Europe pursues unified Russian gas payment response as supply threat eases

European capitals have been on alert for a disruption to gas imports for weeks as Putin seeks retaliation over the West sanctioning Russia for invading Ukraine.

A crunch point appeared to be in the offing when Moscow issued a decree on Thursday requiring foreign buyers of Russian gas to open rouble accounts in state-run Gazprombank from Friday or else risk being cut off.

The Kremlin said on Friday that it would not immediately turn off gas exports to Europe, as payments on deliveries due after April 1 come in the second half of this month and May.

With weeks left before bills are due, governments in Europe - which relies on Russia for more than a third of its gas supply - were talking to their energy companies about how to pay them.

“Working closely with Member States and operators. EU coordination today to establish a common approach on currency payments for gas contracts with Russia,” said Ditte Juul Jorgenesen, director general of the European Commission’s energy division, in a tweet.

The European Commission declined further comment, when approached by Reuters.

Energy exports are Putin’s most powerful lever as he tries to hit back against sweeping Western sanctions, although his room for effective manoeuvre is limited because Moscow doesn't have alternative markets for its gas, which is piped to Europe.

“If Putin turns off the gas it might only be for a relatively short period of time: he needs our money and cannot reroute all the natural gas," said one European gas trader, who declined to be named.

Analysts said the plan, which cements Gazprom’s position at the heart of Russian gas trading, was more about shielding the oil and gas company from future sanctions than depriving Europe of much-needed fuel.

“It is, of course, a game to dodge sanctions, adding to uncertainty, propping up gas prices and filling Putin’s pockets,” a second trader said.

Germany said it was examining Putin's decree, with an economy ministry spokesperson saying private contracts were valid and that the country was paying in euros for Russian gas.

Germany, which depends on Russia for 40 per cent of its gas needs, has already activated an emergency plan that could lead to gas rationing if supplies drop too low.

Gazprom said on Friday it was exiting its business in Germany. It was not immediately clear how the move would affect the supply of Russian gas into Europe's largest economy.

Putin’s decision to enforce rouble payments has boosted the Russian currency, which fell to historic lows after the February 24 invasion, which Moscow persists in calling a “special military operation”. The rouble has since recovered much of the lost ground.

European buyers are still prepared to buy gas under existing contracts while they seek clarity on Putin’s demand.

Austria’s OMV and Gazprom have had initial contact regarding paying for gas in roubles as demanded by Moscow, a spokesperson said on Friday, adding that the company is now waiting for written information.

Denmark’s Orsted, which has a take-or-pay contract with Gazprom running until 2030, said it had not yet received any enquiry from Gazprom.

“Therefore, we still do not know what the (Putin) statement will actually mean for the contract and for the supply of gas from Russia to Danish and European households and businesses,” Orsted said in a statement.

Gazprom said on Friday it had started to notify clients of a requested switch of end-payment currency to roubles.

So far, Gazprombank has been spared from a ban on Russian banks transacting through the SWIFT payments messaging system, although Britain did freeze its assets last week. Britain, however, only gets about 4 per cent of its gas from Russia compared to Germany’s 40 per cent and one-third for the entire region of Europe.

European gas prices have risen as a result of uncertainty over Putin's order, with British and Dutch gas prices up between 7 per cent and over 10 per cent since his announcement. Although they remain far from the record highs seen earlier this year, European prices were once again on the rise on Friday.

Analysis by Brussels-based think-tank Bruegel has posited a set of possible impacts and options arising from the volatility in the continental gas market.

Most of the UK’s gas comes from its own oil fields and also from Norway, although prices are still expected to rise as British energy suppliers have to compete with other European companies to buy UK gas.

Households should be somewhat protected from market fluctuations by Ofgem’s price cap, although the huge hike in the cap came into force today (Friday 1 April). Recent analysis from US bank Goldman Sachs suggested that the price cap could be hiked by another 90 per cent in October if Russian gas flows to Europe end.

A general rule of thumb is that the further east a country is, the more likely it is to rely on Russian gas. Germany and Italy are two major economies who rely heavily on the supply, as well as those countries geographically closer to Russia.

Bruegel has previously suggested that EU countries might have to take “emergency measures” before the end of winter if gas is cut off, saying “Until the summer, the EU would likely be able to survive large-scale disruption to Russian gas supplies, based on a combination of increased LNG imports and demand-side measures such as industrial gas curtailments. Should a halt of Russian gas be prolonged into the next winters, it would be more difficult for the EU to cope.”

Options to import more gas to European countries have been explored. In theory, an additional 1,100TWh (terrawatt hours) of LNG could be imported to EU ports, compared to what was imported in 2021 (730 TWh). The EU’s pipelines with Norway could technically bring 200TWh more than they did last year, while North Africa and Azerbaijan could supply an extra 450TWh between them.

Put together, these options could be enough to replace the 1,700TWh that Russia supplied in 2021. The UK also has space in its pipelines to send another 400TWh to the EU.

However, this additional gas would need to be pumped out of the ground in territories such as the US, the Middle East, and elsewhere, then loaded onto a limited number of ships. Sellers would also need to select Europe as their preferred destination above Asia and the Americas.

The impact of less gas being available to Europe for an extended period could see heavy industries such as steel, aluminium, and silicon production either slow down or halt completely. Governments may also have to step in to tell people to turn down their thermostats at home, in order to conserve national energy supplies.

Other possibilities are that the right weather conditions could turbocharge the output of existing wind and solar farms. Decommissioned coal plants could be brought back into service if they are workable - an option the UK government has reportedly already considered - while Germany could decide to delay the closure of its nuclear plants, politically a highly sensitive national issue.