Russia Cuts Off Gas Supplies to Poland, Bulgaria

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Russia's Gazprom halted gas shipments to Poland and Bulgaria on Wednesday, saying both had failed to make payments under Moscow’s new two-step scheme that requires payment in rubles.

The state-controlled gas giant said in a statement that supply was suspended in line with a Mar. 31 presidential decree that payments for gas delivered since Apr. 1 "must be made in rubles via new accounts."

Poland and Bulgaria are the first two European countries to have seen Russian flows cut off since the new payment scheme was announced.

Gazprom's move represents the Kremlin's most explicit attempt to use energy as a weapon since Russia's February invasion of Ukraine and begs the question of how far President Vladimir Putin is prepared to go in his standoff with the West.

More payments for gas are expected to be made "sometime" in May, the Kremlin said earlier, meaning more European countries may find themselves cut off.

The month-ahead Dutch TTF gas futures contract opened sharply higher at €125 per megawatt hour ($38.40 per million Btu) on Wednesday, but quickly gave up its gains to trade only slightly higher than its Tuesday close.

Instrument of ‘Blackmail’

European leaders were quick to condemn the cut-off, but major buyers say they expect to continue importing gas from Russia under the new payment scheme.

European Commission President Ursula von der Leyen described Gazprom’s move as "yet another attempt by Russia to use gas as an instrument of blackmail" against countries supporting Ukraine, and underscores its unreliability as a gas supplier.

"We are mapping out our coordinated EU response," she said. "We will also continue working with international partners to secure alternative flows."

A draft of yet another package of EU sanctions against Russia is expected as soon as this week, but a vote to enact them may have to wait until later in May.

Austria, which gets most of its gas from Russia, will act in accordance with EU sanctions and OMV will continue to pay in euros, Chancellor Karl Nehammer said on Twitter on Wednesday.

Uniper, Germany’s largest gas distributor, is working with Gazprom and the German government to sort out payment issues without violating sanctions, CFO Tiina Tuomela said on an earnings call the same day. Uniper’s payments under the scheme are due at the end of May, she said.

Italian officials have previously said that they’ve received assurances from Moscow that their flows are not at risk.

Nevertheless, the specter of a broader shut-off looms over a continent that has pledged a rapid cut in Russian gas purchases, but remains extremely dependent on Gazprom for light, heat and industrial needs.

Any escalation would lead to a European supply — and price — crisis.

A full interruption of Russian supply to Germany — Europe's largest economy and gas market — could, for example, potentially lift European gas prices to over $60/MMBtu this summer, according to Goldman Sachs.

Analysts at investment bank Tudor Pickering Holt reckon Russian imports into the EU stand at around 9.8 billion cubic feet per day, down from as much as 12 Bcf/d earlier in April.

They warn that uncertainty over Russian flows and the need to attract more LNG as a replacement will keep European gas prices elevated through the summer.

Breach of Sanctions?

Under the Kremlin payment scheme, European gas importers must open two bank accounts at Gazprombank. They can send payments in euros or dollars to the bank, which will buy rubles on their behalf and send them on to Gazprom.

Guidance from the European Commission last week suggested that conversion might breach sanctions because of the potential involvement of the Central Bank of Russia — but that the payments system might be permissible under certain conditions.

Ten European buyers have already opened accounts at Gazprombank and four have made their payments, Bloomberg reported Wednesday, citing sources close to Gazprom. A new wave of payments is expected after May 15, the sources were quoted as saying.

The payments system, introduced by the Kremlin in response to international sanctions over its invasion of Ukraine, affects pipeline gas exports to "unfriendly" countries in Europe. These include all EU importers of Russian gas, as well as the UK, Switzerland and North Macedonia.

Putin on Wednesday warned that countries trying to intervene in Ukraine will be met with a "lightning fast" response.

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