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  1. Analysis
March 31, 2022

Russia’s energy blackmail of Europe has begun

Vladimir Putin has told European countries that they must pay for imports of gas in roubles, in response to sanctions imposed against Russia.

By Ben van der Merwe

Germany has taken emergency measures to secure its gas supplies as Europe’s stand-off with Vladimir Putin over energy intensifies.

In late March, Putin announced that ‘unfriendly countries’, including EU member states, would soon be required to pay for their imports of Russian gas in roubles. The announcement caused gas prices to jump by 9%.

G7 leaders have rebuffed the demand, saying that any such requirement would be a breach of contract. Major importers have also claimed that their contracts do not allow for Russian companies to require payment in roubles.

What now for Germany’s gas imports?

Germany is now bracing for a halt to gas imports, implementing emergency surveillance of imports and reserves. Further measures could be taken if supplies run low, including the rationing of energy to businesses.

The country is, however, in a much stronger position than it was two months ago. In early February, the country had just 87 terawatt-hours of gas in storage – 30% less than usual for that time of year. Now, with gas reserves finally back to their pre-crisis levels, Russia’s threats hold less water.

Only one German storage facility for which data is available remains significantly undersupplied – a site in the northern city of Rehden. That facility, where storage levels are 22% below their normal levels, is one of two German storage sites run by Astora, a subsidiary of the Russian state-owned energy giant Gazprom.

Russia's sanctions response

Russia’s move to require payment in roubles is the latest in a series of measures taken to prop up the value of the currency, which has been battered by Western financial sanctions.

The rouble lost 43% of its value against the US dollar in the first two weeks of the war, including a 31% fall the day that the first wide-ranging financial sanctions were announced. Recent weeks have witnessed a significant recovery of the currency’s exchange value, however, with the rouble now just 6% below its pre-war value. 

Russia has taken dramatic steps to shore up the currency, including capital controls and a requirement for all companies to convert 80% of their foreign currency earnings into roubles. That includes the substantial earnings of Russia’s gas giants, inflated by the steep rise in energy prices and exempt from key financial sanctions.

The newly proposed changes would force importers to purchase roubles in order to meet their payment obligations, providing a long-term boost to the currency’s exchange rate. The change would also shift the risk derived from exchange rate fluctuations onto European importers, although that would only benefit Russia if the rouble continues to appreciate in value.

In late March, the German government announced plans to end the country’s dependence on Russian oil and coal by the end of 2022, and on Russian gas by 2024. 

While oil and coal can easily be substituted by imports from elsewhere, Germany’s gas is delivered via pipeline. That means that any short-term switch away from Russian supplies would require switching to liquefied natural gas (LNG). Like much of central and eastern Europe, however, Germany lacks the facilities necessary to regasify LNG.

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