Vladimir Putin has threatened to cut off the gas supply to Europe if the “hostile” nations—including all of the EU—do not start paying in rubles for gas. Flows from Russia continue, but the EU and its biggest economy, Germany, are bracing for a potential disruption to gas supply either because of an energy embargo on Russia or Russia halting supplies. Without Russian gas, Europe faces gas rationing, recession, and sky-high energy prices—higher than recent record-highs, economists and analysts say.
The EU has rejected Putin’s demands for payments in rubles, while Russia did not immediately cut off the gas supply to Europe after April 1, partly because it is dependent on revenues from gas and partly because payments for gas delivered after April 1 are not due until later this month or early May.
The Kremlin, however, has signaled the gas-for-rubles demand is just the beginning of a switch to the Russian currency for Russian exports.
Last week, the European Commission said that companies in the EU may have a way to pay for Russia’s gas in rubles without violating sanctions on Moscow. The companies would need to pay in euros or dollars, which would then be converted into rubles, although the transactions would also have to be accompanied by a statement explaining how the companies consider their contractual obligations to be complete once they submitted the euros or dollars. Related: Why Are Big Oil Execs Dumping Millions Of Dollars Worth Of Stock?
“It would be advisable to seek confirmation from the Russian side that this procedure is possible under the rules of the decree” about payments in rubles, the EC said in an advisory document sent to member states on Thursday and cited by Reuters. The EU’s refusal to pay directly in rubles tests Putin’s threat to cut off the gas supply, and buyers in Europe “would be running a very real risk of their supplies being cut,” Katja Yafimava, a Senior Research Fellow at the Oxford Institute for Energy Studies, told Bloomberg.
If Russian gas supply is halted, the worst-hit EU member will be none other than its biggest economy—Germany—which risks rationing and recession, the German central bank and German analysts and industry say.
For Europe, the repercussions of a recession in its biggest economy cannot be understated—the snowball effect of surging energy prices would drag most other economies into recession.
Germany depends on Russian gas for around half of its needs, with many industries using gas and about half of all households heating with gas. The Russian war in Ukraine exposed Germany’s—and Europe’s—vulnerable reliance on gas and other energy flows from Russia. Europe banned coal imports from Russia—as of August—but is still divided on a possible oil embargo, and hasn’t even started a serious discussion on a gas embargo yet.
Germany’s industry has been warning for weeks that an immediate ban on Russian gas would have severe negative impacts on competitiveness, business, and economy.
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Martin Brudermüller, chief executive at Europe’s largest chemicals group, Germany’s BASF, has warned that a halt in Russian oil and gas supply “could throw the German economy into its biggest crisis since the end of World War Two.”
If Russian gas supplies are immediately interrupted, Germany will lose as much as $237 billion (220 billion euros) in economic output both this year and next, the Kiel Institute for the World Economy said earlier this month.
“If gas supplies were to be cut off, the German economy would undergo a sharp recession,” said Stefan Kooths, vice president and research director business cycles and growth at the Kiel Institute for the World Economy.
An embargo on Russian energy trade with Germany “could lead not only to price effects but also to a rationing of energy use,” Bundesbank, the central bank of Germany, said in a monthly report last week.
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“If only energy production and supply sectors were to be cut off from Russian energy deliveries, this could lead to an additional short-term real GDP loss of 1% for the current year,” Bundesbank economists say.
“Should the shock in addition directly hit energy-intensive industries which use fossil energy sources to power their production plants or which process fuels as raw materials, the loss could climb to 3¼%,” the German central bank warns.
By Tsvetana Paraskova for Oilprice.com
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The repercussions for the EU particularly its biggest economy, Germany, will be very costly and damaging not only in terms of a sharp recession with Germany’s economy hit hardest and plunging into zero growth.
Still, the EU is hell-bent on cutting its nose to spite its face by saying it won’t pay in rubles and mulling over embargoing Russian oil supplies.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London