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28 April 2022

Russia too late to weaponize supplies, halts gas to Poland, Bulgaria

Russia has stopped providing gas to both Poland and Bulgaria from Wednesday 27th April, in retaliation to their refusal to pay for Russian gas supplies in roubles. While these countries have depended on Russia for more than half of their gas in the past, their success in rapidly finding alternative sources have rendered Putin’s attempts to weaponizing his energy sector increasingly redundant.

Poland’s state-controlled gas group, PGNiG, confirmed the “complete suspension” of supplies under its ‘Yamal Contract’ on Tuesday, stating that Russia’s Gazprom had informed it that it would come into effect from 8am on April 27.

Later that day, Bulgargaz, PGNiG’s Bulgarian counterpart, announced the same, claiming that it had already taken steps to find alternative imports for natural gas. Historically, Poland has relied on Russian gas for about 40% of its total needs, while Bulgaria relies on it for 99%.

“Gazprom has completely suspended gas supplies to Bulgargaz (Bulgaria) and PGNiG (Poland) due to non-payment in roubles,” Gazprom said in a statement. These are the first two countries that have had their supplies involuntarily cutoff from Russia since the start of its invasion of Ukraine in February. However, with Gazprom also hosting pipelines to Germany, Hungary, and Serbia, it’s possible that disruption could spread. Indeed, the company has stated that it will shut off these pipelines completely should gas be siphoned off while in transit through Poland or Bulgaria.

In response to the cut-offs, fears of shortages have pushed up European gas prices. The benchmark Dutch front-month gas contract at the TTF hub jumped by more than 19% on Wednesday morning, reaching €117 per MWh – almost 7 times higher than this time last year. The euro, which has been consistently falling since February, fell to a five-year low against the dollar.

The move also marks a change in tack from a Russian government that has so far miscalculated its invasion of Ukraine. It is the fiercest response we’ve so far seen to retaliate to Western sanctions on the country’s energy sector, with President Vladimir Putin demanding payment in his domestic currency, which is harder to place sanctions upon; hundreds of billions of dollars of Russian assets have already been frozen in other currencies, amounting to around half of the country’s foreign reserves.

Putin’s demands were that “unfriendly” countries agree to a scheme whereby they open accounts at Gazprombank where payments for Russian gas imports were converted into roubles. Most European parties had already rejected the scheme, although companies like Uniper, a huge importer of Russian gas appears to be considering it.

Hungary has so far stuck with a deal to pay into a euro-denominated, with its next payment due on May 22. Slovakia has reached the same agreement, he added. Slovakia has agreed the same, with its gas supply arriving via Turkey, Bulgaria and Serbia.

The weaponizing of Russian energy supplies is something that has been on the cards since the start of the invasion. Back in February, Russian finance minister Anton Siluanov said that Russia would be ready to redivert its energy flows away from Europe if new sanctions were imposed on the country’s energy sector, pointing to a recently signed oil and gas supply deal with China. European Commission president Ursula von der Leyen denounced Russia’s suspension of gas deliveries as “an instrument of blackmail.”

While Putin may believe he is playing his ace, the rest of the players have already moved to play a different game at a different table. Poland has already said that it would not extend its gas contract with Gazprom beyond its expiry at the end of this year, while the rest of the West are piling statement upon statement pledging to eliminate imports of Russian oil and gas. US President Joe Biden has imposed an outright ban on Russian oil and other energy imports while the UK has said it would phase out imports through the end of 2022.

Russia has overestimated the importance of its role in a western energy sector that is rapidly transforming away from fossil fuels. For Poland, the Gazprom supply contract is for 10.2 billion cubic meters of gas per year – around 50% of national consumption. However, the country’s gas storage facilities are currently 76% full, meaning that the country has a buffer of over 2.5 billion cubic meters as it searches for alternative sources – which it already claims to have found as a result of the investments made to cut dependence on Russian gas, including some seaborne LNG.

It could potentially obtain gas from LNG terminal in Swinoujscie on the Baltic, and from Germany and the Czech Republic, while a pipeline linking Poland to Norway’s gas fields is also due to open in October. Poland’s climate minister, Anna Moskwa, said the country was “prepared for a complete cutting-off of Russian energy resources,” including coal, gas and oil.

The country is also likely to seek more gas from the Yamal-Europe pipeline, which despite usually supplying Russian gas to Germany, has been running in reverse for most of this year, supplying gas from Germany to Eastern Europe. Much of the new gas expected to plug the holes here could come from new gas pipeline imports from the UK, Norway and Denmark, while the USA is working to supply an additional 15 billion cubic meters of LNG to the EU this year.

Bulgaria, similarly, has also said that it would not hold talks with Gazprom to renew its own natural gas purchase deal, which again runs until the end of the year. The country, which consumes around 3 billion cubic meters of gas per year, has already signed a deal to receive 1 billion cubic meters of Azeri (Azerbaijan) natural gas per year, once its new gas pipeline with Greece becomes operational later this year. Other Southern Europe countries can also receive Azeri gas via the Trans Adriatic Pipeline to Italy and the Trans-Anatolian Natural Gas Pipeline (TANAP) through Turkey.

Countries like Austria, dependent on Russia for around 80% of its natural gas, are also racing to fill up its storage facilities before looking to find alternative energy supply deals, having dedicated €5 billion to the endeavor.

In total, the European Commission believes that gas and LNG from countries like the United States and Qatar this year could replace 60 billion cubic meters of Russian supplies through the rest of this year – accounting for nearly two thirds of imports that could be expected between now and December. Some countries are also considering extending the life of coal or nuclear plants to cut reliance on Russian gas.

Then there’s the more sustainable options to replacing natural gas imports; reducing dependency on natural gas all together. Several nations are already exploring the option of increasing their electricity imports from interconnectors, while accelerating strategies to boost new renewable energy capacity, as well as biofuel and hydrogen supply.

The expected 40 GW of solar power capacity and 20 GW of wind power to be installed in 2022 could replace over 20 billion cubic meters of natural gas per year. Tripling capacity by 2030 would displace Russian imports entirely.

Other measures that have been suggested including turning thermostats down by 1 degree Celsius across the bloc, to save an additional 10 billion cubic meters of natural gas this year, while long term strategies of replacing gas boilers with 30 million heat pumps could save a further 35 billion cubic meters according to the European Commission.