Europe Faces Recession if Putin Fully Shuts Off the Gas Taps

April 29, 2022

Europe Faces Recession if Putin Fully Shuts Off the Gas Taps

Europe faces recession and financial crisis if Russia follows through with its threat to halt gas supplies into Europe, experts have warned.

Russian state-owned energy giant Gazprom announced that it would halt gas supplies to Poland and Bulgaria after they refused to pay for gas in Russian roubles following the Kremlin’s demands.

European leaders say natural gas contracts spell out payments in euros and dollars and that can’t be suddenly changed by one side. Poland has taken long-term steps to insulate itself from a cut-off, such as building an import terminal for liquefied gas that comes by ship and had planned to cancel its import deal with Gazprom at year’s end anyway.

Bulgaria says it has enough gas for now.

Still, the open questions about what the change could mean have sent shudders through energy markets, raising uncertainty about whether natural gas could be cut off to other European countries and cause a major hit to the economy.

What Putin is trying to do

Because Putin’s order for rouble payments targets “unfriendly countries,” it can be seen as retaliation for the sanctions that have cut off many Russian banks from international financial transactions and led some Western countries to abandon their businesses in Russia.

The economic motives for demanding roubles are not clear because Gazprom already has to sell 80% of its foreign earnings for roubles, so the boost to Russia’s currency could be minimal.

One motive could be political, to show the public at home that Putin can dictate the terms of gas exports. And by acquiring payments through Gazprombank, the move could discourage further sanctions against that bank.

What’s the state of gas supply to Europe?

The coordinated United States and European Union sanctions exempt payments for oil and gas. That is a White House concession to European allies who are much more dependent on energy from Russia, which provides 40% of Europe’s gas and 25% of its oil at a cost of $850 million a day.

However, such a move would also be costly for Russia and tricky to implement, and although the decision to stop flows to Poland and Bulgaria may strengthen the European Union’s resolve to end its dependence on Russian gas, many member states oppose an immediate embargo of imports.

Could Europe survive a total cut-off?

Europe’s economy would struggle without Russian natural gas, although the impact would vary based on how much countries use. Germany, the continent’s largest economy, is heavily dependent on Russian energy. Its central bank said a total cut-off could mean five percentage points of lost economic output and higher inflation.

Inflation is already at record highs, making everything from groceries to raw materials more expensive, driven by the soaring energy crisis.

Europe is trying to reduce reliance on Russian gas

European leaders have said they can’t afford the consequences of an immediate boycott. Instead, they plan to reduce Russian gas use as fast as possible. They aim to cut the use of Russian gas by two-thirds by the end of 2022 and completely by 2027.

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