Ruble standoff between Putin and Europe risks de facto gas embargo

Russian President Vladimir Putin speaks during his address to the nation at the Kremlin in Moscow on February 21, 2022. (Alexey Nikolsky/Sputnik/AFP/Getty Images/TNS)

The European Union and Russia are at risk of triggering a de facto embargo on Russian gas after the bloc’s lawyers drafted a preliminary finding that the mechanism President Vladimir Putin is demanding for payment in rubles would violate EU sanctions. EU.

Countries including Germany are still considering an early EU assessment that Putin’s demand for the ruble would violate sanctions imposed following Russia’s invasion of Ukraine. The Netherlands has asked its energy companies to opt out of the new payment system in light of EU legal analysis.

Russia could still make clarifications or adjustments to its executive order that could affect how the EU and business move forward. Moscow has attracted around €1 billion a day from Europe in energy purchases, which has helped shield it from the impact of EU sanctions.

If Russia follows through on its threat to cut off gas supplies to non-compliant buyers, it poses a serious threat to the EU, which gets 40% of its gas from Russia. The bloc is struggling to find alternative energy sources to deal with Moscow’s outsized influence on its security, but the transition will take time. The EU is working on its sixth sanctions package, but moves to target Russian energy have been heavy-handed given its reliance.

Germany could face production of 220 billion euros ($238 billion) over the next two years if the gas supply were to be cut off immediately, according to a joint forecast by economic institutes. This is the equivalent of an annual production cut of 6.5% and could tip the country into a recession of more than 2% next year.

On March 31, Putin issued a decree stipulating that “unfriendly” buyers of his gas should open two accounts, one in foreign currency and one in roubles, with Gazprombank. The Russian bank would convert foreign currency payments into rubles before transferring the payment to Gazprom PJSC, the state-owned gas company.

Preliminary analysis by lawyers for the European Commission, the EU’s executive arm, found payments using the system would violate the bloc’s sanctions, according to a person familiar with the matter. Lawyers for the European Council, the institution made up of the leaders of the 27 member states, agreed with the commission’s assessment, another person said.

The commission forwarded the analysis to member states this week, adding that governments should notify the 150 companies that hold gas contracts with Russia, the person said. The EU also said it planned to provide further guidance on the situation to help countries and businesses.

The Netherlands this week asked its companies to refuse the new gas payment terms demanded by Russia. “The Dutch government agrees with the European Commission’s conclusion,” a spokesperson for the Dutch Ministry of Economic Affairs and Climate Policy told Bloomberg. “This means that Dutch companies are not allowed to agree to these conditions.”

Gazprom’s gas exports to the Netherlands are relatively small by regional standards, with supplies to the country accounting for only around 4% of the Russian gas giant’s shipments to the EU and Turkey in the first half of the year. ‘last year.

German Economy Minister Robert Habeck acknowledged the committee’s report to Politico, adding, “We cannot allow any circumvention of sanctions through backdoors.” He, however, did not say whether his government agreed with the assessment, or specify what action Germany would take. Germany is particularly exposed since half of its gas and coal comes from Russia.

The commission is working on a sixth sanctions package that could include restrictions on certain oil imports and goods, according to a person familiar with the work, but member states including Germany, Austria and Hungary have expressed concerns. reservations about a full embargo. Even then, the commission is unlikely to come up with anything concrete before the second round of France’s April 24 elections, two separate officials said.

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