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Kremlin to Keep Up Its Gas Squeeze on Europe, Insiders Say

Commodities Jul 26, 2022 23:46
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(Bloomberg) -- The Kremlin is likely to keep vital gas flows to Europe at minimal levels as long as the standoff over Ukraine continues, ratcheting up the pressure on the European Union over its tough stance on Russia’s invasion, according to people familiar with the leadership’s thinking. 

If the squeeze drags into the winter, it could leave the continent, traditionally Russia’s largest export market, desperately short of the fuel.

Publicly, Russia claims that technical issues like missing paperwork and turbine maintenance have forced it to slash supplies in recent weeks. But in reality, the Kremlin is using the disruptions in Nord Stream, its main remaining pipeline supplying Europe to raise the political heat on leaders there to reconsider the painful sanctions they’ve imposed and their support for Kyiv, the people said, speaking on condition of anonymity to discuss internal deliberations.

They expect the Kremlin and Gazprom (MCX:GAZP), the state-run gas giant, to continue to find reasons to keep flows limited, preventing European customers from building up the supplies they need to meet demand in the winter. EU officials are already warning of major economic disruption if flows don’t resume and calling on consumers to slash use of the vital fuel.

Raising Stakes

The gas dispute is the latest raising of the stakes in the crisis over Russia’s invasion of Ukraine and shows the Kremlin’s willingness to forgo tens of billions of dollars in export revenues to further its geopolitical aims. Gazprom has analyzed the possible impact of a cutoff lasting into next year, according to a person familiar with the situation, and found ways to limit the financial damage thanks to surging prices and revenue so far this year.

Privately, some in the Kremlin expressed surprise that President Vladimir Putin hadn’t moved sooner to cut off gas flows given Europe’s imposition of sweeping sanctions on Russia and supplying of weapons to Ukraine, one of the people said. Russia, the people said, is using its energy leverage as a political tool to retaliate in kind.

In recent days, Russia’s public line has hardened. 

Kremlin spokesman Dmitry Peskov Monday suggested that the problems at Nord Stream are linked to Europe’s imposition of sanctions over the war, warning Monday that while Russia is at the moment “not interested” in cutting off the gas this winter, “the situation may change.”

‘Idle Factories’

Dmitry Medvedev, a former president and Gazprom chairman and now a senior Kremlin official known mainly for his dyspeptic social media posts, went further Tuesday. “The blue-and-yellow hysteria,” he wrote, referring to the colors of Ukraine’s flag, “has caused severe diarrhea from the fear of freezing in their chilly homes, looking out frost-covered windows at idle factories.” 

Europe is by far Russia’s largest export market for gas and the bloc depends on its eastern neighbor for about a third of its imports. EU countries Tuesday agreed on a plan to cut gas use by 15% this winter in preparation for further disruptions in supplies. A halt in flows to the EU could shave as much as 1.5% off EU GDP if the winter is cold and demand isn’t curtailed, according to the European Commission.

EU Sees Political Deal on Forced Cuts in Russian Gas Fight

“Amid what amounts to a full-blown economic war between Russia and the West it’s hard to expect either side to stick strictly to previous agreements,” said Andrey Kortunov, head of the Kremlin-founded Russian International Affairs Council. 

Political Pressure

“It’s not likely that Russia seriously hopes that energy problems will force a change in the EU’s stance on Ukraine,” he said.  “But theoretically it’s possible that accelerating internal difficulties will lead to changes in government in a number of European countries and the new leaders will be far more focused on domestic affairs and less so on Ukraine.”

The EU pact came a day after Gazprom announced it would limit flows via Nord Stream to only 20% of capacity, citing the need for routine maintenance on a turbine that feeds gas into the link. That followed Russian claims that it hadn’t received paperwork needed to reinstall another turbine, which was sent back from maintenance in Canada thanks to a special sanctions waiver.

How Europe Became So Dependent on Putin for Its Gas: QuickTake

The technical issues are real, according to one person familiar with the situation, but Gazprom could still ship higher volumes via Nord Stream by delaying planned maintenance of some turbines. That would pose additional risks to the pipeline’s operations, and Russia sees no reason to do that given Europe’s tough line on Ukraine, the person said.

“This could be counter-productive,” said Oksana Antonenko, director at Control Risks in London. Russia’s actions will accelerate EU moves to diversify away from Russian gas and deprive the Kremlin of a key market it won’t soon be able to replace, she said.

As prices have spiked, EU leaders have accused Russia of using gas as a political weapon. But after decades of reliance on the cheap fuel for heat, power generation and industry, the continent has few easily available alternatives. 

Russia denies politicizing its fuel exports. It also has few quick options for diverting supplies, since the vast majority go through pipelines that take years to build. Flows to China have jumped this year but are still dwarfed by what Russia once shipped to Europe.

©2022 Bloomberg L.P.

 

Kremlin to Keep Up Its Gas Squeeze on Europe, Insiders Say
 

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