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Geopolitics

Russia Strikes Back, But Reach Limited

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As the US and EU pursue new ways to target Moscow's revenues, Russia is hitting back with new countermeasures, halting gas supplies to Bulgaria and Poland and sanctioning Gazprom's former European subsidiaries. The impact of such measures has been limited so far. But it could grow bigger should European gas buyers and Moscow hit any stumbling blocks in implementing an apparent compromise agreement on gas payment mechanisms. Moscow is also expected to respond to any possible EU ban on its oil, although how is unclear. Washington has also raised the possibility of a price cap or tariff on Russian oil exports.

  • The risk of a gas cutoff over the payment issue is falling as key buyers near a compromise solution.

Regardless of Russia’s key motivation to unilaterally impose a new payment scheme for pipeline gas buyers from “unfriendly” European countries, the move has created some division within Europe, including over the viability of a complete halt of Russian gas imports anytime soon. For Moscow, a divided Europe that's also facing rising social discontent over high energy prices is a welcome development — seen as potentially helping to ease sanctions pressure as Moscow's invasion of Ukraine turns into a protracted war.

The EU and its heavyweight members Germany, France and Italy are not ready for an immediate embargo on Russian gas, fearing it would damage their economies more than Russia's. Instead, importers there appear to have reached a compromise with Russia that would allow them to pay for gas supplies under Moscow’s new two-step procedure without breaching EU sanctions against Russia’s central bank. The CEO of Germany’s EnBW, Frank Mastiaux, said in an interview with Suddeutsche Zeitung on May 18 that his company has already tested the mechanism.

A day earlier, Italy’s Eni revealed it was opening two special convertible accounts at Gazprombank, one in euros and the other in rubles, as required by Moscow. Invoicing and payment will continue in euros, which will then be converted into rubles by a clearing point agent operating at the Moscow Exchange without any involvement of Russia's central bank, Eni said. Risks remain, however, as the European Commission says the opening of a ruble account breaches sanctions.

Brussels also insists that payments be considered final when they are made in the currency — euros or dollars — stipulated in the contract. Here Moscow appears to have compromised: Eni said it has clarified with Gazprom Export that the payment obligation will be deemed satisfied by Eni upon the transfer of euros consistent with the contracts. Moscow had previously insisted that payment is only complete when Gazprom receives the rubles.

Buyers that are less dependent on Russian gas imports and/or ready for a faster divorce with Russia might still reject Moscow’s payment scheme, like Poland and Bulgaria did in late April. Finland’s Gasum, for example, has said it won’t pay under Moscow’s new rule and will take its contract to arbitration. High prices mean Moscow isn't likely to feel the pain from any moderate drop in export volumes. And in the short run, buyers that have been cut off will still likely buy at least some Russian molecules from traders or on spot.

  • Russian countersanctions cut off former Gazprom units from cheaper supply contracts — but gas flows have remained steady. 

European buyers already cut off include Gazprom’s former trading and distribution units, controlled by the Gazprom Germania holding company, taken over by Berlin in early April. Russia has imposed blocking sanctions on Gazprom Germania and its 29 subsidiaries registered in Europe and elsewhere, which means they can no longer buy Russian pipeline gas or LNG at preferential terms under long-term contracts, forcing them to pay a higher price on spot markets. One of the blacklisted importers, Germany’s Wingas, tells Energy Intelligence it now procures gas at various European hubs and is maintaining contractually agreed supplies to its customers.

Russia also blacklisted Europol Gaz, the owner of the Polish section of the Yamal-Europe gas pipeline to Germany, meaning Gazprom can no longer flow gas through it. But Gazprom had used the route sporadically over the past several months, shipping only marginal volumes. Combined, the measures have not triggered any sharp declines in overall gas flows.

  • Anticipating an EU oil embargo, Russia plans to develop infrastructure to target new markets.

Hungary, Slovakia and the Czech Republic are seeking an up to three-year exemption from any EU embargo of Russian oil, which is so far blocking agreement. Failure by the EU to agree a unanimous position could move decision-making to national levels. The Slovak government, for one, has proposed a special tax on processing Russian crude, which could help the 1 million barrel per day Druzhba pipeline stay operational.

Any exemption period could be used by Russia to develop infrastructure for exports to other regions. A detailed infrastructure plan is to be prepared by the government by Jun.1, but sources say one of the options to replace the Druzhba pipe is connecting it to the port of Murmansk on the Barents Sea for onward shipments to global markets, including via the Northern Sea Route. Construction could take three years and state support would be needed, including on financing: Loans on domestic markets are expensive and access to international institutions is blocked.

President Vladimir Putin, calling Europe's plan to ban Russian oil and gas "economic suicide," promised such support at a meeting with industry this week, saying the government would do everything it could to help companies improve logistics chains, provide credit resources and insurance services, and develop oil-field service technologies.

  • Finland and Sweden's decision to join Nato points to further breaks, and possibly escalation.

Russia's InterRAO halted electricity supplies to Finland on May 14 because no payments had been received since May 6. Finnish grid operator Fingrid cited InterRao's Nordic subsidiary as saying payment problems were behind the halt, although the move also coincided with Finland's shift in favor of joining Nato. Putin said that Finland and Sweden's decision to become Nato members does not represent an immediate threat for Russia, but that Russia would react to "the expansion of the military infrastructure" on the territories of those countries.

The alienation between Moscow and Helsinki looks set to grow in any case. State-owned Finnish generator Fortum Oyj last week announced plans for "a controlled exit from the Russian market," while gas supplies to Gasum could stop at the end of this week, the Finnish company said, following its refusal to accept the Russian payment system.

Topics:
Sanctions, Oil Supply, Gas Supply, Policy and Regulation
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