Europe denounces ‘blackmail’ as Russia cuts off gas to Poland and Bulgaria

  • Russian gas covers 40% of Europe’s gas needs
  • Moscow calls sanctions an act of ‘economic warfare’
  • Poland and Bulgaria accuse Gazprom of breaking contracts
  • EU says companies can pay without breaching sanctions
  • The gas crisis fuels concerns about the general economic impact

SOFIA/WARSAW, April 27 (Reuters) – Russia’s Gazprom (GAZP.MM) cut off gas supplies to Poland and Bulgaria on Wednesday over non-payment in roubles, sparking an economic war with the Europe in response to Western sanctions imposed for Moscow’s invasion of Ukraine.

The state-controlled gas pipeline monopoly, which supplies Europe with around 40% of its gas needs, said transit through Poland and Bulgaria – whose pipelines supply Germany, Hungary and Serbia – would be cut off if the fuel was illegally diverted.

Fears that more states could be affected, particularly Germany, Europe’s industrial powerhouse which by 2021 depended on Russia for more than 50% of its gas, has driven gas prices up. Russia’s decision has also added to nervousness about the global economic impact of the war.

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President Vladimir Putin’s demand for ruble gas payments is the centerpiece of Russia’s response to sanctions that include freezing hundreds of billions of dollars of Russian assets.

The European Commission accused Moscow of blackmail, but it also said gas buyers from the bloc could engage in the ruble bet against Russia’s gas provided certain conditions were met. Uniper (UN01.DE), the main German importer, said it could pay without violation. Read more

The Kremlin, which calls U.S. and European sanctions an act of economic warfare, said on Tuesday that Gazprom was implementing Putin’s decree on ruble payments. Read more

“Payments for gas supplied from April 1 must be made in rubles using the new payment details,” Gazprom said.

It said it was stopping deliveries to Bulgargaz in Bulgaria and PGNiG in Poland (PGN.WA) “due to lack of ruble payments”.

Warsaw, which has been at the forefront of efforts to provide the Ukrainian military with equipment to fight Russian forces, and Sofia said the shutdown was a breach of contract.

“We will not succumb to such blackmail,” Bulgarian Prime Minister Kiril Petkov said of the Russian rouble demand.

Russia’s new gas payment system, involving the opening of accounts at Gazprombank where payments in euros or dollars would be converted into rubles, provides leeway that could see some countries continue to buy Russian gas, unraveling the united front of the bloc against Moscow.

In a note last week, the European Commission said that if buyers of Russian gas confirmed payment was complete once they deposited euros, as opposed to later when euros were converted into roubles, it would not violate the sanctions.

Germany’s economy ministry said businesses could still pay in euros or dollars under the system. Hungary, which took a similar line in Berlin, said this month that European authorities had “no role” to play in its gas deal. Read more

Germany, Austria, the Czech Republic, Italy, Slovakia and others said Russian gas supplies continued to flow.

European Commission President Ursula von der Leyen called Russia’s action “unacceptable” and said the EU would look for alternatives to fill depleted stores for the winter. Read more

But Europe has few options as the global gas market was tight as a drum before the crisis escalated.

Europe depends on pipelines for most of its gas, and grid-connected European or North African producers cannot add much more production, while shipments of liquefied natural gas (LNG) from further afield are usually reserved in long-term contracts.

The US, which has long blamed Europe for relying on Russia, has offered Europe more LNG but US supplies are not sufficient and even though Europe can get more LNG, it does not have enough plants to regasify the supercooled liquid.

Germany plans to build such factories but, for now, has none.

One of the Kremlin’s most loyal lawmakers has suggested Moscow could expand its reach beyond Poland and Bulgaria.

“The same should be done with regard to other countries that are hostile to us,” said Vyacheslav Volodin, speaker of Russia’s lower house of parliament, the Duma. Read more

Bulgaria and Poland are the only two European countries whose contracts with Gazprom are due to expire at the end of this year, meaning their search for alternative supplies was well underway.

“So they were less willing to compromise on Russia’s ruble payment demand than others in Europe,” said James Waddell, head of European gas at consultancy Energy Aspects.

But he added that the loss of Russian supplies meant that “at some point rationing is inevitable”.

Germany has already activated the first stage of an emergency plan which could eventually lead to a rationing of gas to industry, which represents a quarter of demand. Read more

Carmaker Mercedes-Benz (MBGn.DE) said an abrupt halt in gas deliveries would impact production in Germany. Read more

Poland, whose contract with Gazprom covers around 50% of its demand but which has increased its capacity to receive LNG, has long lobbied the bloc to end dependence on Russian gas, which has been pumped to the Europe from the 1970s to the Soviet era.

Bulgaria, which depends on Russia for around 90% of its gas imports, said it would not hold talks to renew its deal with Gazprom.

Europe’s benchmark first-month gas contract jumped 20% to 118 euros ($125.14) per megawatt-hour (MWh) in early trade. It was around 107 euros around noon.

($1 = 0.9430 euros)

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Reporting from the offices of Reuters, Tsvetelia Tsolova, Marek Strzelecki, Anna Koper; additional reporting by Nora Buli in Oslo, Kate Abnett in Brussels and Stine Jacobsen in Copenhagen; Written by Nina Chestney; Editing by Guy Faulconbridge and Edmund Blair

Our standards: The Thomson Reuters Trust Principles.

Mary I. Bruner