Russia starts cutting off the gas to the Netherlands after its government refused to pay in roubles

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Russia’s Gazprom will halt gas supplies to the Netherlands’ partly state-owned energy firm GasTerra on Tuesday after it refused to pay in rubles following the Russian invasion of Ukraine, the Dutch company said.

Meanwhile, Danish energy company Orsted warned on Monday that Russia could cut gas supplies to Denmark for the same reason, but allayed concerns by saying that gas could still be secured through the European market.

Moscow has asked clients from ‘unfriendly countries’ – including EU member states – to pay for gas in rubles, a way to sidestep Western financial sanctions against its central bank over Vladimir Putin‘s February 24 offensive.

The news came amid skyrocketing gas prices across Europe, and sparked fears that the Kremlin’s continued restriction of supplies could continue this trend.

Energy prices in Europe hit record highs this year after the invasion of Ukraine by Russia, Europe’s top gas supplier, with European leaders ruling out a price cap.

Elsewhere, EU leaders gathered in Brussels hoping to persuade Hungarian Prime Minister Viktor Orban to accept a watered-down oil embargo against Russia as part of a sixth package of sanctions against Moscow, held up by Budapest.

Hungary, which imports 65 percent of its oil consumption from Russia through the Druzhba pipeline, is seeking an exemption from the import ban.

EU members have proposed to exclude the Druzhba pipeline from the embargo ‘for the time being’ and only impose sanctions on oil shipped to the EU by tanker. Orban calls it a ‘good solution’ but seeks further safeguards on his country’s energy supply. 

Dutch GasTerra had ‘decided not to comply with Gazprom’s unilateral payment requirements’ as they would breach EU sanctions and create ‘financial and operational risks’, the Dutch firm said in a statement Monday.

‘In response to this decision by GasTerra, Gazprom has announced that it will discontinue supply with effect from May 31, 2022,’ it said.

The Russian energy giant’s move means that two billion cubic metres of gas will not be supplied to the Netherlands between now and October, GasTerra said, adding that it ‘has anticipated this by purchasing gas elsewhere.

‘GasTerra has repeatedly urged Gazprom to respect the contractually agreed payment structure and delivery obligations, unfortunately to no avail,’ it said.

The Dutch state directly owns a 10-percent stake in GasTerra plus another 40 percent through state-owned gas firm EBN. The rest is owned by energy giants Shell and Esso.

The Dutch government said it ‘understands’ GasTerra’s decision.

‘This decision has no consequences for the physical supply of gas to Dutch households,’ Climate and Energy Minister Rob Jetten said on Twitter.

The Netherlands is the latest in a series of European countries to be hit with a cut in Russian gas. 

On May 21, Russia halted supplies to its neighbour Finland – which has angered Moscow by seeking NATO membership – after energy group Gasum also refused to pay in rubles.

Both Poland and Bulgaria saw their Russian supplies cut a month earlier. 

The Dutch rely on Russia for around 15 percent of their gas supplies, amounting to some six billion cubic metres a year, the government says.

This is lower than the EU average of 40 percent, but like other European countries the Netherlands is scrambling to reduce its dependence on Russian energy.

Dutch Prime Minister Mark Rutte, in Brussels for an EU summit, where leaders are struggling to agree on a Russian oil embargo, insisted that his country did not have an energy security issue.

‘I think there is not a big issue about the Dutch energy security, of course, we are all working on making sure that we stay stable in terms of our energy supply,’ he told reporters.

The Dutch government has already delayed the closure of a huge gas field in the northern province of Groningen, which has suffered repeated earthquakes due to gas extraction, to cope with the energy crisis.

On Monday, Danish energy company Orsted warned Denmark could be the next country to see its supplies of Russian gas cut off.

Orsted, formerly DONG Energy, insisted it would continue to pay for gas deliveries from Russia in euros and that the payment deadline was May 31.

‘Gazprom Export continues to demand that Orsted pays for gas supplies in rubles. We have no legal obligation under the contract to do so, and we have repeatedly informed Gazprom Export that we will not do so,’ the company said in a statement.

‘Therefore, there is a risk that Gazprom Export will stop supplying gas to Orsted. In Orsted’s view, this will be a breach of contract,’ it added.

The company said Russia could not directly cut off gas supplies to Denmark because there is no direct pipeline between the two countries.

This means the country should still be able to secure gas deliveries by purchasing it from the European market.

Orsted said it was filling up its storage facilities in Denmark and Germany to secure gas supplies to their customers. 

In April, Denmark’s government announced plans to rid itself of Russian gas, including moving half of the 400,000 households that are heated with gas to district heating networks or electric heat pumps by 2028.

Gas accounts for 18 percent of energy consumed in Denmark each year. National production accounted for three quarters of the gas consumed in 2019, with Russia among the main sources of imported natural gas, according to the Danish energy agency.

European leaders, who will convene in Brussels on Monday and Tuesday for an EU summit, will not decide on imposing a cap on gas prices but could mandate the Commission to study the issue, the European Commissioner for Economy said.

‘If this is agreed among member states, the Commission will act very quickly to analyse this possibility,’ Paolo Gentiloni told reporters at the Foreign Press Association in Rome, adding it would be difficult to make any predictions regarding the timing of a possible decision.

‘It would already be an important step if the EU Council gave the Commission the go-ahead’ to study the mechanism of a price cap, Gentiloni said.

Italy has proposed that EU member states cap the price of gas imports from Russia to help reduce inflation in the bloc, but other countries have raised doubts about the effectiveness of the idea.

EU leaders gathering in Brussels will try to agree on Russian oil import sanctions, seeking to avoid a display of disunity over the bloc’s response to the war in Ukraine.

According to a new draft of the summit conclusions, the 27 leaders should agree that their next round of sanctions will cover oil with a temporary exemption for crude delivered by pipeline, a compromise that ambassadors had failed to agree on Sunday.

The text seen by Reuters, which might yet be revised again, would confirm an agreement on seaborne oil sanctions, with pipeline oil supplied to landlocked Hungary, Slovakia and the Czech Republic to be sanctioned at some point. 

Meanwhile, Russia is considering paying Eurobond holders by applying the mechanism it uses to process payments for its gas in roubles, though investors said the move would not enable Russia to avoid a historic default on debt.

The scheme, according to the Kremlin and Russia’s finance minister, would allow Moscow to pay bondholders while bypassing Western payment infrastructure. 

It comes days after Washington decided against extending a license that had permitted U.S. creditors to receive bond payments while enabling Russia to dodge default.

That move by the U.S. Treasury pushed Russia a step closer to defaulting on hard currency debt. Foreign Eurobond holders are now awaiting two coupon payments which fell due last week but carry a 30-day grace period.

Russia says it has cash and is willing to pay, refusing any talk of default. Finance Minister Anton Siluanov said on Monday that Moscow will continue to service its external debts in roubles.

But for foreign Eurobond holders to receive payments in foreign currencies as per Russia’s obligations, they would have to open rouble and hard currency accounts at a Russian bank, he told Vedomosti newspaper.