Gas prices soar as Russia cuts supply to Poland and Bulgaria

The European Union accelerated a race to find alternative energy supplies after Russia cut off gas flows to Bulgaria and Poland, escalating an economic conflict in the fallout of its invasion of Ukraine.

It came as the United Nations warned that half of Ukraine’s population would need help this year due to a war that has hollowed out cities and driven millions from their homes, while a series of explosions and fires in strategic locations inside Russia were cryptically described by Kyiv as “karma”.

European leaders denounced the cut to gas supplies as “blackmail” and Poland and Bulgaria reacted with defiance, insisting they could manage on existing stocks and extra deliveries from allies during the warmer summer months while they work to complete pipelines to secure a permanent alternative supply.

“The era of Russian fossil fuel in Europe is coming to an end,” European Commission president Ursula von der Leyen announced, insisting that Russia had “failed once again in its attempt to sow division among member states”.

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The move caused gas prices to jump on financial markets, and the euro sank in value against the dollar while the rouble strengthened. Analysts predicted the wider economic impact to be limited for now, but the step was understood as a warning from Moscow that it may be prepared to cut off more EU countries such as Germany – something that its central bank has warned would plunge Europe’s manufacturing powerhouse into recession.

Winter stocks

Berlin’s vice-chancellor Robert Habeck told journalists that if Russia cut its gas flow the country could manage with existing supplies for much of this year, but that work “at full speed” was needed to ensure stocks for the winter.

The grounds given for the suspension of gas deliveries was that energy companies Bulgargaz and PGNiG did not comply with a decree issued last month by Russian president Vladimir Putin stipulating that payments be made in roubles, seen as a bid to support the currency and soften the economic impact of western sanctions.

Russian state energy giant Gazprom issued a statement to say it had “completely suspended gas supplies” to Bulgaria and Poland “due to absence of payments in roubles”.

Kremlin spokesman Dmitry Peskov denied this was blackmail, and said payments in roubles were necessary because western sanctions had frozen “a big portion of our reserves”.

Russia’s ambassador to Ireland, Yury Filatov, said nobody should be surprised at his country’s counter-measure as Russian foreign reserves in western banks had been “essentially stolen”.

As the economic stakes rise, Minister for Foreign Affairs Simon Coveney has said more than €1 billion in frozen Russian assets could be seized in order to pay for the reconstruction of Ukraine.

Frozen vs seized

The State has already frozen €1.2 billion in Russian-linked funds under an extensive EU sanctions regime – but, in reply to a parliamentary question, Mr Coveney indicated the State would be open to going one step further and seizing it. It would, however, need “a robust and clear legal basis, as it would be a departure from the current practice”, he said.

Work to rustle up alternative energy supplies to reduce EU dependency on Russia ramped up late last year as fears of a potential invasion of Ukraine mounted. Since then, the United States has agreed to send extra liquid natural gas, Italy struck a deal for extra imports with Algeria, Greece pledged to send supplies to Bulgaria, and Poland is due to complete a new gas pipeline to Norway this autumn.

The vast majority of European gas purchase contracts stipulate payment in euro or dollars, and the EU has warned that companies risk being in breach of sanctions if they comply with Moscow’s demands, which involve opening a rouble-denominated bank account with Gazprombank.

Poland said its contract did not stipulate payment in roubles, and President Andrzej Duda denounced the cut to gas supplies as violating “basic legal principles”.

Austria’s government announced its energy company, OMV, would continue to pay for gas in euro, and it was setting aside €5 billion to refill its gas reservoirs. “Austria is sticking to the jointly agreed EU sanctions to the last dot and comma,” said chancellor Karl Nehammer.