Germany is preparing for a potential disruption of natural gas supply from Russia and activated an emergency plan on Wednesday, ahead of the Thursday deadline Vladimir Putin has ordered for gas-for-ruble payments.
Germany triggered an emergency plan in case the supply from Russia is interrupted. The plan could see rationing of gas supply. Other EU member states, including Greece and the Netherlands, have also placed their systems and stakeholders on high alert. Italy and Latvia also issued warnings of potential disruptions.
Putin has set a March 31 deadline for the government, Gazprom, and the central bank of Russia to make the arrangements for payments in rubles from the so-called “hostile” countries.
The Russian President—whose list of “hostile” states includes the United States, all EU member states, Switzerland, Canada, Norway, South Korea, Japan, and many others—ordered last week the central bank to develop a system for payments in rubles within a week.
The EU and G7 rejected the Russian gas-for-rubles idea, saying that changing the currency of the payments would be a breach of contract and that Europe would not be blackmailed into buying gas with rubles.
Yet, the emergency plan in Europe’s biggest economy, and warnings in other European markets, signal that the EU is preparing for a worst-case scenario of disrupted gas supply from Russia.
German utilities had already called last week on the federal government to create a system for early warning about a potential drop in gas supply, noting that there are “serious indications that the gas supply situation is about to deteriorate.”
Germany depends on Russian gas for around half of its needs, with many industries using gas and about half of all households heating with gas. The Russian war in Ukraine exposed Germany’s—and Europe’s—vulnerable reliance on gas and other energy flows from Russia. Europe has been reluctant to impose an embargo or sanctions on Russian energy because of its high dependence on supply from Moscow.
By Tsvetana Paraskova for Oilprice.com
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In normal circumstances a seller demands payment for his goods in a currency of his choice and the buyer has the right to accept or reject. Among countries, this type of dealings would be enshrined in a binding contract. Unfortunately, we aren’t in normal circumstances.
Germany and the EU rejected the gas-for-ruble demand saying it is a breach of contract. But Russia can equally argue that the EU has already breached the international financial system by excluding Russia from it.
So the choice before Germany and the EU is either to accept the principle of gas-for-ruble or have their Russian gas supplies disrupted.
However, the problem facing them is that none of the alternative suppliers are capable of replacing Russian gas supplies now or in the future. Therefore, Germany and the EU could face crippling energy bills which could reduce their economic growth this year to almost zero.
Russia has also signalled that it could soon demand rubles for other exports including oil, metals, and grains.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London