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Friday, December 09, 2022

EXPLANATORY: What’s next for Europe’s natural gas during war?

Russian President Vladimir Putin is demanding payment in rubles for natural gas – or otherwise. Germany speaks of gas rationing in case of a cut-off point. Prices for fuel which is used to heat homes, generate electricity and power power is through the roof.

There are many discussions about natural gas in Europe against the background of Russia’s invasion of Ukraineto say the least.

Here are the most important things to know:

WHAT DOES PUTIN PROPOSE?

Putin said importers of Russian gas should now pay in rubles. European leaders say no dice – the contracts say euros or dollars and one side can not change it suddenly.

Change of currency will normally follow extensive negotiations, analysts say, with clients demanding something in return for being exposed to fluctuations that would accompany the payment of the less stable ruble.

The open questions about what the change could mean sent shivers through energy markets, raising uncertainty about whether Europe’s natural gas could be cut off. and cause a major blow to the economy. But Russia also relies on oil and sales to finance its government as sanctions hurt its financial system.

The Kremlin offered what can be seen as a loophole. Importers will simply have to set up an account in dollars or euros with a designated bank, then a second account in rubles. The importer would pay the gas bill in euros or dollars and instruct the bank to exchange the money for rubles.

In any case, Kremlin spokesman Dmitry Peskov said on Friday that the change would not take place immediately: “Payments on shipments that are currently in progress should not be made today, but somewhere at the end of April, or even in early May. “

European leaders have rejected the proposal as “extortion” and say payments in dollars and euros will continue.

German officials did not want to discuss the impact of Putin’s decree, other than to say they were investigating. Ministry of Economy spokeswoman Beate Baron noted that Russia’s Gazprombank had been given 10 days to explain the procedure, “and of course we, in turn, will look into it.”

A top European Commission energy official has tweeted that the European Union is coordinating “to establish a common approach.”

WHAT IS PUTIN AFTER?

The Kremlin says the change is necessary because Western sanctions have frozen its foreign exchange reserves. Because the measure targets importers in “unfriendly countries”, it can be seen as retaliation for the sanctions that many Russian banks have cut off from international financial transactions and led to some Western companies abandoning their businesses in Russia..

The economic benefits for Russia are not clear. In theory, payment in rubles would increase the demand for the currency and help the Kremlin recover its exchange rate, which has recovered land from its initial dive. after the invasion. But gas exporter Gazprom already has to sell 80% of its foreign earnings for rubles, so the boost for the currency can be minimal.

The Kremlin indicates it also wants to extend ruble payments to other commodities, such as metals.

One motive could be political, said Stefan Meister, head of the program on international order and democracy at the German Council on Foreign Relations.

“Russia is not interested in stopping gas, but it wants some kind of political victory,” Meister said. “It wants to show that Putin dictates the conditions under which he exports gas.”

The move is aimed in part at Russia’s domestic audience, Meister said, with Putin telling his people: “Look, these are hostile states and now they have to pay under a different scheme.”

“So I think it’s also about getting support within the country, to defining who the enemies are,” Meister said.

Another motive could be to protect the designated bank, Gazprombank, from sanctions because it would be the channel for the payments that allow gas to flow, Meister said. It is the third largest bank in Russia, and like Sberbank, the largest, it is not cut off from the international SWIFT payment system.

WHAT IS THE STATE OF GAS SUPPLY TO EUROPE?

Coordinated US and European Union sanctions release payments for oil and gas. This is a concession of the White House to European allies who are much more dependent on energy from Russiawhich supplies 40% of Europe’s gas and 25% of its oil.

According to pipeline operators’ websites, gas continued to flow into Russia’s pipeline system from Russia on Friday.

Many are not happy that European utilities are still buying energy from Russia, which according to the U.S. Energy Information Administration received an average of 43% of its annual government revenue from oil and gas sales between 2011 and 2020.

This helped to pay for the tanks and missiles used in the invasion. But it also means that Russia has strong reasons for not cutting off natural gas.

CAN EUROPE SURVIVE A GAS SHUTDOWN?

Europe’s economy would struggle without Russian gas, although the impact would vary depending on how many countries use it.

Germany, the continent’s largest economy, “is heavily dependent on Russian energy supplies,” said Monika Schnitzer, a professor of economics at the University of Munich and a member of the country’s government-appointed Council of Economic Experts.

“A suspension of these stocks carries the risk that the German economy will move into a recession with significantly higher inflation rates,” she said.

Inflation is already at record highs, which makes everything from groceries to raw materials more expensive. This is driven by rising energy priceswith Europe facing an energy crisis even before the war broke out.

The crisis has made governments and companies struggling to gather supplies from other sourcesbut it will not be enough to cover what is now being used if Russian gas suddenly stops.

The Bruegel think tank estimated that Europe would be 10% to 15% short of normal demand to get through the next winter warming season, which means that extraordinary measures will have to be taken to reduce gas consumption.

European leaders have said they can not afford the consequences of an immediate boycott. Instead, they plan to reduce Russian gas consumption as quickly as possible. They order more liquefied natural gas, which comes by ship; seeks more gas from pipelines from Norway and Azerbaijan; accelerated deployment of wind and solar energy; and push conservation measures.

The goal is to reduce the use of Russian gas by two-thirds by the end of the year and by 2027 completely.

The situation is serious enough that Germany has issued an early warning of an energy emergencythe first of three phases.

In a full-fledged emergency, government regulators must decide which companies will shut down their gas to save homes and hospitals. Manufacturers of chemicals, glass, ceramics and galvanized metals use a lot of gas.

Rationing will hit a European economy already suffering from the effects of the war and high energy prices which pushed inflation to a record 7.5%.

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