Kremlin-backed Gazprom has halted gas supplies to Bulgaria and Poland for failing to pay for gas in roubles, as Russia continues its retaliatory measures to Western sanctions.
In a statement, the energy giant said: “Gazprom has completely suspended gas supplies to Bulgargaz (Bulgaria) and PGNiG (Poland) due to absence of payments in roubles.”
Gazprom also warned transit via both countries would be cut if gas was taken illegally.
Poland and Bulgaria are the first nations to have gas flows cut off by Europe’s chief supplier since Russia invaded Ukraine in February.
The countries are heavily dependent on Russian gas to meet their energy needs, relying on the Kremlin for 50 per cent and 90 per cent of their supplies respectively.
Gas prices have spiked following the news, with the Dutch TTF Futures benchmark up 11.3 per cent and UK Natural Gas prices up 4.9 per cent.
Russia has been hammered by crippling sanctions over the past two months, with the West targeting its central bank, financial institutions, oligarchs and most recently, coal exports.
The European Union (EU) has played its part with five packages of sanctions – but has also spent nearly €43bn on Russian coal, gas and oil following the instigation of conflict in Ukraine.
Russian President Vladimir Putin responded to the growing number of restrictions last month with demands for ‘unfriendly nations’ to pay for Russian gas in roubles.
He signed into law requirements for overseas buyers to open Gazprombank accounts, which will convert euros or dollars into roubles prior to the transaction.
The measure – which came into affect this month – would make Gazprombank more difficult to sanction, prop up the value of the rouble, and create difficulties for Western nations backing Ukraine.
It has also been described by The Kremlin as a prototype, with implications the requirements could be extended to oil and wheat.
The European Commission has suggested the requirements could technically be complied with, and some companies such as Uniper have been open to the adjustment alongside nations such as Hungary.
Nevertheless, the West has largely refused to comply with the demands – with the demands condemned by EU leaders and the G7.
Poland has repeatedly said it will not pay for Russian gas in roubles and has planned not to extend its gas contract with Gazprom after it expires in the end of this year.
The EU is currently weighing up a sixth package of sanctions, including proposals to phase out Russian oil imports by the end of the year, in line with measures already announced by the UK, Germany and Netherlands.
However, it has stopped short of announcing any measures on Russian gas – with the bloc dependent on the country for around 40 per cent of its supplies.
Commenting on the latest developments, Craig Erlam, senior markets analyst at City AM suggested Putin was taking a big risk by shutting out European buyers.
He told City A.M.: “Ultimately, Putin is daring other larger countries to follow which is quite the gamble. The relationship with gas is mutually beneficial and Putin appears to be banking on Europe blinking first. If it doesn’t, we could see much higher gas prices and heightened economic fears in the months ahead as we face the possibility of rationing this winter.”
Ole Hansen, head of commodity strategy at Saxo Bank, suggested the EU would have to weigh up whether it is prepared to be cut off from Russian supplies this winter.
He said: “The EU has rejected the move in principle but now payment deadlines are starting to fall due, governments across Europe need to decide whether to accept Putin’s terms or lose crucial supplies and face the prospect of energy rationing. With Europe ill prepared for supplies to be cut off and Russia in need of the money, it is in the interest of both the EU and Russia to work out a solution.”