EXPLAINER: What’s next for Europe’s natural gas during the war?

Russian President Vladimir Putin demands payment in rubles for natural gas, or else. Germany talks about gas rationing in the event of a cut. fuel prices used to heat homes, generate electricity and the energy industry are through the roof.

There is a lot of discussion about natural gas in Europe in the context of the Russian invasion of Ukraine.to say the least.

Here are key things to know:

WHAT DOES PUTIN PROPOSE?

Putin has said that importers of Russian gas must now pay in rubles. European leaders said no dice — the contracts say euros or dollars and one side cannot abruptly change that.

The currency swap would normally follow lengthy negotiations, analysts say, with clients demanding something in exchange for being exposed to the fluctuations that would come from paying in the less stable ruble.

Open questions about what the switch could mean have sent chills down the spine of energy markets, adding to uncertainty over whether natural gas could be cut off in Europe. and cause a huge blow to the economy. But Russia also relies on oil and sales to finance its government, as sanctions have squeezed its financial system..

The Kremlin offered what could be seen as a loophole. Importers would simply have to open a dollar or euro account at a designated bank and then a second ruble account. The importer would pay the gas bill in euros or dollars and order the bank to exchange the money for rubles.

In any case, Kremlin spokesman Dmitry Peskov said on Friday that the change will not happen immediately: “Payments for ongoing shipments at the moment should not be made this very day, but sometime at the end of April or even early May.

European leaders have dismissed the proposal as “blackmail” and say payments will continue in dollars and euros.

German officials did not discuss the impact of Putin’s decree other than to say they were examining it. Economy Ministry spokeswoman Beate Baron noted that Russia’s Gazprombank has been given 10 days to explain the procedure, “and of course we will look at it carefully in turn.”

A senior European Commission energy official tweeted that the European Union was coordinating “to establish a common approach.”

WHAT IS PUTIN NEXT?

The Kremlin says the change is necessary because Western sanctions have frozen its foreign currency reserves. Because the move targets importers in “hostile countries”, it can be seen as retaliation for sanctions that have prevented many Russian banks from conducting international financial transactions and prompted some Western companies to abandon business in Russia..

The economic advantages for Russia are not clear. In theory, payment in rubles would boost demand for the currency and help the Kremlin prop up its exchange rate, which has regained ground after its initial drop. after the invasion. But gas exporter Gazprom already has to sell 80% of its foreign profits for rubles, so the boost to the currency could be minimal.

The Kremlin indicates that it also wants to extend ruble payments to other commodities, such as metals.

One reason may be political, said Stefan Meister, head of the program on international order and democracy at the German Council on Foreign Relations.

“Russia is not interested in stopping the gas, but wants a kind of political victory,” Meister said. “He wants to show that Putin dictates the conditions under which he exports gas.”

The move is partly aimed at Russia’s domestic audience, Meister said, with Putin telling his people: “Look, these are enemy states and now they have to pay with a different scheme.”

“So I think this is also about building support within the country, defining who the enemies are,” Meister said.

Another motive could be to protect the designated bank, Gazprombank, from being sanctioned because it would be the conduit for payments that keep the gas flowing, Meister said. It is the third largest bank in Russia and, like the largest Sberbank, has not isolated itself from the SWIFT international payment system.

WHAT IS THE STATUS OF GAS SUPPLY IN EUROPE?

Coordinated US and European Union sanctions exempt oil and gas payments. That is a concession from the White House to European allies who are far more dependent on Russia for energy.which provides 40% of Europe’s gas and 25% of its oil.

Gas continued to flow into Europe’s pipeline system from Russia on Friday, according to the websites of pipeline operators.

many are not happy that European utilities continue to buy power from Russia, which on average derived 43% of its annual government revenue from oil and gas sales between 2011 and 2020, according to the US Energy Information Administration.

That helped pay for the tanks and missiles used in the invasion. But it also means that Russia has strong reasons not to cut off natural gas.

COULD EUROPE SURVIVE A GAS OUTAGE?

Europe’s economy would struggle without Russian gas, though the impact would vary depending on how much countries use.

Germany, the continent’s largest economy, “is highly dependent on Russian energy supplies,” said Monika Schnitzer, an economics professor at the University of Munich and a member of the country’s government-appointed council of economic experts.

“A suspension of these supplies carries the risk of the German economy slipping into a recession with significantly higher inflation rates,” it said.

Inflation is already at record highs, making everything from groceries to raw materials more expensive. It is driven by high energy prices.with Europe facing an energy crisis even before the war broke out.

The crisis has left governments and companies scrambling to gather supplies from other sources.but it would not be enough to cover what is used now if Russian gas suddenly stopped.

Bruegel’s think tank estimated that Europe would be 10% to 15% below normal demand to get through the upcoming winter heating season, meaning exceptional measures would have to be taken to reduce gas usage. .

European leaders have said they cannot afford the consequences of an immediate boycott. Instead, they plan to cut Russian gas use as quickly as possible.. They are asking for more liquefied natural gas, which arrives by ship; look for more gas from pipelines in Norway and Azerbaijan; accelerate the deployment of wind and solar energy; and promote conservation measures.

The goal is to cut Russian gas use by two-thirds by the end of the year and completely by 2027.

The situation is serious enough that Germany has declared an energy emergency early warning.the first of three stages.

In a full-fledged emergency, government regulators must decide which companies would have their gas supply cut off. to save homes and hospitals. Manufacturers of chemicals, glass, ceramics, and galvanized metals use a lot of gas.

The rationing would affect a European economy already suffering from the consequences of war and high energy prices. which have pushed inflation to a record 7.5%.

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