Russian gas stoppages stress EU’s political unity and economic outlook, accelerate Russian gas exit


The decision by Gazprom to halt gas supplies to Poland (A+/Negative) and Bulgaria (BBB+/Stable) after both countries refused to use Russia’s proposed mechanism for gas payments is a significant escalation in the energy stand-off between Russia and the EU. The move also substantially increases risk of further gas-supply disruptions to other EU countries if they also decide not to use Russia’s proposed mechanism.

Russia’s decision is a strategic retaliation against the EU, leveraging its power as the most important supplier of natural gas to Europe. Europe received around 40% of its gas from Russia before the war in Ukraine.

Despite the increased risk of further gas disruptions, a complete and prolonged halt of gas supplies by Russia to Europe is not our baseline.

Firstly, energy firms in Germany (AAA/Stable), Austria (AAA/Stable), Hungary (BBB+/Stable) and Slovakia (A+/Stable), which are among the largest importers of Russian gas in the EU, are reportedly planning to open accounts at Gazprombank to meet the Russian demand for gas payments.

Secondly, such a move would weaken Russia’s external position. Energy revenues are a critical source of foreign exchange revenue for Russia, especially since sanctions have frozen around half of Russia’s international reserves. Today, Russia does not have the infrastructure capacity to redirect pipeline gas from the west to the east of the country. The capacity of Russia’s eight pipelines suppling gas to Europe is around 220bcm/year, almost five times that of the one pipeline to China, which, at full capacity, will reach 48bcm/year.

Reliance on gas, Russian energy differs widely across the EU


Poland and Bulgaria have both been accelerating infrastructure projects to start replacing Russian gas when both countries’ gas contracts with Russia expire at end-2022.

Poland has diversified its gas import infrastructure in recent years. The country is planning to replace Russian gas through pipeline imports from Norway via the Baltic Pipe, which will be operational by end-2022 with a capacity of around 10 billion cubic meters (bcm) annually. This would completely substitute Poland’s Russian gas imports of 10bcm, or about 50% of its total domestic use.

Further alleviating the impact from Russian gas interruption is the fact that Poland’s gas storage facilities are almost 80% full and it can import around 6bcm per year via the LNG terminal on the Baltic Sea, in addition to domestic production of around 4bcm. As a result, we do not expect substantial gas shortages in Poland due to Russian gas stoppages.

The risk of gas supply disruptions is higher in the case of Bulgaria, as the country relies on Russia for almost all its natural gas. Construction is underway of a new gas pipeline connected to a planned liquefied natural gas (LNG) terminal in Greece, due to be operational by 2023. This will provide Bulgaria with access to alternative gas supplies from exporters including the United States, Egypt and Qatar.

An additional 1bcm will come from Azerbaijan via the Greece-Bulgaria Interconnector, which is scheduled for Q3 2022 and has a capacity of up to 3bcm annually. Given the relatively small size of Bulgaria’s gas market (annual gas consumption of around 3bcm), Bulgaria will also likely rely on European solidarity and co-ordination to fully meet its energy needs until the projects are fully operational.

The immediate economic impact from Russian gas stoppages would be felt via higher commodity prices, which will add to inflationary pressures with an impact on household and government budgets and corporate profitability. We expect average growth in central and eastern European member states of the EU (CEE-11) to decelerate to 2% to 3% this year, a downward revision from our December forecast of 4.6%. Poland and Bulgaria will grow 3.8% and 1.8%, respectively. Inflation will average about 10% in CEE-11 this year.

The agreement by Hungary, among others, to meet Russia’s terms for gas payments shows how Russia’s demand risks undermining the EU’s sanctions and weakening its common approach.

The crisis highlights the urgency for the EU to create an energy union to enable Member States to better co-ordinate their energy policies and improve the bloc’s energy security. This would also critically alleviate continued energy price increases in case of a widened halt of Russian gas supplies.