On Wednesday, the European Commission presented a sixth sanctions package against Russia over the war in Ukraine, which includes a plan to phase out all crude and petroleum products by the end of the year.
The oil embargo could still be changed to give countries like Hungary more time to adjust, but EU officials insist sanctions are coming.
The sanctions have so far spared Russia’s natural gas exports, which are expected to generate about $80 billion in tax revenue for Moscow this year, according to Rystad Energy.
It would be a much greater demand for Europe, which got 45% of its natural gas imports from Russia last year, a far larger share than oil. But punish the gas would treat a blow for the Russian economy and seriously compromise President Vladimir Putin’s ability to finance his war. A total gas embargo by Western allies reduce Russia’s GDP by almost 3%, according to an analysis by the Kiel Institute for the World Economy, published before the invasion.
Europe is Russia’s biggest customer for gas, and the majority is delivered through pipelines. This would make it difficult for Russia to divert supplies to other countries if the bloc were to turn off the taps.
Lithuanian Prime Minister Ingrida Imonyt announced last month that her country would be the first to cut ties with Russian “poisonous” gas.
A “new world of economic pain”
Holger Schmieding, chief economist at Berenberg Bank, told CNN Business that these goals were “difficult but possible”, but he does not think Europe will go much further and adopt formal gas sanctions.
“If we get the full embargo then, of course, we would be talking about a likely recession in the eurozone,” he said.
As a result, analysts at S&P Global Commodity Insights do not expect EU sanctions on Russian natural gas to kick in until 2024.
“[They] would probably be a gradual reduction rather than an abrupt reduction,” Kaushal Ramesh, senior analyst at Rystad Energy, told CNN Business.
“And [they] would likely incorporate flexibilities for exemptions for some of the most dependent countries.”
There is, of course, another way for Europe to deal with a sudden loss of Russian gas. Moscow could close the taps.
Yet Russia’s willingness to turn off the taps has rattled countries dependent on its exports. Ramesh thinks the European Union is between a rock and a hard place.
Gas sanctions would mean a “whole new world of economic pain”, he said, but that should “be weighed against the idea of Russia unilaterally stopping the flows”.
“[This] is a scenario of lasting uncertainty,” he added.
While neighboring countries have stepped in to share their gas supplies with Poland and Bulgaria, a similar response could be more difficult to orchestrate under an EU-wide embargo.
The block’s gas storage facilities are around 34% full, according to data from Gas Infrastructure Europe. This is about normal for the time of year, but only be enough to get it through until the end of 2022 without additional imports.
“We would then have problems next winter,” Schmieding said.
Europe is rapidly diversifying its energy sources to avoid catastrophe. Imports of liquefied natural gas (LNG) hit a five-year high in April, and gas flows from Norway were up 17% from last week, Rystad Energy said.
Could Germany pull through?
Germany has so far been reluctant to tackle Russian gas. It is the biggest buyer in the world, according to data from the US Energy Information Administration.
“We know that there is a dependence on natural gas from Russia, it’s a reality. We need time to reduce this dependence,” German Finance Minister Christian Lindner said on Monday. CNN’s Julia Chatterley.
German gas distributor Uniper said last week that it could not do without Russian gas in the short term.
“This would have dramatic consequences for our economy,” the company said in a statement.
Even a more gradual elimination would inflict pain. Fears of a supply shortage have sent wholesale gas prices skyrocketing since Russia invaded Ukraine, helping to push producer price inflation, i.e. the price of goods leaving factories, above 30% in March, the highest level in 73 years old.
The country has increased its LNG imports and is accelerating the construction of LNG terminals, the economy ministry announced in March. This, combined with other efforts to diversify and save energy, would allow Germany to reduce Russia’s share of its gas consumption to just 10% by 2024, he said.
Emptying Russia’s war chest?
EU sanctions on Russian gas would strike at the heart of the country’s economy. It is the world’s largest exporter of natural gas, 74% of which goes to European customers, according to the EIA.
Although countries are rapidly reducing their imports, the surge energy price over the past 12 months have been a boon for Russia.
European natural gas futures were trading above €106 ($112) per megawatt-hour Thursday, up 25% from the day before the invasion, according to Refinitiv data.
But diverting its natural gas deliveries would be a much more difficult task. Most Russian gas passes through pipelines, which take years to build.
Kateryna Filippenko, principal analyst for global gas supply at Wood Mackenzie, told CNN Business that there was “simply no infrastructure” for Russia to divert gas to Asia.
“Potentially they could send more LNG to Asia, but the LNG capacity is quite limited,” she added.
Russia plans to build new pipelines from Siberia to Asia, Schmieding said, but it would take a long time.
“Probably by the time that happens, global demand, in response to the current high prices, will be significantly lower than it otherwise would have been,” he said.
Mark Thompson and Jack Guy contributed reporting.
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