Explainer-Nervous Europe sees Putin’s threat of gas stop as a blunder


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© Reuters. FILE PHOTO: Russian President Vladimir Putin chairs a meeting on the development of air transport and aircraft construction, via video link at the Novo-Ogaryovo state residence outside Moscow, Russia March 31, 2022. Sputnik/Mikhail Klimentyev/Krem

By Tommy Wilkes and John O’Donnell

LONDON/FRANKFURT (Reuters) – Russian President Vladimir Putin’s vow to cut off gas to customers unless they start paying in rubles, European officials say is more of a ‘bluff’ to fend off further sanctions than a genuine threat to to stop supplying energy and analysts.

Gas flowed normally to Europe on Friday, and some experts believe the new arrangement could be broadly the same as the old way of paying, with only a slight boost to the embattled Russian currency.

The following explains why, at least for now, Putin’s gas ultimatum is considered a bluff.

WHAT HAPPENED?

Europe is heavily dependent on Russia for its energy needs, with about 40% of its gas coming from the country. So if Moscow turns off the taps, it could lead to immediate shortages, factory closures and crippling energy costs.

Gas contracts are priced in euros or dollars, but Putin said they should be paid in rubles.

Western countries called Putin’s demand “blackmail” and refused. Now it seems they don’t need to change much, although they can change the way they pay for their gas to put money more directly into Russia’s pocket.

Under the decree signed by Putin, foreign gas buyers will be required to open accounts with state-controlled Gazprombank from Friday and pay directly — instead of, say, a German buyer using a local bank to transfer the money.

Gazprombank would then use that money to buy rubles to support the currency, a role typically played by Russia’s central bank, which has been hampered by the freezing of hundreds of billions of its reserves in response to war.

The question of Putin’s ruble baffled many European officials and pundits and much remains unclear, making a final assessment difficult.

It will take a while before we know whether the new payment arrangement is workable because the gas bill is paid weeks after delivery. That means any dispute — or gas outage — is free for some time, if at all.

There was no sign of any immediate interruptions Friday. Flows remained stable through two of the three main pipelines that bring Russian gas to Europe – Nord Stream 1 across the Baltic Sea and to Slovakia via Ukraine.

Flows via the other main route, the Yamal-Europe pipeline over Belarus, had changed direction and were now carrying gas from Germany to Poland, but this is not uncommon.

IS IT A ‘STORM IN A TEACUP?’

For now it seems so. European officials and experts believe it is primarily intended to protect Russian energy giant Gazprom (MCX:) from future sanctions – if Gazprombank cashes in the money, Europe cannot approve it without cutting gas.

An Italian minister said that if the Russian decree to pay for gas in rubles remains as it is “all in all, not much would change”.

“It amounts to a warning from Putin not to tighten financial sanctions further,” said Jeffrey Schott of the Peterson Institute of International Economics, a think tank.

It wouldn’t be much of a boost for the ruble either. Prior to the invasion, Russia’s central bank demanded that most of its foreign exchange from gas be converted into rubles. Now everything should be converted into Russian currency.

“What sounded grandiose has turned into a storm in a teacup. By making it the main recipient of money for gas, it provides an additional shield against sanctions surrounding Gazprombank,” said Jack Sharples of the Oxford Institute for Energy Studies.

A European official said he believed Putin had demanded the switch to ruble payment to test who agreed. But nobody did.

“After the pushback, he’s trying to find a system where he can claim he’s won, when in fact something close to the status quo is going on,” the official said.

DO THE LIGHTS GO OFF?

Energy exports are Putin’s most powerful lever as Russia tries to fight back against what it calls an “economic war”. European officials and analysts are reluctant to say that his threats to cut supplies are truly vain.

This would hurt Russia’s Gazprom as it would struggle to transfer all of its gas destined to Europe to alternative buyers, said Dmitry Polevoy, an analyst at Moscow-based brokerage Locko-Invest.

Experts believe it is nevertheless symbolically important and has shaken confidence in Russia’s trustworthiness in Germany, which this week had to take the exceptional step to warn of possible future rationing.

A European Union official said that while he deemed the impending closure without payment in rubles a “bluff”, the full implications of Putin’s demands were unclear and a tougher stance could emerge in the coming days.

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