Russian sanctions and European projects

As the reality of European sanctions against Russia dawns on both sides, European companies seek to relieve the pressure they have caused on the continent. For some, that has meant sweeping changes to comply with the sanctions, while others are negotiating ways around them.

In Brussels, EU politicians continue to negotiate the bloc’s sixth sanctions package against Russian companies and state affairs. Although Hungarian government officials sympathetic to Putin continue to obstruct the package’s progress, EU officials remain optimistic about its passage. Most expect the next round of sanctions to come before mid-June. In the meantime, countries are adjusting to the loss of Russian oil and gas security.

Currency disputes and circumvention of sanctions against Russia

Since the end of March, Russia has demanded that other European countries pay for their energy in rubles. Almost all existing energy contracts specify payment in euros or US dollars and converting them to rubles would require a Russian ruble bank account.

Russia has already stopped supplying gas to Bulgaria and Poland after the countries refused to comply.

In May, the European Commission clarified that opening a bank account with a sanctioned Russian bank would not violate the bloc’s sanctions. However, the EU expects companies to clearly state that they consider their obligations fulfilled when they pay in the currencies specified in their contracts. Payments in currencies not specified by the contracts would constitute a violation of the sanctions. Consequently, the governments of the two Germany and Italy told companies they could open ruble accounts to pay for Russian energy without violating sanctions.

French energy giant Engie said this will make it continue to pay Gazprom for the gas, doing so in euros. The companies took steps to avoid breaching the sanctions, but the move drew reviews of Ukrainian companies and French citizens. Engie is not the only one, with the German giant EnBW, the Swedish Alfa Laval and the Hungarian MVM CEEnergy, all among those who have commercial relations with Russia.

The deadline

Russia has already cut gas supplies to Poland and Bulgaria, demonstrating its determination to respond to sanctions. Both countries, especially Poland, denounced Russia’s aggression and decided to strengthen Ukraine without direct military intervention, making them prime targets.

Just over half of Poland’s gas imports came from Russia, leaving it with a large void to fill. From October, Poland will have access to the new Baltic Pipe gas pipeline, transporting 10 billion cubic meters of gas from Norway per year.

Stakeholders made their final investment decisions on the pipeline in 2018. Although it has less gas security than expected at the time, PGNiG, Poland’s state-owned oil and gas company, said it would expects the high cost of gas to suppress demand as much. that it will not need all of Baltic Pipe’s new capacity.

Russia has also targeted its neighbor Finland as it closes in on the defensive NATO alliance. Russian utility Inter RAO ended its electricity exports to Finland in mid-May, although both sides said it was due to non-payment. Later, after Finland and Sweden submitted their applications for NATO membership, politics played a more obvious role in the decision-making.

From the beginning of the year to mid-March, Finnish gas imports from Russia averaged 3.2 million cubic meters per day. The Finnish utility Gasum took care of it, refusing to pay in roubles. On May 20, Finland’s Gasum announced that Gazprom turn off the gas connections from the next morning, generally seen as a response to Finland’s application for NATO membership.

Chairman and CEO Mika Wiljanen called it “unfortunate” but said “we have prepared carefully for this situation and if there are no disruptions in the gas transmission network, we will be able to supply gas to all our customers in the coming months”.

German law changes allow nationalization

In Europe’s largest economy, just under half of gas imports come from Russia. Poland’s disconnection from Russian gas caused a flurry of policymaking in Berlin; the country began to make plans to ensure the security of its energy supplies in the event of an unexpected and instantaneous cut in the supply of Russian gas. The country’s gas storage is about 33% full.

Vice-Chancellor Robert Habeck said: “We must therefore be prepared for the situation to escalate. Therefore, with the amendment of the Energy Security Act, we are once again significantly refining our instruments and updating them.

The country’s government has begun debating legal amendments that would allow for the emergency repossession of its biggest energy companies. This allows the creation of trusts to administer the companies if the government perceives a risk of supply disruption likely to “not fulfill its missions in the service of the functioning of the community”. The trusts would also assume the voting rights of the shareholders.

This law could affect any company involved in “very important” energy infrastructure that ensures a constant supply or public safety. Gazprom Germania has faced this fate before, with its voting rights now held by network regulator Bundesnetzagentur.

Ultimately, the German government remains reluctant to fully nationalize the companies due to the fear it would cause among the remaining private companies and the markets in which they trade. However, if the market is already ruined, Germany may not have much to lose by keeping the companies running through their nationalization.

In the event of a full shutdown, companies would compete for units of gas through auctions. If that happened, the Bundesnetzagentur said some businesses might not receive any gas, but it would take into account the size and criticality of a business when distributing “rationed gas”.

Longer term divestment from Russia by Europe

Turning to the long term, EU countries have advanced their green energy plans. In March, European Commission President Ursula von der Leyen announced plans to phase out two-thirds of Russia’s fossil fuels by the end of 2022. REPowerEU StrategyRussian imports would cease by 2030.

The strategy promises a large increase to renewable investments, building on the forthcoming ‘Fit for 55’ legislative package. At the same time, the European Parliament discussed increasing its renewable energy target. Fit for 55 would likely adjust the target in any case, but the invasion of Ukraine prompted EU lawmakers to debate an increased target in a separate law sooner.

At the same time, Germany, Denmark, the Netherlands and Belgium have agreed on a 135 billion euro deal to develop their offshore wind and green hydrogen infrastructure. Before 2050, this will develop 150 GW of offshore wind capacity, which is half of the EU’s current mid-century target.

However, these will be offset in the short term by increased coal burning by countries looking for a cheaper alternative to petrochemicals. The European Commission has acknowledged the likelihood that coal burning will increase by around 5% over the next decade, with statements indicating that the environmental cost would be worth the safety gains.

On this, EU climate chief Frans Timmermans said: “You could use the coal a bit longer. But if, as we propose, you rapidly accelerate the introduction of renewable energies, then you have the opposite movement. If we can actually do what we plan, we will reduce our emissions even faster than before.

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