This escalates tensions between Europe and Russia over energy and Russia’s invasion of Ukraine. It also adds urgency to plans to reduce the continent's dependence upon Russia as a source of oil and gas.
These are the key facts to understand about Europe's natural gas situation:
What did Russia do in the past?
Gazprom, a state-controlled Russian energy company Gazprom, claimed it was cutting off Poland & Bulgaria due to their refusal to pay in Russian rubles as President Vladimir Putin demanded.
European leaders insist that natural gas contracts are in place for payment in dollars or euros and can't be changed suddenly by either side. Poland has taken long-term measures to protect itself from cutoffs, including building an import terminal for LNG that ships by ship. It had originally planned to end its year-end deal with Gazprom. Bulgaria claims it has enough gas.
The uncertainty surrounding the meaning of the change has sent shockwaves through the energy markets. It raises questions about the possibility that natural gas could be cut off from other European countries, and could cause major economic damage.
Edward Gardner, Capital Economics, stated in a report that President Putin's order that gas payments from 'unfriendly' countries be made in rubles raises concern that supply could be cut off for other European countries during the due dates in the coming weeks.
Russia warned that this could happen if other countries don't pay in rubles for their energy supplies. Russia, however, relies on oil sales to finance its government because of sanctions that have squeezed its financial system.
According to the Kremlin, importers will need to open an account in dollars, euros or both at Russia's third largest bank Gazprombank. Then, a second account would be opened in rubles. The importer would pay for the gas bill in dollars or euros and then direct the bank to convert the money into rubles.
Ursula von der Leyen, President of the European Commission, stated Wednesday that Russian sanctions against paying in rubles are violated and that contracts with companies "should not be subject to Russian demands."
What's Putin doing after all these years?
Putin's order to pay ruble money targets "unfriendly" countries. This can be considered retaliation against the sanctions that have deprived many Russian banks of international financial transactions, and caused some Western companies in Russia to close their operations.
Gardner wrote that Gazprom's decision to stop deliveries to Poland, and Bulgaria today because they refused to pay Russian gas in rubles represents an escalation of Russia's use gas as political leverage.
Gazprom has to sell 80% or more of its foreign earnings to Russia for rubles. This means that the economic motivations for Russia requesting rubles are not clear. However, Russia could see a small boost in its currency. To show that Putin can control the terms of gas exports, one motive could be political. The move, which requires payments through Gazprombank to be made, could discourage any further sanctions against the bank.
This could be used by Putin to create a pretext for cutting off support from Ukraine. Russia continues to send gas to Hungary via the same pipeline system, despite Viktor Orban, the populist Prime Minister of Ukraine, agreeing to Putin's payment arrangement.
Analysts from Eurasia Group, which is a political risk consulting firm said that "the Russian move almost certainly responds to increasing levels of Western support for Ukraine." It signals that Putin is willing to sacrifice revenues amid increased NATO military assistance to Ukraine and stronger US. Statements about supporting Ukraine in the victory of the war.
Simone Tagliapietra is an energy expert and senior member of the Bruegel think-tank in Brussels. He stated that Russia is using EU fragmentation to its advantage -- it's a divide-and-rule strategy... which is why we require a coordinated EU response."
How is Europe's gas supply?
Payments for oil and gas are exempted from payments by the European Union and the United States through coordinated sanctions. This concession by the White House to European allies is an acknowledgement of their dependence on Russia's energy. Russia supplies 40% of Europe’s gas and 25% its oil at a price of $850 million per day.
Many people are unhappy that European utilities continue to buy energy from Russia. According to the U.S. Energy Information Administration, 43% of their annual government revenue came from oil and gas sales between 2011-2020.
Russia's decision not to sell gas outside of long-term contracts prior to the war contributed to a winter energy crisis that drove up prices and served as a wakeup call to Europe's dependence upon Russian energy. The war forced a rapid reassessment and re-evaluation of decades of energy policies in which cheap Russian gas supported Europe's economy.
Russia is not the only one who loses its natural gas supply to Europe.
Russia could theoretically ship oil via tanker to other countries, including India and China. These are oil-hungry countries and do not have to take part in sanctions.
Gas is a different matter. The pipeline connecting to China doesn't connect with the gas pipeline that runs from northern Russia's Yamal Peninsula to Europe. Russia only has limited capabilities to export liquefied natural gas via ship.
Can Europe withstand a complete gas cutoff?
The impact of Russian natural gas on Europe's economy will vary depending on the amount used by each country. However, Europe's economy could not survive without it. Economists have different estimates of the impact on European economic growth. Moody's analysts stated in a recent study, that Europe would be plunged into recession if it had to stop all energy sources -- oil and gas.
Germany is the continent's biggest economy and heavily depends on Russian energy. According to its central bank, a total cutoff could result in 5 percentage points less economic output and higher inflation.
Due to soaring energy prices, inflation is already at an all-time high, making it more difficult for consumers to buy groceries and raw materials.
According to the Bruegel think-tank, Europe will be 10% to 15% less than normal to heat the next winter. This means that extraordinary measures must be taken to reduce gas consumption.
What is Europe doing to lessen its dependence on Russian gas?
European leaders said that they cannot afford to suffer the negative consequences of a boycott. They plan to cut down on Russian gas consumption as quickly as possible. They are increasing their order of liquefied natural gases, which is shipped by ship, and seeking out more gas through pipelines from countries like Norway and Azerbaijan.
The goal is to reduce Russian gas use by at least two-thirds by 2020 and all Russian gas consumption by 2027. It remains to see if this goal can be achieved in practice. Liquid gas supplies are limited and export terminals are at maximum capacity.
Germany, which does not have an import terminal, plans to build one. However, this will take many years. Italy, which receives 40% of its gas from Russia has made deals to replace approximately half the amount from Algeria, Azerbaijan and Angola. It is also looking to increase its imports from Qatar. Europe is under pressure to replenish its underground reserves before next winter's heating demands.
This is a serious situation, so Germany has issued an alert for an energy crisis.