Crucial oil and gas trade had been largely kept out of the Russia-EU tensions, but stakes rose this week. Russia’s state-owned energy company Gazprom halted gas supplies to Bulgaria and Poland yesterday, for rejecting its request for payment in roubles. This was likely in response to these countries’ rising military support to Ukraine as well as a general signal to rest of the member countries of the costs involved in supporting Kyiv in midst of Moscow’s invasion of Ukraine. This turn of events also challenges the belief that Russia would be keen to preserve its export revenues and not risk cutting supplies to its key trading partners. However, ongoing military and political developments as well as stepped NATO aid appears to have tilted the balance in favour of more aggressive tactics.
Bulgaria’s net imports of natural gas accounts for 0.8% of total EU gas purchases and Poland at 4.6%. On aggregate basis, EU’s total import dependency for gas/ crude/ NGL is at >90% for the EU at large, of which 41% of gas and 27% of oil/NGL comes from Russia. For now, the two member countries will, reportedly, receive intra-EU supplies to make up for the shortfall. Reports also suggest that both countries were already in midst of measure to lower their dependence on Kremlin ahead of the expiry of their contract with Gazprom at end-year. Nonetheless, developments will be under close watch, especially if the ban expands to the other EU members for failing to meet Moscow’s currency payment demands. A widespread stoppage of either gas or oil supplies to the EU might translate into a stagflationary shock, with futures contracts tracking wholesale gas prices in Europe rallying sharply before settling up 8% on the day. Signaling downside risks to the Eurozone wide growth outlook, the German government cut its 2022 growth projection to 2.2% yoy from 3.6% in Jan22 as geopolitics poses a fresh headwind, whilst inflation is seen at 6.1% yoy this year before seen slowing to 2.8% in 2023. On policy, ECB officials are likely to come together to end net asset purchases in early 3Q22 and raise the -0.50% deposit facility rate to neutral by end-year and positive in 2023. After a strong set of PMIs, quickening in tomorrow’s Eurozone inflation number will be a key input in this respect.
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