Russia Cuts Off Gas to Poland and Bulgaria, Highlighting Value of LNG

Russian state gas company Gazprom has informed its utility customers in Poland and Bulgaria that it will be shutting off their supply, penalizing them for refusing to pay in rubles. The political decision sends a signal to Gazprom's larger customers in Germany, France, Italy and the rest of the EU: Russia intends to press hard for ruble payments to support its flagging currency, despite the terms of its euro-denominated contracts. 

For many, the decision indicates that the era of the "purely commercial," apolitical Russian energy contract is over - even for longtime Russian allies like Bulgaria. "You have seen today the question of gas dependency on Russia,” European Commission president Ursula von der Leyen told the New York Times.

For now, both Bulgaria and Poland have access to enough gas from their neighbors to tide them over. Over the long term, the shutoff appears likely to add to pressure on the global LNG market, according to analysts. Poland built its own LNG import terminal years ago in anticipation of this moment, and will ratchet up imports. Likewise, Bulgaria is expected to source foreign gas via Greece's LNG receiving infrastructure and pipeline network. 

However, there may be limits to how much LNG can help fill the gap: the EU has limited import capacity, and there is only so much LNG production to go around. "All the terminal slots in Europe are booked. In fact, they're diverting some cargoes to Asia as we speak," said Poten Partners head of analytics Kristen Holmquist. "If Russia does decide to send less gas to Europe, we're really seeing the global gas situation under a lot of strain."

The price of gas on European markets jumped about eight percent at the news of the shutdown, and if Russia follows through on its threat and shuts down the gas supply to larger customers like Germany, the impact on EU gas prices (and the global economy) could be serious. In a recent note to clients, Goldman Sachs analyst Samantha Dart warned that "a full interruption of Russian flows to Germany would potentially lift European gas prices to over 200 euros per megawatt hour," nearly double the current level. This could take more than two percent off the top of Euro-area GDP growth for 2022, according to a previous Goldman analysis.

For now, gas flows to Germany are "stable," reported German economy minister Robert Habeck on Wednesday. That does not mean that Germany intends to remain dependent: Since the start of the invasion, Habeck has been scouring the world's energy supply market for alternatives to Russian gas, traveling to Dubai, Qatar and Norway to negotiate alternative sources. His team (and industry partners) have already severed the German market from its dependence on Russian oil supplies, and may move to nationalize the last German refinery that still imports Russian oil.  

Like other recent Russian foreign policy choices, the gas shutoff has created side effects that may not be favorable for Russian interests. Bulgaria has remained neutral in the conflict so far, reflecting longstanding ties to Moscow. It was also heavily dependent on Russian natural gas; the sudden end of a Russian energy partnership may weigh on the debate when Bulgaria's parliament takes up the question of providing military assistance to Ukraine next week. Bulgaria holds deep stocks of disused Soviet-era systems that Ukraine could use for the fight in the Donbas, including hundreds of tanks, self-propelled guns and armored personnel carriers, along with the ammunition and parts to run them.