Bloomberg: What would be the consequences of a possible closure of the “tap” of Russian gas in Europe

The prospect of Europe being cut off from Russian gas supplies is beginning to be closer to reality, according to a Bloomberg News report.

Time passes in the controversy over the Kremlin’s demand that its customers in Europe pay in rubles for Russian gas, on which the region depends for one-fifth of its electricity generation.

The European Union has said the Russian decree violates sanctions and gives Russia more power. He proposed an alternative that avoids payment in rubles on Friday, but it is up to Moscow to decide whether this is acceptable. Payments expire in May, and then the time of truth will come.

The EU solution includes an additional safeguard for the payment of Russian gas, which confirms the Russian side that the payment is completed when it is deposited in euros or dollars, as the Commission stated that the process of conversion into rubles can be completed in for an indefinite period of time, which would mean that the companies would actually grant a “loan” to Russia.

By refusing the Russian president’s payment terms, European buyers “will run a very real risk of their supply being cut off,” said Katja Yafimava, a senior researcher at the Oxford Institute for Energy Studies.

The geopolitical “chicken game” could lead Europe to impose energy restrictions for the first time since the oil crisis of the 1970s. As Europe’s largest consumer of Russian gas, Germany is more exposed, but the effects could extend to the whole continent and beyond.

What could happen

Collapse of the gas market

The European gas market would see immediate effects. Trading is already on the rise, with prices five times higher than in the same period last year. This could get worse.

In the event of a supply disruption, contracts could more than triple, especially if Europe enters next winter with depleted reserves, according to Kaushal Ramesh, senior analyst for gas and LNG at Rystad Energy.

Such a wave would put governments and central banks under pressure as they try to control the soaring rise in inflation. The risk is that the growing cost of living crisis will intensify and lead to wider turmoil and deeper crisis.

Changes in energy policy

With less fuel for gas generators, the risks of power outages will increase. While countries will try to turn to other sources, the options are limited.

France would shut down large gas-fired power plants to save on fuel for other needs, Italy would maximize production of coal or fuel oil, and Germany has discussed burning more local lignite. But these choices would have a big impact on the environment.

On the positive side, warmer weather will reduce gas consumption for heating, delaying the worst effects until at least the fall.

By boosting other energy sources, including the accelerating expansion of renewable energy sources, the EU aims to reduce its dependence on Russian gas by two-thirds this year.

Restrictions on gas use in Germany

Germany has launched an emergency plan, with a working group meeting daily to monitor gas consumption and reserves. The energy regulator monitors companies based on their use to help determine how supplies are distributed.

Consumers will be protected as much as possible, which means that industry will bear the brunt of such a development. This is a big risk for Europe’s largest economy. The country is dependent on Russia for 40% of its gas supplies and fuel is vital to the chemical and metal industries.

At the same time, what BASF produces at Europe’s largest chemical plant is used in the manufacture of cars, medicines and fertilizers, all of which are supplied by pipelines filled with Russian gas. The company warns that a sudden shutdown would shock many industries and cause irreversible damage to German competitiveness.

Concerns are being raised by companies such as the Thyssenkrupp steel company, the Volkswagen carmaker and the utility RWE.

“Stopping gas supplies through pipelines right now would have dramatic consequences,” RWE CEO Markus Krebber said in a copy of a speech at the company’s shareholders’ meeting next week. Many manufacturers “could no longer operate their factories”.

Chancellor Olaf Solz said cutting off gas supplies from Russia would cause a severe economic crisis in Europe, leading to the loss of millions of jobs.

The abrupt cessation of Russian gas supplies could cost the German economy 220 billion euros, or about 6.5% of annual gross domestic product, according to a joint forecast by the country’s top economists. The Bundesbank estimates that production could shrink by almost 2% this year in the event of an embargo on Russian coal, oil and gas.

But the Berlin-based think tank DIW says a combination of energy savings and optimizing alternative supplies could put Germany in a position to compensate for Russian gas as early as this winter.

The government is intervening more in the energy sector with new rules for gas storage. It also plans to bring some critical energy infrastructure under temporary state control.

Consequences beyond European borders

Emerging economies will face greater difficulties in seeking energy supplies, especially for liquefied natural gas, as they will find it difficult to compete with Europe, which already draws most of its liquefied natural gas supply from the US and other nearby exporters. As a result, it maintains LNG spot prices well above normal for this season.

Pakistan, for example, suffers from power outages, in part due to European countries making better offers for LNG shipments than the Asian country facing significant economic problems.

Argentina is also dependent on LNG and has had to spend hundreds of millions of dollars to secure deliveries for the coming winter in the southern hemisphere.

” Double bluff ”

As in any chicken game, there is a chance that one or both sides will move away from the edge of the cliff. While Europe needs gas, the continent remains the only potential short-term market for Russian deposits.

The closure of the “faucet” can now permanently close the door on Russian energy imports, ending a key source of revenue for Russia. Germany, which has been criticized for its restrained support for Ukraine, will face renewed pressure to take a stronger stance against Putin.