RUSSIA’S DECISION TO halt gas deliveries to Poland and Bulgaria raises major concerns about the security of Europe’s supply of energy as well as the threat of higher energy prices, Irish economists have said.
On Tuesday evening, Russian gas giant Gazprom cut off gas supplies through the Yamal pipeline to Bulgaria and Poland, two EU and NATO members backing Ukraine in the conflict.
President Vladimir Putin had said last month that Russia would no longer accept payments in currencies other than the ruble in retaliation for the West’s economic sanctions against Moscow over its invasion of Ukraine.
He had warned “unfriendly” countries, including all EU members, that they would be cut off from Russian gas unless they opened an account with Gazprombank in rubles to pay for deliveries.
While both Bulgaria and Poland are massively reliant on Russia for their gas supplies, the two nations have said they have contingency arrangements in place. Warmer weather over the coming months will also help reduce their demand for natural gas for home heating within the two economies.
But Gazprom’s decision marks a significant escalation in Russia’s response to Western sanctions, according to energy economist Muireann Lynch, Senior Research Officer Economic and Social Research Institute (ESRI).
It raises the prospect of Russia cutting off gas flows to other European countries, including Germany, dealing a major economic blow to the bloc, which is already grappling with record inflation, mostly driven by energy prices.
While Ireland imports none of its gas directly from Russia, a supply shock in Europe could lead to gas rationing across the bloc next winter, forcing countries to share supplies. Most of Ireland’s gas supplies come from Britain, which — despite Brexit — would likely roll in behind any efforts to share gas in solidarity with Europe, Lynch said.
That could lead to scarcities and would, at the very least, drive natural gas prices even higher as countries scramble to find alternative sources. As they have done over recent months, Irish electricity and gas companies would be likely to hike the prices they charge households in response to rising wholesale costs.
“I don’t think we’re there yet,” said Lynch.
But I wouldn’t be leaning as strongly on the argument that Russia can’t afford to stop selling us gas as I would have even two months ago. They have shown they’re willing to do things that we wouldn’t have thought they were willing to do, even at the expense of their economy.
She added, “I kind of see it as a Rubicon being crossed.
“It’s sort of like all bets are off because previously, you would have said that Russia would be shooting itself in the foot to do this kind of thing.”
Piped gas exports to Europe alone are worth about €400 million per day to the Russian economy, according to the International Energy Agency with over two-thirds of Gazprom’s total exports going to Europe in 2020.
Gas and energy exports generally are also an increasingly important source of revenue for the beleaguered Russian economy, which has been largely cut off from trade with the west by sanctions.
But the latest move by Gazprom may throw into question previous assumptions about Russia’s willingness to retaliate using its energy exports.
Germany — which has already issued a warning on its own gas supply levels, indicating that rationing may be on the cards in the near future — is now reportedly preparing for the worst.
On a visit to Japan this week, German Chancellor Olaf Scholz said his country, which relies on Russia for around 40% of its natural gas supply, has planned for the loss of Russian deliveries.
“We can only prepare ourselves, and it’s what we had already started to do before the war,” he said, adding that it “makes no sense” to speculate on possible Russian actions.
Scholz also said that Western countries would continue paying for Russian gas in euros or dollars despite the Kremlin’s threat.
“We looked at the contracts for the gas deliveries,” Scholz told reporters.
“They say that payments are made in euros, sometimes in dollars… and I made clear in my conversation with the Russian president that that will remain the case,” referring to a telephone call with Vladimir Putin.
But gas markets have not reacted to the cutting off of flows to Poland and Bulgaria as dramatically as they did in the early days of the war.
While the benchmark price of wholesale natural gas contracts for delivery in the summer rose sharply on Tuesday, they failed to even approach the record heights seen in early March, shortly after the invasion. However, prices are still five times higher than they were a year ago.
Dr Lisa Ryan, an energy economist at the School of Economics in University College Dublin, said she doesn’t believe that Russia can afford to “cut its nose off to spite its face” by announcing further cuts.
“Early on, markets were really worried,” she said.
“They weren’t even really sure what kind of sanctions the European Union was going to impose. I think as time has gone on, everybody is realising that the Russians can’t afford to cut everybody off. They just don’t have the market replace European demand at the moment.”
Since the start of the war, European countries have also put contingency plans in place, Ryan said, that should alleviate any sudden impact from supply curbs.
“Poland has put things in place that are already paying off,” she said, including fast-tracking the development of a new pipeline from Norway.
The Baltic pipeline — due to be completed in October — is expected to be able to deliver up to 10 billion cubic metres of Norwegian gas. Poland has also announced plans to expand its capacity to store liquified natural gas (LNG) from the United States.
“So you can see why they’re kind of able to call Russia’s bluff at the moment,” Ryan said.
For Ireland, these are longer-term questions, particularly given the Government’s climate ambitions, she explained.
“You hear a lot of talk about how crazy it is that the minister hasn’t signed off on a new LNG terminal in Kerry but that’s not going to help us in the very short term,” Ryan said.
While US energy companies are keen to find new markets for LNG in Europe as a replacement for Russian gas, Ryan said increasing Irish reliance on the fossil fuel is not a decision that should be rushed into.
“Those sort of decisions shouldn’t be made just in the middle of a crisis where the price has gone up last night,” Ryan said.
“To make a decision like that, it has to be in the whole frame of what we do with our renewables; what other kind of responses do we have; how are things looking with our British and Norwegian supply — before we start panicking.
“Because then you’re just into another form of dependency and you have locked yourself into a contract — and also infrastructure — for another long period, that might not be the right thing to do.”
Additional reporting by – © AFP 2022
To embed this post, copy the code below on your site
have your say