Russian gas and sanctions

We had too and fro over the past few days following the Russian decision to suspend gas deliveries to Bulgaria and Poland, after they failed to agree to Russian demands that all payments for gas needed to be made in rubles.

There was a piece in the FT earlier this week, suggesting that numerous European entities, and countries, had agreed to transact in ruble for gas. It felt a bit like the dam was breaking, which is really what Moscow wanted.

But in response, the EC has now issued the following statement, making clear that transacting for gas in rubles breaks sanctions, as it is not as per the original contracts and forces in effect EU entities to deal with the CBR, a sanctioned entity.

https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/faqs-sanctions-russia-gas-imports_en.pdf

Slovakia has come out and said that Gazprombank has opened ruble and euro accounts to enable payment for gas as per Moscow’s new terms, but these accounts have not yet been activated, hence they are presumably not breaking sanctions. It has asked the EC for further clarification. But Slovakia has been assisting Ukraine with arms supplies, so if it fails to pay for future gas deliveries in rubles, one assumes it might end up in the same position as Bulgaria and Poland.

This all leaves the question really as to why the Kremlin is bothering with this ruble payment initiative, as payment is still being made in Euros, ultimately it gets the benefit of the hard currency.

I think there are three reasons:

First, all this sows disharmony in the EU. It exploits fissures between those countries like Poland looking for a quicker embargo on Russian energy and those like Germany and Hungary who still want to be able to buy Russian gas - Hungary seems to have no problem importing Russian gas longer term given the close Putin - Orban relationship, while Germany wants a longer transition to wean itself off Russian gas to minimise the disruption to the German economy.

Actually Russia does not want to cut energy supplies to Europe, as this will cost it a EUR110bn plus business. And on gas, the lack of alternative export pipelines East means that if it is not selling this gas to Europe, it loses the revenues. It will take it years to build alternative pipelines.

But by introducing doubt about the future supply of gas and energy, it forces the likes of Hungary and Germany to lobby on its behalf for the continuation of supply from Russia. It hence takes wind out of the sails of those trying to force an energy embargo.

Second, this is all about leverage, and the use of menace by Moscow to get what it wants. It wants the West to stop arms supplies to Ukraine. It thinks that by threatening to cut energy supplies to Europe some European countries will bottle out on sending arms supplies to Ukraine. So it’s about securing leverage.

Third, it’s about breaking sanctions more broadly. By forcing European entities to transact in rubles, in effect with the CBR, it aims to break the sanctions straight jacket around the CBR, and about transacting in rubles more generally. Notable with the sanctions imposed after February 24, has been the importance of self sanctioning - Western companies deciding that’s it’s too much hassle, or too risky from a reputational perspective to transact with Russia. International business is leaving Russia, en masse, irrespective of whether their business is sanctioned. The Kremlin wants to stop this and how better than getting European countries and major Western energy companies to transact again in rubles, and with the CBR. This would send a clear message to global business that Russia is still open for business.