The Russian utility Gazprom has announced it will suspend natural gas shipments to Poland and Bulgaria beginning on April 27. On March 31, Putin signed a decree that required “unfriendly” EU nations to pay for natural gas in rubles rather than in euros or dollars. The response from the EU initially has been that member states should continue to pay for gas with euros or dollars as stipulated in existing contracts. Last week, the EU issued guidance indicating European nations might be able to pay for Russian gas in rubles without breaching sanctions if the transactions were conducted in specific ways.
If you read coverage from April 22, it’s clear that the EU was searching for a way to meet sanction obligations without tipping over the proverbial apple cart and completely disrupting Russian gas flows to Europe. While Gazprom had previously set a deadline of April 27 for companies to make the switch and begin paying in rubles, a little tacit flouting of the deadline on both sides would have indicated a preference for de-escalation. Instead, Gazprom will move ahead with disconnecting the two European countries.
In much the same way that patent trolls trying to pick off easy targets often start with smaller companies, Russia may be trying to escalate the situation without escalating too much. While Poland relies on Russia for 45 percent of its natural gas, it generates most of its electricity from coal. Similarly, Bulgaria is not particularly dependent on natural gas. Trade.gov notes “Roughly 10 percent of industrial consumers represent 80 percent of gas demand, primarily in the chemicals, fertilizers, cement and glass sectors as well as combined heat and power plants.” Bulgaria’s agreement with Gazprom was set to expire this year and the nation had already declared it would not negotiate a new agreement with the Russian firm.
Poland also isn’t interested in backing down. According to Polskie Górnictwo Naftowe i Gazownictwo (PGNiG, the state oil and gas company), its underground reservoirs are 80 percent full and future supply lines are secure. “PGNiG believes that the suspension of deliveries of gas is in breach of the Yamal contract,” the Polish company said. “Therefore, the company will take adequate action to reinstate the execution of deliveries of gas under the contract.”
“Moreover, the company reserves the right to claim damages on account of the suspension of deliveries of gas and will exercise all of its contractual rights as well as all the rights it has under the law.”
Poland and Bulgaria have issued several statements reassuring citizens that alternative arrangements are being made and that conservation measures are not currently required. Reuters is calling this a “major escalation,” but I’m not sure I agree. This is Gazprom taking a carefully targeted action against two smaller nations as a way of upping the ante without dramatically upping the stakes. It could be argued that this is one phase of Russia’s response to the increased aid and-hitting heavier military hardware flowing into Ukraine from Western nations.
Gazprom’s decision to terminate contracts with Poland and Bulgaria may represent an escalation, but it’s not the same as, say, a Russian moratorium on natural gas shipments to all of Western Europe. That would be a “major escalation” over the current status quo and would likely trigger an equally harsh response from the EU. This looks more like an attempt to escalate — but not so far as to provoke a disproportionate response.