Thu. Sep 29th, 2022

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

April 29, 2022

Key Point: Stop the war and make peace.

It should be clear from the beginning of the Ukraine War blew up on February 24, 2022, the root cause is European nations dependence on Russian energy. Put it bluntly, if Russia does not supply energy to Europe, there would be no need of Cold War: Soviet Union had no standing. Germany and many other EU nations gets their coal, oil, and gas from Russia all this time. Recent news reports confirmed that Russia receives about US$1 billion energy payment from EU, even after February 24, everyday even now so overall Putin received US$66 billons already. So, what is impact of the unprecedent severe economic sanctions against Russia led by the US? In contrast, President Biden just asked the US Congress to approve new US$33 billion dollars for Ukraine. The fund is supposed to support Ukraine till September 30, 2022, the end of US fiscal year. That would be about 150 days from now, if the war continues that long, then Putin should get paid by EU about US$150 Billion. It is not a good deal for US taxpayers! It is also hard to imagine, if the war continues for another 150 days, what will be left in Ukraine: human causalities, infrastructure devastations, and a completely ruined economy! Of course, Russia will also suffer significant causalities and a broken economy. But it will get US$ 1 Billion per day from EU nations.

The following reports illustrate the about face maneuvers by EU major powerhouses including Germany to secure enough Russian energy for keeping their economies alive. Some quotes:

  1. Germany appears to be pursuing a compromise and says the ball is now firmly in Putin’s court.
  2. “We’re going to do just like others — I repeat, like others, because it’s not true that others reject” the new payment terms, said Hungarian Foreign Minister Peter Szijjarto. “The others just aren’t being this honest.”
  3. “Now it is up to the Kremlin and Gazprom whether they say this is enough or not,”
  4. “Either we buy natural gas and crude oil or there’s no fuel, no heating and the economy grinds to a halt,” said Cabinet Minister Gergely Gulyas.

All these maneuvers to secure Russian energy supply to Europe also means that EU will pay more for her energy security if the Ukraine war keeps going!

Europe Starts Splintering in Its Response to Russia’s Threat

Ewa Krukowska, Alberto Nardelli, Jonathan Tirone and Zoltan Simon

Fri, April 29, 2022, 5:18 AM

(Bloomberg) — Europe’s response to Russia’s threat to turn off the gas if companies don’t pay in rubles is starting to splinter.

Poland and Bulgaria have already been cut off for failing to abide by Vladimir Putin’s new terms. But Austria is confident it can keep the gas flowing and Hungary says it has no choice but to agree to Moscow’s demands. Germany appears to be pursuing a compromise and says the ball is now firmly in Putin’s court.

As payment deadlines come due governments and companies are wrestling with the dilemma of bending to Russia’s demands and strengthening Putin in his war against Ukraine or risk plunging their citizens into energy rationing. At stake is the European Union’s credibility.

Companies, some of which are still at least partly state-owned, are asking the European Commission for clarity.

So far, the EU has issued vaguely worded guidelines telling companies to pay in euros and seek confirmation from Moscow that the transaction will be considered settled at that point. Russia has said the payment has to be converted into rubles and deposited in an account in Gazprombank before it’s considered made. EU officials have said — though not yet explicitly on paper — that opening a ruble account would breach the sanctions the bloc has imposed on Russia’s central bank.

EU President Ursula von der Leyen has made clear statements that companies mustn’t pay in rubles. But so far, the bloc’s written guidelines appear to allow more wiggle room.

Gas prices have eased off earlier highs this week as traders are betting on a fudge. Hungary said on Friday that it’s not the only country ready to comply with Putin’s new terms. Bloomberg reported this week that four European buyers have already paid in rubles, while Italy’s Eni SpA is taking preparatory steps so that it can keep buying Russian gas.

“We’re going to do just like others — I repeat, like others, because it’s not true that others reject” the new payment terms, said Hungarian Foreign Minister Peter Szijjarto. “The others just aren’t being this honest.”

A piecemeal approach in Europe would have the advantage of keeping the markets working: Germany is now sending gas to Poland, a situation that can only hold as long as Germany doesn’t get cut off.

Germany’s response is up in the air. Uniper SE, a massive buyer of Russian gas, has long believed it can find a fix, a view its spokesman reiterated on Friday. Economy Minister Robert Habeck said earlier this week that companies will pay in euros, and leave it up to Russia to make the conversion. He said it remains to be seen “if this helps, and this is enough for Putin’s face-saving, so that he can say, look these are rubles.”

“Now it is up to the Kremlin and Gazprom whether they say this is enough or not,” he said.

Bulgaria’s experience suggests it might not be. Bulgarian Energy Minister Alexander Nikolov explained on Thursday why his government decided not to accept Russia’s terms, which resulted in flows being cut.

“The request was to authorize Gazprombank to execute the transaction on an external entity, that is the Moscow exchange,” he said. “Therefore you do not have any control on your own funds and at the end of the day, the payment is considered executed when it is in Russian rubles,” he told reporters.

