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In Russia-Europe gas standoff, both sides lose -Breaking

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© Reuters. FILE PHOTO: A normal view of the WINGAS gasoline storage facility close to the northern German city of Rehden January 7, 2009. REUTERS/Christian Charisius (GERMANY)

By Nina Chestney

LONDON (Reuters) -Europe and Russia will each lose closely if President Vladimir Putin follows by on his menace to chop gasoline provides to international locations he judges “unfriendly” except they pay in roubles.

Even on the peak of the Chilly Struggle, Moscow by no means lower gasoline to Europe, however on Thursday, Putin signed a decree ordering international patrons to pay in roubles as a substitute of euros from April 1 or face going with out Russian provides.

European capitals rejected the ultimatum and on Friday Kremlin spokesman Dmitry Peskov stated it might not have an effect on settlements till later this month.

Though the specter of shortages comes after the height demand European winter season, Europe nonetheless has a lot to lose when its companies and households are already reeling from file power costs, whereas Moscow might be reducing off one in every of its fundamental sources of income.

Russia exported round 155 billion cubic metres (bcm) of gasoline to Europe final yr, offering greater than a 3rd of its gasoline provide.

With out it, Europe must purchase extra gasoline on the spot market the place costs are already round 500% larger than final yr.

Germany and Austria, each closely reliant on Russian gasoline, have activated emergency plans, which embrace rationing if needed, and different European international locations have plans in place.

“Patrons’ unwillingness to abide by (Putin’s) order dangers suspending provides. Each patrons and Gazprom (MCX:) will face losses in consequence,” stated Dmitry Polevoy, analyst at Moscow-based brokerage Locko-Make investments.

DASH FOR GAS

European international locations must compete with Asia to draw extra liquefied (LNG) from Qatar or the USA, and even amongst themselves for different pipeline provides from locations comparable to Norway and Algeria.

U.S. LNG exporters have already emerged as huge winners of Europe’s provide disaster, whereas Norway has additionally benefitted.

Greece stated on Friday it may keep away from gasoline provide issues if Russian flows are halted offered enough gasoline is obtainable on the world market.

Final week, the USA stated it’s going to work to provide 15 bcm of LNG to the European Union this yr however this may not absolutely exchange what Russia sends to Europe by way of pipelines.

Aside from attempting to get extra in an already stretched world gasoline market, a number of European international locations have additionally stated they must use extra coal, doubtlessly prolong the lifetime of nuclear crops and improve renewables output.

“A disruption of Russian pure gasoline flows in the direction of Europe stays a tail threat. Europe has extra choices for different provides, and with demand seasonally low for the approaching months, has no threat of operating out of provides this yr,” stated Norbert Rücker at Swiss personal financial institution Julius Baer.

However that threat would improve in the direction of the winter months when gasoline demand normally rises.

Fuel in European storage may be sufficient for spring and summer season with out demand curtailment, however Europe will threat coming into subsequent winter with solely round 10% of gasoline in retailer by the tip of October with out some power conservation measures, stated Kateryna Filippenko, principal analyst at Wooden Mackenzie.

To draw extra LNG from elsewhere, European wholesale gasoline costs would want to stay larger than the Asian benchmark LNG value. Rocketing gasoline costs are already hurting shoppers and industries and governments have spent billions of euros on measures to try to defend them.

“We have now to remember that the businesses who’ve signed long-term contracts with Gazprom do obtain gasoline at considerably decrease costs than now we have to pay within the LNG market. So there shall be impression on our power costs,” EU power commissioner Kadri Simson instructed EU lawmakers final month.

SELF SABOTAGE?

Russia faces the lack of an necessary income stream for its home funds.

Within the first 9 months of 2021, the newest information out there from Russian gasoline producer Gazprom present its income from gross sales to Europe, Turkey and China was 2.5 trillion roubles ($31 billion) from exporting 176 bcm of gasoline between January and September.

“For Russia, a choice to limit provide could be like capturing itself within the foot,” stated analysts at SEB Analysis.

If the cost mechanism is designed to shore up the rouble, that may be short-lived. Previous to the invasion, the Russian central financial institution required 80% of international forex from gasoline to be transformed into roubles. Now it might all must be switched into the Russian forex.

“The transfer will lower Russia off from a significant supply of international change (FX) at a time when sanctions have already massively restricted the Russian Central Financial institution’s entry to its FX reserves,” stated analysts at Fitch Options.

European patrons have repeatedly stated the transfer constitutes a breach of contract. Gazprom dangers being concerned in arbitration fits the place it might be pressured to pay massive fines sooner or later.

One other query is what Russia can do with the gasoline it normally provides to Europe. The speaker of Russia’s higher home of parliament, Valentina Matviyenko, stated final week that Moscow may redirect provides to Asian markets amongst others.

Nonetheless, there isn’t a pipeline that permits Russia to ship the gasoline equipped to Europe to Asia. A pipeline from Russia to China sends gasoline from different fields that don’t provide Europe and there’s no interconnector to re-route these flows.

Asian markets may additionally be reluctant to purchase extra.

“You make your self unattainable as a gasoline provider to different international locations. How possible is it, for instance, that China or India would select to depend on Russian gasoline if Russia so clearly exhibits that it doesn’t hesitate to make use of the gasoline as a weapon,” stated SEB Analysis analysts.

As a substitute, Russia may be pressured to pump the gasoline into home storage websites that may maintain round 72 bcm. Gazprom-owned storage websites in Europe may maintain one other 9 bcm.

Gazprom expects home gasoline demand to extend to 260 bcm by 2026 from 238 bcm in 2020 and has plans to develop storage.

However within the quick time period, if European gasoline had been re-directed to present storage, it might be full in three to 4 months and a few gasoline manufacturing may then be shut down, damaging long-term progress, analysts stated.

($1 = 81.5210 roubles)

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