The new reality of falling Russian gas exports to Europe
Two weeks ago, Russia suspended exports of gas to Poland and Bulgaria. Both countries had refused to make payments for natural gas in Rubles, which the Russian government had requested in response to international sanctions in the context of the invasion of Ukraine.
Thus Russian gas is not that invulnerable and is comparable to its oil exports to Europe.
Poland can get away with this because it does not depend much on Russian gas and it still have reserves that can last until June. The situation is a bit more complicated for Bulgaria, though.
The Institute of International Finance says it projects that further disruptions to natural gas imports from Russia will likely occur over the remainder of the year and contribute to weaker economic growth in the Euro area.
A technical recession in Q2, and perhaps even in Q3, is set to keep full-year real GDP growth to 1% in 2022—significantly below the statistical carryover of 1.9pp.
As a result of weaker growth, natural gas consumption should also decline over May-December relative to the respective monthly values in 2021 and extend the duration of current storage levels.
Since the beginning of the war in Ukraine, European governments have increasingly recognized the constraints to their foreign policy decision-making due to strategic dependencies—including the reliance on Russian oil and natural gas exports.
This has already led to a concerted effort to diversify supplies, accelerate the construction of LNG terminals, and step up the development of renewables.
Gas production within EU
Another important element could be an increase in domestic natural gas production within the EU to the extent possible. For example, Romania is already able to cover nearly 75% of consumption with domestic sources.
“In our view, Russia’s decision to cut-off flows to Poland will not have a noticeable effect on other Central and Eastern European countries.
“This is due to the fact that flows through the Yamal pipeline have already declined markedly since mid-2021. Gazprom has also reduced deliveries via Ukraine—from above 100 bcm in previous years to 67 bcm in 2020 and 34 bcm in 2022.
“Over the first four months of 2022, flows through Nord Stream 1 accounted for 66% of the total, while transit through Ukraine and Belarus accounted for 25% and 9%, respectively.
“It is not inconceivable that the Russian government will “punish” other countries for their rejection of its demand to pay in Ruble. However, this would have important consequences for FX inflows into Russia as well—especially in the case of an oil embargo, which appears more likely than not to occur at some point in the near future,” says the Institute.