“So there is a significant amount of time when you don’t have any control over your funds and you don’t have control over the delivery of natural gas,” he said. “If you look at it from a corporate perspective, there is not a sensible person that would sign it.”

For its part, Slovakia is seeking guidance from the bloc as it tries to avoid breaching sanctions. Deputy Economy Minister Karol Galek said in an interview that huge questions remain over the payment system.

Austria, which has one of Europe’s oldest and deepest connections to Russian energy, seems less concerned. EU Minister Karoline Edtstadler said Thursday that the European Commission had approved its oil major OMV’s payments for Russian fuel, though she didn’t detail what discussions had taken place and there was no confirmation from Brussels.

Four European Gas Buyers Made Ruble Payments to Russia

Enforcement of sanctions mostly comes down to national governments. Before the matter ends up in court, it will be for governments to decide how to deal with any companies that do bend the rules.

In the end, some countries will be forced to make their decisions based on economic realities. Hungary has made its priorities clear.

“Either we buy natural gas and crude oil or there’s no fuel, no heating and the economy grinds to a halt,” said Cabinet Minister Gergely Gulyas.

LORNE COOK, DANICA KIRKA and FRANK JORDANS

Thu, April 28, 2022, 7:13 AM

BRUSSELS (AP) — Cutting off natural gas to Poland and Bulgaria cost Russian President Vladimir Putin very little — but it is adding stress on European countries wrestling with how to reduce the energy imports feeding the Kremlin’s war chest and how to keep a united front on the war in Ukraine.

European Union officials say yielding to Putin’s demand to pay for gas in rubles would violate Western sanctions imposed over the invasion. Poland and Bulgaria were cut off after refusing the demand and say they will manage because they were already working to end their dependence on Russian energy supplies.

Analysts say there is enough ambiguity in the European stance to allow the Kremlin to keep trying to undermine unity among the 27 member countries — even if an implied threat to cut off major customers such as Germany and Italy may turn out to be an empty one because it would cost Russia heavily.

The cutoff sent a chill through EU officials wondering how their utility companies will heat homes and generate electricity next winter. Putin got maximum disruption of what he regards as a hostile alliance for minimal costs because Poland and Bulgaria are relatively minor customers who were about to end their contracts at year’s end anyway.

Poland’s entire gas import was only 10 billion cubic meters per year, out of total European imports of 155 billion from Russia. Gas in roughly that amount is already flowing to Poland from other European countries pitching in to help.

Russian energy giant Gazprom has lost relatively little revenue but opened a new front in its confrontation with Europe.

Putin is creating “a system where he can basically divide countries — as we are seeing — for the ones that don’t want to comply with this new scheme will be cut off, while others will try to comply and essentially go against the European Union indication,” said Simone Tagliapietra, an energy expert and senior fellow at the Bruegel think tank in Brussels.

European payments for Russian oil and gas amount to $850 million a day even as governments condemn the war. It’s the result of decades in which Russia was regarded as a reliable supplier of cheap gas despite warnings from Poland and other central and Eastern European countries that Russia could use energy as a weapon. While Europe needs the oil and gas, those sales are the main pillar of the Kremlin’s budget.

John Lough, an associate fellow in the Russian and Eurasia program at the Chatham House think tank, said Russia’s cutoff of Poland and Bulgaria was meant as a signal to major importers Germany and Italy, which both get 40% of their gas from Russia.

“But if they have to follow through on their threats, then they have to cut off the nose to spite their face,” he said of Russian officials. “And that’s a big problem. So it’s a kind of game of chicken.”

A wide-ranging gas cutoff would hit industrial users that can’t easily substitute other energy sources. Liberty Ostrava steel works in the Czech Republic has “no short-term solution to replace natural gas” because a changeover would take nine to 12 months, spokeswoman Barbora Cerna Dvorakova said.

European Union countries or companies that agree to the terms of a Russian presidential decree insisting they pay their gas bills in rubles will be in breach of the bloc’s sanctions, senior EU officials said Thursday. Around 97% of European gas contracts with Russia are in euros or dollars.

Under Putin’s new payment system, the Kremlin has said importers would have to establish an account in dollars or euros at Russia’s third-largest bank, Gazprombank, then a second account in rubles. The importer would pay the gas bill in euros or dollars and direct the bank to exchange the money for rubles.

The sanctions violation essentially comes with the use of the second bank account because the ruble conversion involves a transaction involving Russia’s sanctioned central bank.

The EU’s executive branch, the European Commission, says companies could remain in compliance by paying in euros or dollars per their contract, then making a “clear statement” to Gazprombank that their payment obligations are over.

That leaves an opening for the Kremlin to accept the statement or not — a potential pressure point for member countries.

Russia has Europe “over a barrel in the sense of making it a requirement that if they want any gas, then they’ll have to break their own sanctions by paying for it in rubles,’’ said David Elmes, an energy expert at Warwick Business School. “And so they’re calling Europe’s bluff, if you like. Which do you want to do on the gas — or do you want the sanctions?”

