Gazprom's Gambit And The Weaponisation Of Energy: Russia Stops Gas Supply To Bulgaria And Poland

In its toughest response yet to Europe, Russia's Gazprom has announced that it will be suspending supply of natural gas to Bulgaria and Poland. Bulgaria depends on Russia for around 90 per cent of its gas and Poland gets almost 50 per cent of its gas from Russia. The move has been taken by Gazprom due to both countries' failure to pay in Rubles.

“Payments for gas supplied from April 1 must be made in rubles. (There will be) suspension of gas supplies from April 27 until payment is made in accordance with the procedure,” the statement said.

As a result of this announcement by Gazprom, European natural gas futures jumped more than 23 per cent when trading opened today morning.

What motivated Moscow apart from the sanctions?

This move by Russia marks Moscow's willingness to cross a rubicon. Moscow is increasingly viewing the willingness with which most western nations are supplying arms and ammunition to Ukraine, as an indirect declaration of proxy war against Russia.

America's defence secretary Loyd Austin went ahead and spelled it out, incase anyone in Russia was still in doubt. He said explicitly that the US wants to see Russian military weakened. This rare uncharacteristic honesty of a US policy maker saying the quite part out loud lays to rest any arguments about US being involved in Ukraine because it cares about Ukraine.

Russian capability to impose cost on America is limited. By deciding to suspend gas supplies to Poland and Bulgaria, Russia has signalled to Brussels and Washington that Moscow will not hesitate to use energy as a weapon to impose costs on Europe.

Gazprom - a Russian company or Russian strategic weapon?

It is pertinent to remember that Gazprom is not just a company. Gazprom is the world's largest gas producer and majority of it is owned by the Russian state.

Gazprom is a child of the cold war. It was born from the Soviet Union's Ministry of Gas Industry in 1989. Its goals aren't limited to furthering its own commercial interests but furthering Kremlin's interest as well.

It is headed by Alexey Miller since 2001, who is no stranger to Vladimir Putin. In 2018 when US imposed sanctions on him, he said that,"finally I’ve been included. It means we are doing everything right".

Alexander Nikolov, the Bulgarian energy minister said that, "Bulgaria will not negotiate under pressure and with its head bowed. Bulgaria does not give in and is not sold at any price at any trade counter party."

This decision by Gazprom came on the heels of US and other western allies agreeing to send more arms and ammunitions to Ukraine. Poland and Bulgaria rely significantly on Russian natural gas, along with Germany. These countries are the ones resisting imposition of embargo on Russian energy.

The other variables and impact on inflation

The EU has so far imposed sanctions on Russian coal and is currently working on the possibility of imposing an embargo on Russian oil. Russian gas however has been kept off the table as Germany and other European countries are heavily reliant on Russian gas for energy production and heating.

The current weather in Europe blunts to a certain degree the sharpness of Gazprom's decision. It is spring in Europe, the weather is turning warmer. Gas consumption, which surges in the winter, as energy consumption in households goes up due to the necessity of heating, is in decline, easing some of the pressure that has kept prices elevated for months.

Nonetheless, Europe will need to urgently replace Gazprom's supplies with alternative sources. Gas prices are already high and it is obvious that they will rise further. This will result in inflation soaring higher which translates into more burden on consumers across the European Union.

Gazprom's decision to move first and suspend the gas exports makes it reasonably clear that few weeks ago, when Russian President Vladimir Putin demanded that 'unfriendly' countries pay for energy in Rubles or face consequences, he wasn't bluffing.

For now, Poland and Bulgaria are putting up a brave face. "We are ready to be fully cut off", said Poland’s climate minister, Anna Moskwa.

Ursula von der Leyen, the president of the European Commission categorised Gazprom's decision as 'blackmail'. “The announcement by Gazprom that it is unilaterally stopping delivery of gas to customers in Europe is yet another attempt by Russia to use gas as an instrument of blackmail,” she said.

She added that the European Commission is working with allies to secure gas supplies for affected member states. Dmitri S. Peskov, the Kremlin’s spokesman, rejected her accusations and said that Russia was compelled to demand Ruble payments for gas because sanctions have frozen a big portion of Russian reserves.

The possible mitigating routes available

Poland has some options to deal with this scenario. It has been working for some years to reduce its dependence on Russian gas, unlike Germany which has been 'blessed' with a former chancellor like Gerhad 'Gazprom' Schroder. For now, the Yamal pipeline, which Russia is cutting off, will run in reverse. In other words, gas will be travelling from storage in Germany to Poland. Although this isn't a sensible longterm solution.

Poland also has a liquified natural gas terminal which allows it to import LNG from suppliers like Qatar and the US. Germany doesn't have one. LNG is transported via the sea lanes using ships, which is quite different and complicated compared to how Russia transports pipelined gas to Poland and other European countries.

LNG at first has to be turned into liquid in order for it to be transported; it must then be “re-gassed” at terminals, usually near the coast, before it can be used to heat and power homes.

Many countries have invested in regasification plants. Europe's import terminals ran at 45 per cent capacity last year, according to a report by Energy intelligence. This should be a good thing right? It means Europe has plenty of idle capacity which can now be put to good use. Yes, but it is a bit more complicated.

The issue is that all these terminals are not well connected and they aren't in the right places. As mentioned earlier, Germany, has none. Spain has a quarter of Europe's capacity, but, Spain's gas infrastructure is quite isolated from Europe. All these shoddy planning and dependence on Russian energy makes one wonder about the competence of the famed European technocrats. Germany, which for decades has been driving the EU, hides a lot behind the patina of German competence, it seems.

Poland for its part has attempted to ensure that it is not dependent on just LNG either. A new pipeline under the Baltic Sea which will bring gas from Norway is also scheduled to come online later this year.

The amount of gas Poland has been storing in its storage facilities is more than double of the European average. Poland's storage facilities are more than 75 per cent full, offering the country a good buffer.

The situation, already quite grim, will turn much more grimmer if Russia halts supply of natural gas to Germany. Although that seems unlikely, Germany is the largest importer of gas from Russia. It is in Russia and Germany's interest to work out a solution to Kremlin's demand for Ruble payments.

What's the lesson for others?

The lesson from this for all countries, including India is that energy security is paramount. Security policy can never be made on the basis of hope. "We hope if we rely on this country more for our energy needs..or that country for our energy needs" is a non starter. One assumes the worst case scenario and from there builds up capacity to mitigate that risk. Diversification of sources from which we import our energy is a short term solution but not a panacea.

If one is being pithy, the insight from energy crisis in Europe is this - on energy policy, see what the Germans did and avoid it like plague, see what the French did and attempt to emulate it.