A significant part of the legacy left behind by Angela Merkel (“leader of the free world,” the “indispensable European,” etc.) has been Germany’s dependence on Russia for natural gas. That it could leave Germany subject to Russian blackmail was, of course, always obvious, and Putin may be about to apply some very direct pressure.
Philip Plickert writing in today’s Capital Matters:
Simultaneously abandoning nuclear power and phasing out coal has left Germany more dependent on Russian natural gas than ever before. More than half of its natural-gas imports come from Gazprom and other Russian companies. This was the natural, if regrettable, outcome of the energy policies championed by Chancellor Angela Merkel and her predecessor Gerhard Schröder.
Germany finds itself now in a situation where it can be taken hostage by Putin. In response to Western sanctions, Moscow has demanded this week that EU countries pay for their energy imports from Russia in rubles — otherwise they would stop by Friday. The EU will not bow to that demand. Brussels claims to have emergency plans if Russian supplies of natural gas stop, but a sudden stop would hurt immensely. German industries claim that several hundred thousand jobs are at stake . . .
The ruble threat has been around for a couple of days. Yesterday, it seemed that it might have been averted at least for the present.
Germany will continue to pay for Russian gas in euros or dollars, a government spokesman said, adding that Russian President Vladimir Putin had told the German chancellor nothing would change for European partners despite his plan for rouble payments.
Russia has said that because of Western financial sanctions over Ukraine, it plans to require payment for its energy exports – especially the gas that Germany depends on – in roubles rather than the usual euros or dollars from April 1.
In a phone call between the leaders, Putin told German Chancellor Olaf Scholz that nothing would change for European partners and payments would be made in euros and transferred to Gazprom bank, which would convert the money into roubles, the German spokesperson said.
“Scholz did not agree to this procedure in the conversation, but asked for written information to better understand the procedure,” said the spokesperson.
He added that a Group of Seven agreement, stating energy supplies from Russia would be paid for only in euros or U.S. dollars, remained . . .
So, it seemed fairly likely that the gas would continue to keep flowing for now.
Today’s news reports seem to be suggesting that things have been moving in the opposite direction.
Russia will stop supplying gas to countries it considers “unfriendly” unless they pay in roubles, according to a presidential decree effective immediately.
Buyers in 48 countries, including the EU, will be required to open a bank account both in foreign currency and in roubles at Gazprombank in Russia, according to the decree published on Thursday. The targets are countries that have established sanctions against Russia’s economy, governing and business elite for its invasion of Ukraine.
Vladimir Putin on Thursday said Russia was establishing “a clear and transparent scheme” for these foreign customers.
“If such payments are not made, we will consider this a default on the part of the buyers — with all the ensuing consequences,” he added during a speech at the Kremlin.
The decision and the threat of supply disruptions, largely mooted by Russia’s president in the past week, have triggered alarm among European countries that rely heavily on Russian gas. Germany on Wednesday said it was preparing for energy rationing.
Putin gave the central bank, the customs authorities and the government 10 days to implement the new system. Because most April deliveries-related payments are not expected until early or mid-May, the decree will effectively be tested next month.
Olaf Scholz, Germany’s chancellor, said on Thursday he had told Putin that his country had checked its contracts with Russia for gas deliveries and would keep paying for them in euros and sometimes dollars
For more on when this could kick in, Reuters:
Russian President Vladimir Putin’s order for foreign gas buyers to use Gazprombank to make gas payments in roubles covers deliveries due after April 1, a source familiar with the situation told Reuters.
“Payments for ‘April gas’ on some contracts start in the second half of April, on others – in May,” the source added.
So there may (if Putin sticks to what’s left of the letter of these contracts) be some brief breathing space in which a deal could be cooked up. And, of course, most European countries have some reserves.
Meanwhile, European natural-gas futures prices spiked this morning, but (as at the time of writing) are off the day’s peak.
The Daily Telegraph (my emphasis added):
Germany and wider Europe have . . . been trying to diversify their supplies from Russia, with the Continent aiming to cut its dependency on Russian gas by two-thirds this year. This week the US and the EU struck a deal for the former to try and send the latter about 15bn cubic metres more gas than planned.
But there remains a huge hole to be filled, with the EU having imported more than 10 times that amount of gas from Russia last year.
Options are limited amid a global scramble for gas that pushed prices to record levels even before Russia’s invasion of Ukraine.
Countries have been looking to run coal-fired and nuclear power plants for longer than planned, but those and other measures can only go so far. “For Europe there isn’t really any alternative to Russian gas in the short term,” says Leon Izbicki, natural gas analyst at Energy Aspects.
“Liquified natural gas markets are already delivering the maximum they can into Europe – we still need that Russian gas to be able to fill up storage ahead of winter to guarantee security of supply.
“Any event that would see a significant supply disruption would mean the introduction of widespread rationing of gas, particularly among industrial customers across Europe.”
Rationing is part of the third step of Germany’s emergency gas plan, the first phase of which has been triggered today. The first step involves convening market players for daily monitoring of gas markets, while the third kicks in when there is “significant disruption to supplies” and the market cannot cope.
In that scenario, Germany’s regulator, the Bundesnetzagentur, is tasked with securing the “vital demand for gas with special consideration of protected customers and minimising consequential damage”.
That would essentially mean hospitals and households are prioritised for gas, with Germany’s manufacturing heartlands, such as steel-mills, car-makers and glass makers, in line to be told to cut usage first.
Studies have estimated the potential hit to Germany’s GDP from the curtailment of Russian supplies would be anything between 3pc and 6pc. The already sky-high wholesale price of gas if Russian supplies were cut off, however, is much harder to predict.
If, and it is still an if, the taps are turned off, the political consequences of all that are anyone’s guess.
As the FT reports, this may only be part of a wider game, a response to the way that many of the sanctions directed against Russia revolve, as Putin has observed, around the weaponization of the Western financial system against Russia.
The FT:
“When companies from these countries refuse to fulfil contracts with Russian banks, enterprises, individuals, when assets in dollars and euros are frozen, it makes no sense to use the currencies of these countries,” he added.
“The transfer of payments for Russian gas supplies to Russian roubles is an important step towards strengthening our financial and economic sovereignty.”
Russia would strive to use its currency as payment for other exports, Putin added.
“We will continue to consistently and systematically move in this direction as part of a long-term plan, to increase the share of foreign trade settlements in the national currency and the currencies of those countries that are reliable partners.”
I’ve written before about how the weaponization of the Western financial system (which is, in many respects, a weaponization of the dollar’s global role) could, over time, backfire. “Over time” is a vital qualification, but the division of much of the world into two competing military, political, and economic blocs is moving on ahead right now.
Oh yes, via Bloomberg yesterday (my emphasis added):
Russia may expand the list of commodities for which it demands payment in rubles to include grain, oil, metals and others, raising the stakes after President Vladimir Putin last week said Moscow will require European buyers of its gas to use the Russian currency.