A complete shutdown of Russia's gas supply to Europe is now looming as a possibility, with G7 nations refusing Vladimir Putin's demand to pay for Russian gas in roubles and Moscow insisting it will not export gas for free.
Mr Putin announced last week that Russia would only accept payments in roubles for natural gas deliveries to "unfriendly countries", which includes all European Union members.
The move appeared designed to prop up the rouble, which has collapsed against other currencies since Russia's invasion of Ukraine and the ensuing western sanctions.
Asked by reporters if Russia could cut natural gas supplies to European customers if they reject the demand to pay in roubles, Kremlin spokesman Dmitry Peskov said in a conference call that "we clearly aren't going to supply gas for free". Russia supplies about 40 per cent of Europe's gas needs.
The G7 major economies rejected the rouble payment demand last week while US and German officials are due to meet with energy industry executives in Berlin this week to discuss ways to boost alternative supplies for Germany.
Germany, the most reliant of any EU state on Russian energy, is exploring the possibility of importing additional gas from Norway, the Netherlands and Qatar. But natural gas cannot be shipped and needs a pipeline, making any switch logistically challenging.
Berlin has already pulled the plug on the massive Nord Stream 2 gas pipeline with Russia in protest over Mr Putin’s aggression.
Carsten Brzeski, chief economist at Dutch bank ING, warned last week that while German households could cope with a potential shock to supply, German businesses could not, and the result would be a major disruption in production and potentially a recession in the euro zone.
The stand-off between Moscow and the West over gas triggered another upward shift in prices on Tuesday. In the Dutch gas market, the front month contract was up €5 at €114 per megawatt hour (MWh) while the British gas price for day-ahead delivery was up 23p (27 cent).
On Thursday the Russian central bank, the Russian government and state oil giant Gazprom are expected to present their proposals for rouble gas payments to Mr Putin. "It will then be interesting to see whether Russia follows through on its threat. So far, both sides have appeared keen to avoid being the first to halt the flow of gas," said analysts at Commerzbank.
EU commissioner Mairéad McGuinness labelled Mr Putin's demand "a stunt" ahead of EU, G7 and Nato meetings.
“While clever, I’m not convinced it’s such a strategic move by Putin. Why did he wait a month? I see it more as a defensive move, because sanctions are hitting the central bank’s reserves hard,” Ms McGuinness said.
“It does, however, highlight, if that were needed, our overdependence on Russia when it comes to energy,” she added.
Russia is ready for the possibility that Europe might stop buying Russian energy supplies, the Tass news agency quoted the speaker of Russia's upper house of parliament as saying on Tuesday. Valentina Matviyenko added that if Europe were to refuse to buy Russian energy, Moscow could redirect supplies to Asian markets among others, Tass reported.