Russia’s energy giant Gazprom has informed Poland and Bulgaria that it will cut off gas supplies from Wednesday, escalating Moscow’s dispute with Western countries opposed to its invasion of Ukraine.
In March, Russian President Vladimir Putin said the world’s largest natural gas producer would require “unfriendly” countries to pay for fuel in rubles, with Gazprombank opening accounts in rubles. Buyers will continue to make payments in euros or dollars, and they will be converted into rubles.
Poland and Bulgaria will be the first countries Russia has cut off since Moscow launched a so-called military operation in Ukraine on February 24th. Several countries have said they will not comply with Moscow’s demands.
What is behind the change?
Russia’s economy has been hit by Western sanctions, although the European Union has not restricted-energy imports.
Europe receives about 40% of its gas from Russia, paying between 200m and 800m euros ($ 880m) a day so far this year.
Currently, almost all contracts for the purchase of Russian gas are denominated in euros or US dollars, according to consulting firm Rystad Energy. Payments in rubles would benefit the Russian economy and strengthen its currency.
Is it legal?
Several buyers have said they will continue to pay in euros because their contracts do not allow for currency changes. Some legal experts say Russia is unlikely to change the terms of the treaties unilaterally.
“Contracts are made between two countries and are usually in US dollars or euros. So if one country unilaterally says ‘no, you will pay for it,’ then there is no more contract,” said Tim Harcourt, chief economist at the Institute for Public Works. politics and management at Sydney University of Technology.
Only a few Russian gas buyers, such as Hungary and Uniper, Germany’s main importer of Russian gas, said they would be able to pay for future supplies under the scheme announced by Moscow without violating EU sanctions.
Another complication is the caution of Western banks trading in Russian assets.
“Even if the buyer is willing to pay in rubles, this can be quite challenging given the sanctions imposed on many Russian banks,” said ING Bank.
A source familiar with the talks with gas buyers, who declined to be named, said it was unclear how the scheme would be implemented, but work continued.
Payments in rubles are technically possible, as the sanctions are only partial, said a bank manager with experience in foreign exchange markets. A Western buyer can pay euros or dollars to his bank, which in turn will send them to a Russian bank and ask them to pay Gazprom in rubles, he added.
It remains unclear whether Russia’s central bank can provide enough liquidity in rubles to allow European customers to acquire the currency.
What does Russia want? Will Bulgaria and Poland fulfill it?
It is not yet clear whether Poland and Bulgaria will comply with Moscow’s demands. Both countries rely heavily on Russian imports through the pipeline.
The Polish gas company PGNiG, whose gas deal with Russia expires later this year, has repeatedly said it will not follow the new scheme. She also said she would not extend her contract with Gazprom.
Poland says it does not have to cut supplies to customers. The country can supply gas through two connections with Germany, including a reverse via the Yamal pipeline. A connection with Lithuania with an annual capacity of 2.5 billion cubic meters will be opened on May 1, and there is an interconnector with the Czech Republic for up to 1.5 billion cubic meters.
Bulgaria also has a contract with Gazprom, which expires at the end of the year. The country relies almost entirely on Russian gas imports and has taken steps to find alternative supply agreements, according to a statement from its energy ministry. Bulgaria consumes about 3 billion cubic meters of gas a year and imports over 90% of it from Russia.
Earlier, Bulgarian Energy Minister Alexander Nikolov said a counterparty in Sofia could process transactions in rubles without giving details of the operation.
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