Russia's gas cut-off to Poland and Bulgaria should be manageable, analysts say

LONDON (NYTIMES) - Gazprom's announcement on Tuesday (April 26) that it would suspend natural gas supplies to Poland and Bulgaria is not likely to have a major impact on the overall European gas market, analysts say.

But it is a warning that further, more serious cut-offs of fuel from Russia could be in the offing as the war in Ukraine grinds on.

The move "increases the risk of other early terminations for other European contracts", Mr Giacomo Romeo, an analyst at investment bank Jefferies, wrote in a comment.

Russia's cut-off of gas is the first major suspension of supplies to European countries since the war in Ukraine began in late February.

Gazprom, the Russian gas monopoly, said in a statement that it was acting because the Bulgarian and Polish gas companies had not met President Vladimir Putin's demands that they pay in Russian roubles for gas supplied since April 1.

European leaders and utilities have said complying with the demand for roubles would violate Western sanctions. Russia said it would cut off gas to those not complying. As payments came due, it was unclear how the stand-off would be resolved.

Mr Putin seems to be testing European customers, trying to find weakness and sow division. Russian officials have made bellicose comments but until now, Gazprom had honoured the supply contracts with Europe that help finance the Kremlin's war machine.

"Russia seems set to make good on its threat to weaponise energy exports," Ms Helima Croft, head of commodities at investment bank RBC Capital Markets, wrote on Wednesday.

Analysts say that, in effect, tearing up contracts with Poland and Bulgaria is relatively low-risk. Poland did not want to sign another contract with Gazprom, and Bulgaria is a small customer, consuming around 2 per cent of the gas that the Russian behemoth sends to Europe.

Some analysts say Mr Putin may have miscalculated. Before this public breach, companies may have been willing to hold their noses and quietly do Russia's bidding for the sake of security of supply, but now it may be more difficult for blue-chip Western European firms to do so.

"If you are a big, listed utility and you are seen publicly to bow to blackmail from Putin, you might get real trouble from your shareholders," said Mr Henning Gloystein, a director for energy and climate at political risk firm Eurasia Group.

Mr Gloystein also said some national governments might tell their companies not to comply with the Kremlin's diktats.

The European Union, though, appears interested in helping companies continue to buy fuel from Russia without disruption or legal jeopardy.

The EU hinted recently in a guidance paper that an arrangement proposed by Moscow - under which companies open an account at Gazprombank, the financial arm of the company, and make deposits in euros or dollars that are then converted to roubles - might not be considered a breach of sanctions.

On Wednesday, Uniper, a large German utility, said it was talking to Gazprom about carrying out the rouble requirements in the light of the EU's recent statements.

"Our view is that a payment is still permissible," said Uniper chief financial officer Tiina Tuomela on a call with analysts, adding that the company was "in close contact with the German government on this matter".

Other companies may follow Uniper's lead, favouring securing supplies for their customers over taking a stand against Russia. Hungarian Prime Minister Viktor Orban, who has close ties to Mr Putin, has already said his country was ready to comply.

Mr Gloystein said he thought that some companies would baulk and that more cut-offs might occur.

For Europe, the gas stoppage comes at a good time, if there is such a thing. With the spring weather turning warmer, gas consumption, which surges in the winter, is in decline, easing some of the pressure that has kept prices elevated for months.

In a note to clients on Tuesday, analysts at Goldman Sachs said they expected the Russian cut-offs to "have only a modest physical impact" on the supply and demand balances in the key north-west European market.

Despite such assurances, the Russian move led to a surge in European natural gas futures prices on Wednesday - they opened more than 20 per cent higher on the Dutch TTF exchange, at €125 (S$182) per megawatt-hour. The prices eased later in the day.

Poland will most likely be buffered from the Russian cut-off in the coming months. It has been taking in only modest amounts of gas this year from Russia through the Yamal pipeline, which Gazprom is cutting off. Indeed, the pipeline has often been running in reverse, taking gas from storage in Germany to Poland.

Unlike some other European nations, Poland has been working for at least a decade to avoid being held ransom by Moscow over energy.

This preparation means that Warsaw has other options for obtaining gas, including a liquefied natural gas terminal that the country built to reduce its dependence on gas from Russia. The facility allows Poland to import fuel from suppliers like Qatar and the United States.

In addition, a new pipeline bringing gas from Norway under the Baltic Sea is expected to come online this year.

Poland has also been putting gas into storage facilities that are now more than 75 per cent full, more than double the European average.

In a statement on Wednesday, PGNiG, the dominant Polish energy company, said it had "various possibilities of obtaining" gas, including from Germany and the Czech Republic.

PGNiG said that by stopping gas flows, Gazprom was breaching its contract. The Polish company said that "after a thorough analysis", it had decided that paying in roubles was not consistent with the terms of its contract.

Bulgaria also maintains that it has met its legal obligations and that gas is being used "more as a political and economic weapon in the current war", said its energy minister, Mr Alexander Nikolov.

While heavily dependent on Russian gas, Bulgaria is a minnow in terms of overall European consumption of the fuel, analysts say. But like other smaller countries in southern and Eastern Europe, it may struggle to completely replace Russian gas, analysts say.

"It is in the interest of both the EU and Russia to work out a solution," the Goldman analysts wrote, warning that a larger suspension of gas could lead to a "significant economic toll".