Did you think sanctions on Russian oil were tough? Try Gas – POLITICO

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The EU’s tussle over imposing sanctions on Russian oil is a warning of how much tougher a gas embargo will be.

As soon as the sixth package of sanctions is passed, the EU will run out of money Punish sectors without inflicting significant pain on their core industries and economic needs. Once the EU agrees on oil sanctions, cutting Russia’s gas supply is the most difficult remaining option.

Gas has always loomed over the sanctions discussions. Other belligerent countries like Poland and the Baltics have been pushing to cut Russian supplies since the war began in February, and they are now increasing the pressure.

As always, Berlin will be the deciding factor in how quickly it can go. Germany is already reducing its reliance on Russian gas supplies, but its target of a full phase-out by the end of 2024 should offer protection to countries like Hungary that are hostile to energy sanctions.

According to Adam Guibourgé-Czetwertyński, Poland’s deputy climate and environment minister, imposing a gas embargo is “naturally the next step”. “This is the necessary step if we are to end this war.”

Several EU diplomats have said Putin’s decision to cut off two EU countries from Russian gas over their refusal to process payments in rubles was a game changer, especially as Moscow had specifically warned that other EU countries could be next.

“The question is not whether we do it,” said an EU diplomat. “The question is when.”

Brussels has already announced plans to reduce its reliance on Russian gas by two-thirds by the end of the year and halt supplies entirely within five years. Sanctions on Russian gas could make this plan more enforceable and would likely impose an even faster schedule.

Different ball game

But the more the EU tries to hit Putin, the more it risks hurting itself. Sanctions are now hitting core sectors of economies, leading to spin-offs, exemptions and poses to water down sanctions proposals.

The EU is far more dependent on Russia for gas – 40 percent of its gas supply – than for coal or oil, making it harder for the bloc to stay united. A number of countries, including powerhouses like Germany and Italy, have warned of the risks of an EU-wide recession if Brussels suddenly halted Russian gas imports.

There are fears that cutting Russian gas would hurt Europe more than Russia, given that the bulk of Moscow’s energy export earnings come from oil, not gas.

“It would be devastating for Europe within weeks, as opposed to maybe a year or two for Russia, and the advantage that Putin has is that he can always use this as a ‘Fortress Russia’ narrative,” said Jonathan Stern , founder of the Gas Research Program at the Oxford Institute for Energy Studies. “What will the narrative look like in Europe… for people potentially losing their jobs by the hundreds and thousands?”

Voluntarily opting out of Russian gas purchases is also legally dangerous, as all EU-based companies that import from state-backed export monopoly Gazprom do so under long-term contracts that oblige them to take gas or pay anyway.

Brussels hopes to replace the 155 billion cubic meters of gas coming in from Russia annually, but under existing contracts with EU-based companies, “even in 2030, take-or-pay commitments aren’t much below 90 billion cubic meters,” Stern said . “These contracts are above national law, so they were designed so that governments couldn’t suddenly say, ‘We’ve changed our minds.'” He said governments would then have to compensate companies for breaches of contract.

“A lot of companies have said, ‘We’re going to honor our contracts through 2030,’ because of course they’re terrified of a lawsuit when this conflict is over that would quickly bankrupt them,” Stern added.

Hidden behind Germany

As in previous packages, Germany is likely to set the pace when and how Russian gas imports are hit. It is no coincidence that the European Commission made progress on coal and oil only after Berlin’s involvement and then approved the timeline that Germany set for its own national exit.

Germany’s dependence on Russian gas is significant and not as easily remedied as oil and coal, in part because of its scale: before Russia invaded Ukraine, more than half of Germany’s gas supply came from Russia.

Germany’s fears – politicians, analysts and the central bank have all warned of a recession in the event of a gas ban – are not unfounded. Heavy industry remains the backbone of the country’s economy, and sectors such as steel rely on gas for manufacturing purposes. About half of all households heat with gas.

But Berlin was not idle. By the end of April, it had reduced that dependency to 35 percent through imports of liquefied natural gas and other measures, and aims to be fully independent by 2024. A faster pace would not be “realistic” for Germany, said Climate and Economics Minister Robert Habeck calledbut added: “We’ll have to try [to achieve] the unreal in any form.”

It will also be crucial to convince Italy, the EU’s third largest economy. Around 40 percent of Italy’s natural gas imports come from Russia, Rome has neither nuclear power nor coal and hardly any oil. But so far Italy appears on board. This week Prime Minister Mario Draghi to the European Parliament: “We supported the sanctions that the European Union decided to impose on Russia, including sanctions in the energy sector. We will continue to do so with the same conviction in the future.”

As with the coal and oil sanctions debate, some EU countries are hiding behind Germany’s broad shoulders, happy not to be in the spotlight because they refuse to impose more sweeping sanctions on Russia. Austria gets around 80 percent of its natural gas from Russia, and other landlocked countries such as the Czech Republic, Hungary and Slovakia would quickly run into difficulties.

Of course, Moscow could waive gas sanctions if Moscow turns off the tap first, as it did in Poland and Bulgaria. More payments are due in mid-May, and countries are desperate for clarity on how to pay for their gas without running afoul of sanctions. The EU has suggested a workaround, but it hasn’t been tested yet, and Sofia has warned it might not work.

It is still unclear when Brussels could sanction gas. An EU diplomat expressed optimism and said he hoped this would happen within a few weeks. Others suggested an announcement at an EU summit at the end of this month is possible, too.

“It must be done,” said another diplomat. “But it won’t be nice.”

Jacopo Barigazzi, Leonie Kijewski, Paola Tamma and Zosia Wanat contributed to the coverage.

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