Russia to Cut Gas to Poland, Bulgaria Until Pay Demands Met

(Bloomberg) — Russia halted gas flows to Poland and Bulgaria in a major escalation, and said it will keep supplies switched off until the two countries agree to Moscow’s demands to pay for the fuel in rubles.

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European gas prices surged 20% on Russia’s sudden move to turn its vast energy resources into a weapon against Ukraine’s allies. But prices later eased as it emerged that some European companies have taken steps to accede to Moscow’s demands, reducing the risk of a broader cutoff.

The European Union has yet to respond — beyond calling Moscow’s move “blackmail” and holding a meeting — and there’s been no action from Germany, the country most dependent on Russian gas. Last week the bloc left the door open to a possible compromise, but the move to close the taps on EU members Poland and Bulgaria probably makes a fix less politically palatable.

The EU’s ability to remain united may now be tested: as payment deadlines start falling due, governments and companies across Europe have to decide whether to meet the new rules or face the prospect of gas rationing.

Last month President Vladimir Putin shocked European governments and markets by demanding gas should be paid for in rubles — via a complicated mechanism involving setting up two linked bank accounts to handle the foreign exchange transaction. The EU in principle has rejected the demand, saying it would violate sanctions and strengthen Russia’s hand.

But last week it suggested exemptions may be possible. Uniper SE, a massive buyer of Russian gas, has said it believes it can keep buying gas without breaching sanctions.

According to a person close to Russian gas giant Gazprom PJSC, four European gas buyers have already paid for supplies in rubles, and 10 companies have opened accounts at Gazprombank that would allow them to meet the new payment rules.

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Read: Four European Gas Buyers Made Ruble Payments to Russia

The next raft of payments is due in the second half of May, according to the person. All eyes are on Germany and Italy, both heavily dependent on Russian energy, as the speaker of the state Duma called on Wednesday for other countries to also get cut off.

“We should do the same with other countries that are unfriendly to us,” Vyacheslav Volodin said in a Telegram post.

Putin’s Calculation

Putin’s gambit all but removes from the EU’s potential toolkit the option of sanctioning Russian gas. European ambassadors meet on Wednesday and options to ban oil are expected to be discussed.

When he first announced the demand, Putin said shifting to rubles would help protect Russia’s huge gas revenues from sanctions or seizure by the EU. The move also appeared aimed at ensuring Gazprombank, one of few big state banks not hit with the severest sanctions, would remain largely untouched.

Putin has also repeatedly highlighted the economic and political costs of higher energy prices in Europe, suggesting the Kremlin may believe that western governments won’t be able to withstand the pressure domestically of a cutoff as long as Moscow can.

Europe Risks Rationing If Putin Cuts Off Russian Gas Supply

Benchmark Dutch futures soared as much as 24% to 127.50 euros per megawatt-hour, the highest level since April 1. They traded 5% higher at 11:30 a.m. in London.

Transit Warning

Gazprom also warned Poland and Bulgaria — which are both transit countries for Russian gas — that if they syphon off gas that’s meant for other destinations then the company will reduce transit flows.

This is the first cutoff to Europe since disputes on gas prices between Russia and Ukraine in 2006 and 2009 led to disruptions in onward supplies to European nations. The second disruption, in the freezing winter of 2009, lasted almost two weeks and halted all gas transit to the EU via Ukraine, leading to a scramble for supply. Slovakia and some Balkan countries had to ration gas, shut factories and cut power supplies.

Poland has said it has enough gas in storage and that consumers won’t feel the hit. Bulgaria has secured supplies for “at least a month,” Energy Minister Alexander Nikolov told reporters in Sofia.

“It’s clear that at the moment the natural gas is used more as a political and economic weapon in the current war, and not in the context of legal-commercial relations,” Nikolov said.

Poland Accuses Russia of Gas Imperialism, Stoking ‘Putinflation’

(adds companies opening accounts)

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