Uniper, Germany’s biggest importer of Russian gas, said it has been paying in euros and will continue to do so but indicated that it would be prepared to open a second account in rubles.

“We believe that a change of payments which conforms to sanctions laws and the Russian decree is possible,” the company said in a statement. “What’s clear is that Uniper will continue to pay in euros.”

The company declined to say when and under what conditions it would open the ruble account. It said “doing without Russian gas at short notice isn’t possible, it would have dramatic consequences for our national economy.”

That’s why EU sanctions so far have avoided Russian oil and gas. German Chancellor Olaf Scholz acknowledged Thursday that “any interruption would have consequences for the economic situation.”

Italian officials said they were waiting for further guidance from the EU on whether the payment workaround violates sanctions. Carlo Bonomi, head of Italy’s main business lobby Confindustria, said he didn’t think Russia would cut natural gas deliveries to Italy.

“Obviously, it’s a situation in continuous evolution, but regardless, the government is working with the aim of making Italy independent in case of any escalation,” he said. We are optimistic.”

But Putin may be playing a longer game, knowing that next winter will put more pressure on gas supplies. The European Union’s executive commission has unveiled proposals to cut reliance on Russian gas by two-thirds by the end of the year through additional supplies of liquefied gas by ship, faster rollout of wind and solar, and tough conservation measures.

Coordinated action on diversifying energy sources could be a victim of Putin’s ruble payment demand as some countries get exemptions and other don’t, Tagliapietra said.

“How can we have a joint energy response if different countries are doing, or not, business with Putin?” he said.

Russian sanctions: German energy company agrees to Russia’s ruble conversion plan

Peter Aitken

Thu, April 28, 2022, 2:30 PM

BARRON’S: Russia’s Gas-for-Rubles Plan Finds Soft Targets. What It Means for Prices.

Vladimir Putin’s armies are meeting stout resistance from Ukrainian defenders in the battle for the Donbas. The Russian leader has found a softer target in European utilities facing his demand that they start paying for Russian natural gas in rubles. What Putin would win from that is less clear.

The day after the Kremlin declared a gas cutoff for Poland and Bulgaria, big customers like Germany’s Uniper (ticker: UN01.Germany), Austria’s OMV (OMV.Austria), and Italy’s Eni (ENI.Italy) said they would comply with the ruble payment demand, or try to. Quickly, European gas prices subsided from their latest Russia-panic spike.

Poland and Bulgaria, which have been buying some 13 billion cubic meters of Russian gas annually between them, were just a warm-up for Russia’s currency offensive. The real battleground will be Germany, which imports about 50 BCM a year from Russia’s Gazprom (GAZP. Russia)—a 10th of its total energy supply.

A hard stop would pitch Europe’s top economy into a recession “similar to the pandemic,” with power rationing for bedrock industries like steel or ceramics, says Franziska Holz, energy markets researcher at Berlin-based think tank DIW. The German public is “split about 50-50” on whether Ukraine is worth such a sacrifice, she estimates.

Putin is sowing ambiguity of his own. One interpretation of the pay-in-rubles ultimatum looks acceptable to the European Union and commercial customers: They could make existing euro payments at contractual rates to state-owned Gazprombank, which would then convert them to rubles. Another is much less acceptable: Buyers themselves would have to convert euro payments into rubles at “market” rates.

Under current capital controls and trade sanctions, market rates are pretty much whatever the Russian central bank says they are. The recent dramatic “rally” in the ruble has been officially orchestrated, says Simon Harvey, head of FX analysis at currency broker Monex Europe. “The price you see on your screen is not the price you’ll get if the ruble starts trading again,” he warns.

The Kremlin, no surprise, hasn’t clarified which option it has in mind.

Wobble on one side and murk on the other may reflect that neither wants to push the gas-for-rubles staredown to the limit, says Jacob Mandel, a gas analyst at Aurora Energy Research.

Gazprom has more than 50 “significant” customers in Western Europe. That would allow selective enforcement to keep markets tense without halting vital revenue to Moscow. “My best guess is a few more companies receive a supply cut, but the largest buyers find a way around it,” Mandel says.

Uncertainty is Putin’s friend, tactically. European gas prices have climbed more than 20% since he invaded Ukraine in late February, buoying Russian export earnings. “Continued pressure on Europe means more revenue for Putin,” says Anne-Sophie Corbeau, a scholar at Columbia University’s Center on Global Energy Policy.

The Kremlin boss’ strategic goal of shaking Europe’s support for Ukraine is faring less well. Even as Germany sought wiggle room on gas, the Bundestag voted, 586-100, to shred a post- World War II taboo and send heavy weapons to Kyiv. Pro-sanctions French President Emmanuel Macron trounced Putin-friendly Marine Le Pen for re-election. And neutral Sweden and Finland might apply to join NATO in a few weeks.

Putin might yet play his economic trump card, halting gas supplies, to fight the trend. For now, it still looks to be up his sleeve.

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