Russia: Gas Supply Threats and the War

Published on March 30, 2022
SGH Insight
** We believe Moscow will deliver on its demands. If the West continues to refuse to pay in Rubles – which we believe would be the appropriate even if costly response in wartime — Russia will cut off gas supplies. And if European nations reverse themselves, and agree on some face saving “compromise,” we expect they will be quickly facing the threat of if not real de facto price hikes, with a Ruble exchange rate that will for all practical purposes be set by Moscow.
** As of today, our understanding is that Moscow relayed to Beijing that Putin’s order to settle natural gas exports in rubles to “unfriendly” nations (including Europe and Japan) will come into effect in early April, “no matter how the West refuses.”
** Putin will review the proposals for ruble gas payments submitted by the Central Bank of Russia and Gazprom tomorrow, on March 31, and approve it soon after.
** If European countries or Japan insist on paying for gas in euros, dollars, or yen, Moscow has told officials in Beijing that it will refuse to supply gas to them, and that Gazprom is ready to stop supplying gas to Europe “in time.”

....The stand-off over gas is now here.
** We believe Moscow will deliver on its demands. If the West continues to refuse to pay in Rubles – which we believe would be the appropriate even if costly response in wartime — Russia will cut off gas supplies. And if European nations reverse themselves, and agree on some face saving “compromise,” we expect they will be quickly facing the threat of if not real de facto price hikes, with a Ruble exchange rate that will for all practical purposes be set by Moscow.
** As of today, our understanding is that Moscow relayed to Beijing that Putin’s order to settle natural gas exports in rubles to “unfriendly” nations (including Europe and Japan) will come into effect in early April, “no matter how the West refuses.”
** Putin will review the proposals for ruble gas payments submitted by the Central Bank of Russia and Gazprom tomorrow, on March 31, and approve it soon after.
** If European countries or Japan insist on paying for gas in euros, dollars, or yen, Moscow has told officials in Beijing that it will refuse to supply gas to them, and that Gazprom is ready to stop supplying gas to Europe “in time.”...

...We are not alone in suspecting that Russia is redirecting its forces to embark on a new and perhaps equally brutal stage of the war to take control of Mariupol, reinforce its territorial advances connecting the Donbas to Crimea, push north from there, encircle and defeat the one third of Ukrainian forces that have been tied down in defense of the eastern regions and Donbas, and solidify its new territorial claims before coming to the negotiating table — if then...


Market Validation
Bloomberg 4/27/22

Russia to Halt Gas to Poland on Wednesday in Major Escalation
Moscow and Europe are fighting over how gas should be paid for
Poland says it has enough gas in storage; prices jump 17%

Russia will halt gas flows to Poland on Wednesday in a major escalation in the standoff between Moscow and Europe over energy supplies and the war in Ukraine.
Moscow appears to be making good on a threat to cut off gas supplies to countries that refuse Vladimir Putin’s new demand to pay in rubles. Europe has said that doing so would breach sanctions and strengthen Russia’s hand unacceptably. Poland has been particularly vociferous in its criticism of Russia over the war.
Poland’s main gas supplier PGNiG said it has been informed that all flows will stop from Wednesday. Minutes earlier, Russian gas giant Gazprom issued a warning that Poland must pay up for its gas supplies on Tuesday -- in the Russian currency.
“I can confirm we’ve received such threats from Gazprom which are linked among other things to the means of payment,” Prime Minister Mateusz Morawiecki told reporters in Berlin. “Poland is sticking to the arrangements and maybe Russia will try to punish Poland” by cutting deliveries.

European gas prices surged as much as 17% as traders calculated the risk of other European countries being hit next.


Bloomberg 3/31/22

Europe Gas Rises as Putin Threatens Supply Halt in Ruble Demand
Buyers need to open special accounts with Gazprombank: Putin
Italy, Germany earlier signaled Russia is softening its stance

European natural gas rose as Russian President Vladimir Putin said supplies would stop if buyers don’t pay in rubles.
Clients should open special accounts in state-controlled Gazprombank JSC to allow foreign currency to be swapped to rubles for settlements, according to an order signed by Putin. The new rules will be valid from April 1.

