Russia halts some gas deliveries while EU readies oil restrictions

Good morning and welcome to Europe Express.

Russia fired the first warning shots yesterday in a looming energy war when it halted gas deliveries to Poland and Bulgaria. But the EU called the Kremlin’s bluff: it can use reverse flows, alternative supplies and storage to help the two countries.

The European Commission insisted that other countries hold firm rather than cave in to Russian demands. At the same time ambassadors were discussing how to curtail Moscow’s oil revenues. I’ll run you through the latest on the fossil fuel disputes and where sanctions are likely to land sometime mid-next week.

A helping hand for Ukraine came yesterday in the form of tariff exemptions for goods including steel, foodstuffs and machinery. We’ll bring you the latest after an interview with the commission executive vice-president in charge of trade, Valdis Dombrovskis.

Fossil wars

While the price of European gas was going through the roof yesterday on the back of the Gazprom move, EU ambassadors held a first exchange on how to deprive Vladimir Putin of lucrative oil revenues.

In short: It’s complicated.

Germany was somewhat open to an oil embargo (we wrote yesterday why). But it pushed back against the alternative idea of an oil price cap backed by the threat of US sanctions on countries paying more than what Europe was willing to offer.

Hungary on the other hand remains very reluctant to accede to an oil embargo given its high dependency on Russian fossil fuels.

The European Commission will engage in so-called confessionals with small groups of ambassadors before putting forward a draft legal text — most likely mid-next week, said several EU diplomats familiar with the discussions. Landing a deal will be very difficult, diplomats admit.

Apart from the reality of Gazprom cutting supplies to Poland and Bulgaria, there was some confusion yesterday about what paying in roubles actually means and whether setting up euro and rouble accounts with Gazprombank would be legal. (Here is the FT’s excellent explainer on the Kremlin’s motives and which countries could be next.)

On Friday, the commission’s legal guidance suggested that the Russian requirement to set up bank accounts with Gazprombank was not necessarily in breach of the EU sanctions (Gazprombank was carved out of the sanctions regime to begin with, precisely to allow payments for gas to be made). Questions remain, however, on whether the Kremlin will use this to further squeeze its European customers by setting off-the-charts exchange rates or issuing its invoices in roubles.

Yesterday, commission chief Ursula von der Leyen took an uncompromising stance. Most EU contracts, 97 per cent, she said, stipulated that gas supplies should be paid in US dollars or euros and therefore the Russian request to pay in roubles was in breach of those contracts.

“Companies with such contracts should not accede to the Russian demands — this would be a breach of the sanctions, so a high risk for the companies,” von der Leyen said.

Leaving aside Poland and Bulgaria’s gas companies which refused to set up accounts with Gazprombank, a number of other European gas suppliers, including in Germany, the Netherlands, Italy and Austria, indicated they had already or were going to open up euro-denominated accounts with Gazprombank, which the Russian bank would then convert into roubles.

Still, EU officials expect more countries to be cut off in the coming weeks, given that neither the war in Ukraine nor the bloc’s efforts to include more Russian energy imports in its sanctions regime are likely to stop.

Trade help

Brussels is trying every measure it can think of to support the war-torn Ukrainian economy, writes Andy Bounds in Brussels.

The latest idea, announced yesterday, was scrapping tariffs on imports from Ukraine for one year. European trade commissioner Valdis Dombrovskis also wants to suspend anti-dumping and safeguard measures in place on Ukrainian steel exports for the same period.

The measure, applied to the €1bn of goods that pay duties, could be worth around €65mn to Ukrainian businesses.

Dombrovskis told Europe Express it was an “unprecedented trade liberalisation measure”.

“It’s meant to be for one year, but from the commission side we will be evaluating the situation and will be ready to come with another proposal to extend this measure if deemed necessary,” he added.

The measures mainly concern industrial goods such as fertilisers, aluminium and machinery. The European Commission also wants to abolish a minimum entry price on many Ukrainian fruit and vegetable imports.

Dombrovskis noted that trade between the EU and Ukraine has doubled since a trade agreement in 2016, to €52bn in 2021.

But Ukraine’s economy is expected to shrink by 45 per cent this year. “It’s important to support the Ukrainian economy, and that’s where this trade liberalisation measure comes in,” he said.

He admitted that it was difficult to get goods out of Ukraine, even for farmers and factories whose work has not been disrupted by the war. Rail and road is the only option thanks to a de facto Russian blockade in the Black Sea. “We are seeing how we can help Ukrainians maximise their exports,” he said, including loosening controls on lorries entering the EU.

Ukraine’s president Volodymyr Zelensky thanked the EU in an online address to the nation and said other countries would follow its lead.

“This will allow us to maintain the economic activity and national production in Ukraine as much as possible,” he said.

The EU has already pledged €1.2bn in financial aid for Kyiv, but the IMF says the government needs $5bn a month to stay afloat. The tariff proposal, which should be approved swiftly by member states, will not be the last financial support measure required.

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What to watch today

  1. Nato secretary-general Jens Stoltenberg holds a debate with members of the European parliament about Ukraine

  2. UN secretary-general António Guterres visits Ukraine after his trip to Moscow

Notable, Quotable

  • Far-right discord: The chances of Eric Zemmour and Marine Le Pen joining forces ahead of the June parliamentary elections in France have considerably diminished after a sparring match over who lost more in the presidential election.

  • Hungary in crosshairs: The EU has triggered its rule of law mechanism against Hungary for repeated failure to address spending concerns for more than 10 years. These include procurement contracts with only one bidder and the absence of an anti-corruption strategy.

  • Ukrainian crops: This FT visual journalism piece zooms into a Ukrainian farm and also offers the global perspective of how the war has disrupted foodstuff markets, shipping and prices.

  • Prison rentals: Denmark is to send foreign convicted criminals to Kosovo, renting 300 prison places in the Balkan state to serve their sentence — and be deported afterwards.