Europe’s biggest energy companies prepare pay for Russian gas in roubles

Some of Europe’s biggest energy companies are preparing to undercut EU sanctions by agreeing to pay for Russian gas in roubles, according to reports.

As ordered by Vladimir Putin, large gas companies in Germany, Austria, Slovakia and Hungary intend to open accounts with Gazprombank after Moscow halted gas supplies to Bulgaria and Poland yesterday for their refusal to pay in roubles.

Russia’s decision resulted in European gas prices surging by 24 percent yesterday, with prices on Thursday rising a further 4 percent. Western leaders accused Moscow of blackmail and of trying shake the EU’s unity over its support of Ukraine.

But according to the Financial Times, firms including Germany’s Uniper and Austria’s OMV will open rouble accounts at the Swiss-based bank, which was founded in 1990 specifically to serve Russia’s Gazprom – the world’s largest supplier of natural gas.

President Putin last month ordered Western countries to pay for their gas supplies from the state-owned company in roubles, as Russia’s own economy wilts under crippling Western sanctions over the Kremlin’s invasion.

Otherwise, Putin said, the taps would be turned off and Europe would be without Russian supplies. What some thought was an idle threat became reality on Wednesday when Poland and Bulgaria saw their Gazprom supplies halted.

A senior European Union official warned on Thursday that the EU will consider any energy company opening an account with Gazprombank in roubles as a violation of sanctions that have been placed on Russia.

The official also said the EU cannot accept that payments in euros to Russia for gas are considered completed by Moscow only after they are converted into roubles. 

‘What we cannot accept is that companies are obliged to open a second account and that between the first and second account, the amount in euros is in the full hands of the Russian authorities and the Russian Central Bank, and that the payment is only complete when it is converted into roubles,’ the official said.

They noted that could be considered a loan to the Russian central bank, adding: ‘This is absolutely clear circumvention of the sanctions.’

Another senior EU official said that there is ‘consensus on this from all member states, is that none is willing to pay’ in roubles.

Some of Europe’s biggest energy companies – including some in Germany, Austria, Slovakia and Hungary – are preparing to undercut EU sanctions by agreeing to pay for Russian gas in roubles, according to reports. Pictured: Austria’s largest refinery OMV at Schwechat near Vienna, Austria, on April 27

Sources close to negotiations between European purchasers and Gazprom told the FT that talks have now accelerated with payment deadlines fast approaching.

Even though Russia has demanded rouble payments for its gas, the payments system it has proposed would see the use of accounts at Gazprombank, which would convert payments made in euros or dollars into roubles.

This offers a potential loophole that some countries could try to use in order to keep buying Russian gas against Western currencies, despite Western sanctions.

The European Commission said last week that if buyers of Russian gas confirmed payment was complete once they had deposited euros, as opposed to later when the euros have been converted to roubles, that would not breach sanctions.

Europe gets about 40 percent of its gas from Russia, paying 200 million to 800 million euros per day so far this year – funding Moscow’s war machine.

Currently, nearly all Russian gas purchase contracts are denominated in euros or U.S. dollars, according to consultancy Rystad Energy. Payments in roubles would benefit the Russian economy and shore up its currency.

Pictured: The business tower Lakhta Centre, the headquarters of Russian gas monopoly Gazprom, in St. Petersburg, Russia, 27 April 2022. State-owned Gazprom cut off supplies to Poland and Bulgaria after the EU countries refused to pay in roubles

Germany’s Uniper energy company told newspaper Rheinische Post on Thursday that it will transfer payments for Russian gas to a Russian bank and no longer to a Europe-based bank

Austrian energy group OMV – one of the largest importers of Russian gas – is now preparing to open rouble accounts at Gazprombank, the FT said on Thursday

Germany’s Düsseldorf-based Uniper (one of the financiers of the Nord Steam 2 project) told newspaper Rheinische Post on Thursday that it will transfer payments for Russian gas to a Russian bank and no longer to a Europe-based bank.

‘The plan is to make our payments in euros to an account in Russia,’ the daily paper cited a Uniper spokesperson as saying.

Uniper on Wednesday said it considered Russian gas flows into Germany secure for now – despite the halt in supplies to Poland and Bulgaria – as transit volumes headed elsewhere would be unaffected, Germany’s top importer of Russian gas said.

Meanwhile, Austrian energy group OMV – one of the largest importers of Russian gas and based in Vienna –  is now preparing to open rouble accounts at Gazprombank, the FT said on Thursday, citing people with knowledge of the preparations.

