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Russia's national energy company cuts off natural gas to Poland and Bulgaria

LEILA FADEL, HOST:

European leaders say Russia's decision to cut off natural gas supplies amounts to blackmail. Russia's national energy company announced it was turning off the tap to Poland and Bulgaria because they refused to pay for supplies in rubles. The move shows Moscow's leverage over Europe. It's the biggest supplier of natural gas to the union, and it comes as European nations step up military support to Ukraine and more European nations join the U.S. in its mounting sanctions on Russia.

Joining us now to discuss all this is Henning Gloystein. He's the director of energy, climate and resources at the Eurasia Group, based in London. Good morning.

HENNING GLOYSTEIN: Good morning. Thank you for having me.

FADEL: So this seems like a big move, cutting off gas supplies. How significant is it in terms of possible impact here?

GLOYSTEIN: It is indeed a big move. It's a further escalation of the conflict between Russia and the EU as well. Russia is essentially signaling all its customers in the EU that it is willing to cut off its supply if these clients in Europe are not willing to switch their payment currency from euros or dollars into ruble, as Gazprom is demanding. So there is a significant risk of further cut-offs because there are dozens of supply contracts that Russia still has in the EU and which will all be under review right now.

FADEL: Is this really about rubles and dollars, or is it about - is this Russia's answer to sanctions, their form of sanctions?

GLOYSTEIN: Yeah, it's probably a bit of both. I mean, Poland earlier this week has announced a new round of sanctions against Russia, so there is the possibility that it's in response to that. But Russia does also need to support the ruble, its currency. And, you know, if it manages to switch all its payments for the natural gas it sends to Europe, which is a lot, that would give the ruble some significant support. So it's probably mostly to support the currency, but also a convenient tool to punish the EU for sanctions. It's economic warfare, effectively.

FADEL: Yeah. As you mentioned, President Vladimir Putin said, quote, "unfriendly foreign buyers would have to pay in rubles instead of dollars and euros." But no country except Hungary has actually agreed to this. And you mentioned Poland has announced sanctions, but why are Poland and Bulgaria specifically being singled out maybe beyond that?

GLOYSTEIN: Well, I mean, there is, of course, the slight notion that they are weaker links within the EU. It is - and they are not overall massive customers for Gazprom, so cutting them off - it's 10 billion cubic meters from Poland and three from Bulgaria. It's not huge for Gazprom. It's not a big loss of revenue for them, whereas if it, say, cut off Italy or Germany, it would be a massive loss of revenue for Gazprom. So it is a gradual escalation, showing all the big customers in Europe that Russia is willing to act if they don't, you know, bow to the blackmail that essentially is happening here.

FADEL: Do you expect Russia to escalate, to go after bigger countries? Is this a tit for tat at this point?

GLOYSTEIN: It's possible. I mean, it's mostly actually with companies rather than governments, but it's the big importers, of course. And in Germany and Italy and elsewhere in the Netherlands, they will be looking at their supply contracts. They will be talking to their national governments to see whether they are allowed to pay in ruble or whether they're even willing to give in to this form of blackmail because it is a breach of existing contracts or whether they can find alternative supply sources. So it's very hard to say, I mean, whether Russia is willing to further cut off bigger supply deals because it would be incredibly painful for Russia as well. But it's a bad sign. I mean, it's not a good situation Europe is in here because it is entirely possible that Russia cuts supply. This isn't as bad as now in May and as we're heading into summer, where gas demand and heating demand is really low. But it is a risk for next winter, when things get cold again, and people might freeze at home if there is no gas.

FADEL: Now, Germany says it's already preparing for the fallout. A gas lobby group there says it needs to immediately start stockpiling for next winter and reduce consumptions. Will other European countries, you think, start to do the same?

GLOYSTEIN: Oh, yeah, absolutely. Actually, I'm in Berlin right now. And we've been speaking to the energy industry for the last day or two. Everyone in Europe who has Russian supply contracts - so Germany, Italy, Netherlands, Austria, Czech Republic - they're all looking at any form of alternatives they can access just to ensure that the inventories are filled up ahead of next winter and in case of a major Russian supply disruption. They're all in emergency mode now.

FADEL: And this decision - what is the larger economic impact across Europe? What might it look like beyond Poland and Bulgaria?

GLOYSTEIN: I mean, it's another flame in a fire to the inflationary pressure that's happening across Europe. I mean, gas prices are really high. Gas is needed not just for heating. It's an industrial feedstock for fertilizer. There's a fertilizer shortage in the world already. It's needed to make additives for diesel in trucks as a fuel. So it adds inflationary pressure that is already high, I mean, in the EU and around the world. EU inflation levels have hit multi-decade highs, and this is just going to add to that problem. And of course, if there is massive supply cuts from Russia later this year, we might even have to see energy rationing in some parts of Europe. And energy rationing means demand curtailments of industry, and that would then, you know, be a massive blow to the EU's economic growth and maybe even cause a recession.

FADEL: So it sounds like it could have larger implications even beyond Europe.

GLOYSTEIN: Absolutely. I mean, the EU will now try and access any form of gas that it can, that is not Russian, and that means mostly liquefied natural gas or LNG tankers. And they will bid the price for those up really significantly, as they have in the past. They did this already last December, when they were first fearing an interruption of Russian gas. And this, of course, means that gas buyers across the world, as far away as Japan and China and South Korea, will have to pay more for gas because the Europeans are entering this global market and driving up the price.

FADEL: Henning Gloystein with the Eurasia Group, thank you so much.

GLOYSTEIN: Thank you very much. Transcript provided by NPR, Copyright NPR.