3/31/22 @NatashaBertrand

NATO Secretary General Jens Stoltenberg said today that according to NATO's intel, "Russian units are not withdrawing but repositioning. Russia is trying to regroup, resupply and reinforce its offensive in the Donbas region. At the same time, Russia maintains pressure on Kyiv"

After an initial headline shock, markets generally dismissed demands last week by Russia’s President Vladimir Putin that purchases of Russian gas exports be paid for in Russian rubles instead of euros or US dollars once the Central Bank of Russia submitted an implementation plan to the Kremlin this Thursday.

We suspected that this muted response was largely due to a sense when push came to shove that Putin would not really want or be able to pull that off, and a notion perhaps that the redenomination of invoices and payments could be seen as a simple mathematical conversion exercise, and a meaningless if not even self-defeating political exercise.

** We warned, however, that this was not a simple redenomination exercise, nor a matter of invoicing choice, but a retaliation measure from Putin over financial sanctions that would develop into a threat to gas prices and supplies from Moscow that was real, and that should be taken seriously (see SGH 3/23/22; “Sanctions Retaliation, Ruble, and Gas Flows”).

Indeed, the G7 countries, including the most directly affected European Union member states, in response quickly, forcefully, and unanimously declared that they would not accede to these demands for payment in Rubles that were clearly intended to force the very nations that had imposed sanctions on Moscow to in effect water them down.

The stand-off over gas is now here.

** We believe Moscow will deliver on its demands. If the West continues to refuse to pay in Rubles – which we believe would be the appropriate even if costly response in wartime — Russia will cut off gas supplies. And if European nations reverse themselves, and agree on some face saving “compromise,” we expect they will be quickly facing the threat of if not real de facto price hikes, with a Ruble exchange rate that will for all practical purposes be set by Moscow.

** As of today, our understanding is that Moscow relayed to Beijing that Putin’s order to settle natural gas exports in rubles to “unfriendly” nations (including Europe and Japan) will come into effect in early April, “no matter how the West refuses.”

** Putin will review the proposals for ruble gas payments submitted by the Central Bank of Russia and Gazprom tomorrow, on March 31, and approve it soon after.

** If European countries or Japan insist on paying for gas in euros, dollars, or yen, Moscow has told officials in Beijing that it will refuse to supply gas to them, and that Gazprom is ready to stop supplying gas to Europe “in time.”

A Word on the Military Conflict

In the larger context of the course of the war, having met with surprisingly strong and stiff military resistance from Ukraine, Putin has redefined, at least for now, some of his initial goals surrounding the invasion of Ukraine to focus away from Kyiv and onto the Donbas.

Markets, and truth be told too many Western political leaders, are now looking ahead to a Realpolitik deal that would scupper Ukraine’s NATO ambitions and in effect cede territories already under Russia’s control to Moscow, in exchange for a cessation of hostilities.

Indeed, while it has been denied, there is considerable speculation that Washington has been urging Ukraine’s President Volodymyr Zelensky to push through with such negotiations, while London has been playing good cop/bad cop in signaling to Moscow over the prospects for an eventual removal of sanctions.

But this is not the age, or stage, of Yalta, or Versailles, and of the big powers neatly redrawing Ukraine’s map – at least not yet.

We are not alone in suspecting that Russia is redirecting its forces to embark on a new and perhaps equally brutal stage of the war to take control of Mariupol, reinforce its territorial advances connecting the Donbas to Crimea, push north from there, encircle and defeat the one third of Ukrainian forces that have been tied down in defense of the eastern regions and Donbas, and solidify its new territorial claims before coming to the negotiating table — if then.

For markets grappling with geopolitical risk, a prolonged fight over the territorial integrity of Ukraine, even if relegated to the eastern front, which is no guarantee, will mean no prospect in sight for the removal of sanctions, and continued stress on energy, commodities, supply chains, European growth, and inflation.

The West having declared economic war on Russia in response to the invasion of Ukraine may help put into perspective Putin’s threat to cut off supplies of gas to Europe.

In the words of a senior official in Beijing, “compared with a military strike against Ukraine, requiring unfriendly countries to pay for gas in Rubles is a small thing for Putin.”

Back to list