing for potential cuts by filling the storage and buying more LNG and the conditions will also be supported by milder weather. The EU countries will now further accelerate energy transition as the gas payment dispute with Russia is a more like a wake-up call," Jaller-Makarewicz said.
Short-term and mid-term solutions need to be found to reduce gas demand which will also make the gas prices better, she said.
Gas prices in Europe had broken new records this year due to supply concerns after Russia started the war against Ukraine.
- Russia's gas flow routes to EU
Russia carries 55 billion cubic meters of natural gas per year to the EU via Nord Stream 1 pipeline through the Baltic Sea while the Yamal pipeline, going through Belarus, Poland, and Germany, delivers about 33 billion cubic meters of gas annually.
Russia’s gas flows via Ukraine to the continent reach 40 billion cubic meters and it is at steady levels despite the war.
TurkStream pipeline, carrying Russian gas to Turkiye and then to the EU, has 31.5 billion cubic meters of capacity, and half of this capacity reaches Turkish markets while the second half to the EU markets.
Since its opening on Jan. 8, 2020, the TurkStream pipeline carried 18 billion cubic meters to Turkiye and 16.8 billion cubic meters to Europe as of 2021 end.
- Which EU country depends most on Russian gas?
According to IEA data, Germany imports the highest amount of Russian gas with 40 billion cubic meters, followed by Italy with about 29 billion cubic meters and the Netherlands with 15.7 billion cubic meters per year.
Hungary imports about 12 billion cubic meters of Russian gas annually.
Bruegel data shows Germany's gas imports are 53.7% dependent on Russia while Austria is 80.2% and Italy 33.4% by the end of 2021.
Russia accounted for 81.3% and 78% of Poland and Hungary's gas imports, respectively.
Czech Republic's gas imports reliance on Russia is 53.5%, Switzerland's 44.4%, France’s 7.6%, and Holland's 5.2%.
Countries like Estonia, Finland, Moldova, North Macedonia, and Bulgaria meet almost 100% of their gas imports from Russia.
By Nuran Erkul Kaya
Anadolu Agency
energy@aa.com.tr