Can Europe live without Russian energy?

Poland’s and Bulgaria’s decision not to pay for Russian natural gas in rubles could have serious consequences not just for the two European countries, but for the rest of the continent as well. While heavily dependent on Russian energy, Europe, at least at this point, does not have much choice but to agree to Russia’s terms regarding gas supplies.

It is a well-known fact that Russia is the European Union (EU)’s largest energy supplier. The EU gets roughly 45 percent of its natural gas from Russia, and Moscow accounts for 25 percent of the EU’s oil imports, as well as 45 percent of its coal imports. Without Russian energy, European economies would be placed on the brink of collapse.

Brussels’ long-term strategy is to reduce European dependency on Russian energy. In the short-term, however if all the EU members stop purchasing Russian natural gas and oil, Russia’s economy would suffer, but Europe to get hit even harder.

Nevertheless, Poland and Bulgaria have taken a chance to try to live without Russian gas. Russia’s energy giant Gazprom has already halted gas supplies to the two EU member states. Given that their gas storages are almost full, the two nations are not expected to have any significant economic problems in the near future. But what happens if other EU members refuse to purchase Russian energy in rubles?

“If consumers refuse to pay under the new system, the presidential decree will of course be implemented”, said the Kremlin’s spokesman Dmitry Peskov, referring to a document that the Russian President Vladimir Putin signed on March 31.

According to the decree, purchasers of Russian gas from what Russia deems “unfriendly” countries would have to set up special “K-accounts” to transfer their payments. Once the payment is received, the funds will be exchanged into rubles. The entire payment facility will be set up and run through Russia’s Gazprombank, a subsidiary of state energy giant Gazprom.

For political reasons, many EU countries have refused to comply, claiming that Russia is trying to “blackmail” them. Some reports, however, suggest that at least 10 European companies have already opened accounts at Gazprombank in order to meet Russia’s demand to pay in rubles, although the EU warned them not to take such steps.

The problem, however, is that some European countries – Bulgaria being one of them – are almost 100 percent dependent on Russian natural gas. They will have to find a way to continue purchasing Russian energy, one way or another, given that other producers such as Azerbaijan, Algeria and the Gulf States, can unlikely replace Russia as the major supplier any time soon.

The very fact that the transit of Russian gas through Ukraine goes smoothly suggests that Western countries do not plan to halt Russian energy any time soon. It is possible that those nations that have ceased to buy Russian gas – as well as those that will stop buying in the near future – will implement the same model that Ukraine has been implementing for years.

In November 2015, Kyiv stopped buying Russian gas. Or, more precisely, it stopped buying it directly from Russia. Officially, Ukraine increased purchases from Europe instead, but in reality a significant volume of it still comes from Russia. Natural gas has been delivered to Ukraine from the EU via so-called virtual reverse – mostly from Slovakia – while in practice Kyiv remains a consumer of Russian gas, buying it from European partners at an inflated price and also receiving it from transit volumes.

If Brussels does not punish those companies that have already opened ruble accounts in Russia, then it will be crystal clear that the EU plans to use the same strategy. In other words, those countries that have agreed to open ruble accounts will likely serve as some sort of a gas hub. For instance, if Germany sets up a special “K-account” at Gazprombank, it could purchase larger amounts of Russian natural gas, and then re-export it to Poland at a market price which is currently above $1300 per thousand cubic meters.

Such practices, however, will not continue on forever. Sooner or later, Europe – be it under pressure from the United States or voluntarily – will significantly reduce, if not completely stop energy imports from Russia. As the European Commission President, Ursula Von Der Leyen, recently stressed, the era of Russian fossil fuels in Europe will come to an end, and that Brussels is determined to make it happen as soon as possible.

Indeed, as a result of the Ukraine conflict, the world will face a transformation of the energy trade. Russian energy flows are expected to move eastward, while Europe will have to find a way to live without relatively cheap Russian gas and oil.