Austria’s government responded on Wednesday that Russian natural gas deliveries to the country continued unrestricted and there was no indication that would change, while it was scrambling to find alternative sources.

An OMV spokesperson told Reuters news agency the company was working on a sanctions-compliant solution but declined to specify whether this meant using accounts as the FT reported. 

The FT also said Italy’s Eni, another of Gazprom’s large customers, was evaluating its options. The Italian government-backed company has until the end of May, when its next payment for Russian supplies is due, to make a final call, the newspaper said, citing Italian officials. 

Slovakia, which is also heavily reliant on Russian gas, previously suggested it may be forced to comply with demands to pay in roubles.

Poland’s Prime Minister Mateusz Morawiecki speaks to media at the gas station of Gaz-System in Rembelszczyzna, near Warsaw, Poland, Wednesday, April 27, 2022

Pictured: A map showing gas pipelines that enter Europe from Russia. Polish state-controlled gas utility company PGNiG today confirmed that Gazprom had ‘completely suspended’ the supply of gas to Poland via the Yamal pipeline (dark green)

Russia’s decision to cut off Poland and Bulgaria sparked fears that the Kremlin could next target countries – like Italy, Germany and Austria – amid Putin’s insistence that ‘unfriendly’ states must pay their bills in roubles. 

One expert told the Times that most European Union importers were ‘extraordinarily’ likely to give way to Russia. 

Several countries have drawn up plans to ration supplies, which could see major industry and manufacturers ordered to shut down to protect gas for homes and prevent blackouts.

The Russian move is forcing governments across Europe to speed up a switch to alternative supplies. Western officials say that this represents a major strategic failure for Moscow.

One UK official said: ‘This will be one of the major strategic developments from this campaign and it will be a failure for Russia because it will reduce its income and also compromise its offensive capability.

‘This is one of the costs we are inflicting on Russia. Long-term sanctions will have the same effect. The Prime Minister has said Russia must be seen to have failed.’

Britain’s Deputy Prime Minister Dominic Raab slammed Russia’s decision, saying it will add to its status as an ‘economic and political pariah’.

On Wednesday, other European leaders blasted Russia’s decision to cut natural gas shipments to Poland and Bulgaria as ‘blackmail,’ saying the cutoff and the Kremlin’s warning that it might cease shipments to other countries is a failed attempt to divide the West over its support for Ukraine.

Russia’s move to use its most essential export as leverage marked a dramatic escalation in the economic war of sanctions and countersanctions that has unfolded in parallel to the fighting on the battlefield. 

Russian President Vladimir Putin ordered European countries to pay Gazprom, the world’s biggest natural gas company, in roubles after the West froze Russian assets and largely cut Moscow out of the West’s economic system. Pictured: A Gazprom logo seen in Russia

Putin demanded countries he terms ‘unfriendly’ agree to a scheme under which they would open accounts at Gazprombank and make payments for Russian gas imports in euros or dollars that would be converted into roubles

EU Commission President Ursula von der Leyen called the move ‘yet another attempt by Russia to use gas as an instrument of blackmail. This is unjustified and unacceptable’

The tactic against the two EU and NATO members could eventually force targeted nations to ration gas and deal another blow to economies suffering from rising prices. At the same time, it could deprive Russia of badly needed income to fund its war effort.

Poland has been a major gateway for the delivery of weapons to Ukraine and confirmed this week that it is sending the country tanks. 

Just hours before Russia’s state energy giant Gazprom acted, Poland announced a new set of sanctions against the company and other Russian businesses and oligarchs.

Bulgaria, under a new liberal government that took office last year, has cut many of its old ties to Moscow and likewise supported punitive measures against the Kremlin. It has also hosted Western fighter jets at a new NATO outpost on Bulgaria’s Black Sea coast.

The gas cuts – which came after energy companies Bulgargaz and PGNiG did not comply with Putin’s order to pay in roubles – do not immediately put the two countries in any dire trouble. 

Poland, especially, has been working for many years to line up other suppliers, and the continent is heading into summer, making gas less essential for households.

Also, Russian gas deliveries to both Poland and Bulgaria were expected to end later this year anyway.

Still, the cutoff and the Kremlin warning that other countries could be next sent shivers of worry through the 27-nation European Union. 

Germany, the largest economy on the continent, and Italy are among Europe’s biggest consumers of Russian natural gas, though they, too, have been taking steps to reduce their dependence on Moscow.

‘It comes as no surprise that the Kremlin uses fossil fuels to try to blackmail us,’ said EU Commission President Ursula von der Leyen.

‘Today, the Kremlin failed once again in his attempt to sow division amongst member states. The era of Russian fossil fuel in Europe is coming to an end.’

European leaders have condemned Russia actions, deeming it blackmail (pictured: Pipes at a gas transmission point near Warsaw)

Most European countries have publicly balked at Russia’s demand for roubles, but it is not clear how many have actually faced the moment of decision so far. 

Greece’s next scheduled payment to Gazprom is due on May 25, for example, and the government must decide then whether to comply.

Polish Prime Minister Mateusz Morawiecki told his country’s parliament that he believes Poland’s support for Ukraine – and the new sanctions imposed by Warsaw on Tuesday – were the real reasons behind the gas cutoff.

Bulgarian Prime Minister Kiril Petkov called the suspension blackmail, adding: ‘We will not succumb to such a racket.’

Ukrainian President Volodymyr Zelensky said that Russia views gas as a weapon for political blackmail and ‘sees a united Europe as a target.’

‘The sooner everyone in Europe recognises that they cannot depend on Russia for trade, the sooner it will be possible to guarantee stability in European markets,’ Zelensky said late on Wednesday.

While the president of the European Commission said Gazprom’s move was ‘yet another attempt by Russia to use gas as an instrument of blackmail’, EU member state ambassadors asked the executive for clearer guidance on whether sending euros breached sanctions.

France will host a meeting of EU energy ministers on May 2 to discuss how to deal with Russia’s move.

Kremlin spokesperson Dmitry Peskov said Russia remained a reliable energy supplier and denied it was engaging in blackmail.

He declined to say how many countries had agreed to switch to paying for gas in roubles but other European customers said gas supplies were flowing normally.

ANALYSIS: How energy is increasingly weaponised 

By SUSANNAH STREETER   

Energy is being increasingly weaponised as the war in Ukraine looks set to enter the long haul and expectations grow that a crude oil embargo will end up being slapped on Russia by the EU. 

For now the tit for tat retaliation centres around gas supplies, with Russia turning off the taps to Poland and Bulgaria after both nations’ refusal to pay in roubles.

Sanctions isolating from Russia from the global financial systems have prompted this strategy to drive a rouble rebound, after the currency went into freefall following the invasion, and it’s been working helped by the initial 20 per cent interest rate hike and currency controls.

High incoming tax receipts expected have helped push up the currency this week. 

But if Russia’s customers continue to refuse to sign contracts in roubles, and accelerate efforts to find other sources of energy as they have pledged to do, these revenue streams risk turning into a trickle putting fresh pressure on the rouble.

This latest move by Russia is also expected to pile pressure on Germany to relent in its opposition to a crude embargo. 

The expectation of another supply squeeze on global markets if more consumers turn their back on Russian oil has pushed up Brent crude above $106 (£84) a barrel.

 

Susannah Streeter is a senior investment and markets analyst at Hargreaves Lansdown

The invasion of Ukraine has reduced towns and cities to rubble, and forced more than 5 million people to flee abroad in a conflict that has prompted fears of wider conflict in the West, unthought of for decades.

Moscow calls it a ‘special operation’ to disarm Ukraine. Kyiv and its allies call the war an unprovoked act of aggression on a sovereign nation.

Since the Russian invasion force was driven back at the outskirts of Kyiv last month, Moscow has refocused its operation on eastern Ukraine, starting a new offensive to fully capture two provinces known as the Donbas.

Blasts were heard early on Wednesday in three Russian provinces bordering Ukraine, authorities said, and an ammunition depot in the Belgorod province caught fire.

Kyiv has not confirmed responsibility for these and other earlier incidents, but has described them as payback. ‘Karma is a cruel thing,’ presidential advisor Mikhaylo Podolyak wrote on social media.

An aide to the mayor of the ruined port city of Mariupol said Russian forces had renewed their attacks on the Azovstal steel plant, where fighters and some civilians remain holed up.

Concern has increased over the prospect of the conflict widening to neighbouring Moldova, where pro-Russian separatists have blamed Ukraine for reported attacks this week in their region, occupied since the 1990s by Russian troops.

Authorities in Transdniestria said there had been firing across the border from Ukraine on Wednesday.

Ukraine has accused Russia of trying to mastermind ‘false flag’ attacks in the region, and Moldova’s pro-Western government accuses the separatists of trying to stir conflict.