Europe’s Russian gas in jeopardy, Ukraine braces for new assaults

A charred car is seen in front of a destroyed apartment building in Mariupol
A charred car is seen in front of an apartment building destroyed during Ukraine-Russia conflict in the besieged southern port city of Mariupol, Ukraine March 30, 2022. REUTERS/Alexander Ermochenko

March 31, 2022

By Vitalii Hnidyi and Pavel Polityuk

TROSTYANETS/LVIV, Ukraine (Reuters) – Russia’s President Vladimir Putin threatened on Thursday to halt contracts supplying Europe with a third of its gas unless they are paid in roubles, his strongest economic riposte so far to crushing Western sanctions over his invasion of Ukraine.

The continent’s biggest recipient of Russian gas, Germany, called the ultimatum for Friday “blackmail”.

But Moscow did offer a mechanism for buyers to obtain roubles by sending foreign currency to a Russian bank.

The energy showdown has huge ramifications.

Europe wants to wean itself off Russian energy but that risks further inflating soaring fuel prices. Russia has a huge revenue source at stake even as it reels from sanctions.

Putin’s five-week invasion of Ukraine has killed thousands, pulverised residential buildings, left masses of terrified people cowering and hungry in basements, and uprooted about a quarter of the 44 million population from their homes.

Facing stiff resistance from Ukraine’s military and a militant Western stance, Putin has played one of his biggest cards in the demand on European energy buyers.

“They must open rouble accounts in Russian banks. It is from these accounts that payments will be made for gas delivered starting from tomorrow,” he said on Thursday, adding that Europe had until now been getting some gas for free because it was paying in euros and then freezing them.

“If such payments are not made (in roubles), we will consider this a default on the part of buyers, with all the ensuing consequences … existing contracts will be stopped.”

Western companies and governments say that would be a breach of contracts in euros or dollars, but they were anyway preparing for a potential full-blown energy crisis.

However, the order signed by Putin does allow them to send foreign currency to a so-called “K” account at Russia’s Gazprombank, which would then return roubles for the buyer to make payment for the gas.

‘MAJOR ESCALATION’?

“Potentially, the Kremlin is acting from a fear that Gazprombank will soon be sanctioned too, amid a wider bid by the European Union to cut energy ties with Russia completely,” said analysts at Fitch Solutions.

“Russia would have to physically halt gas flows to EU 27 (European Union member states) to force the issue, marking a major escalation not even performed at the height of the Cold War. It would mark another major financial blow to Russia’s coffers.”

Putin sent troops on Feb. 24 for what he calls a “special military operation” to demilitarise and “denazify” Ukraine. But at talks this week, Moscow said it would scale back offensives near the capital Kyiv and the north as a goodwill gesture and focus on “liberating” the southeastern Donbas region.

Kyiv and its allies say Moscow is simply trying to regroup following losses from a Ukrainian counter-offensive that has recaptured suburbs of Kyiv and strategic towns and villages in the northeast and southwest.

Ukraine’s President Volodymyr Zelenskiy praised “our defenders” who had resisted aerial bombardments and pushed armoured columns back. Now, he said, Russia was building up forces for new strikes on the Donbas, which it demands Ukraine cede to pro-Moscow separatists.

U.S. and European officials said Putin had been misled by generals about his military’s dire performance.

‘THE CHILDREN ARE SHAKING’

In the besieged Black Sea port of Mariupol, tens of thousands of people have been trapped for weeks without power and with scant food, water and other supplies.

The International Committee of the Red Cross (ICRC) said it was bringing a convoy of aid to the city, which once housed 400,000 people and has been destroyed by relentless bombardment.

Ukraine said 45 buses were going to Mariupol and the ICRC said it would evacuate people from Friday if the warring parties allowed safe passage. “The lives of tens of thousands of people in Mariupol depend on it,” said ICRC spokesperson Ewan Watson.

In a Russian-held part of Mariupol, people climbed out of cellars to appear, ghostlike, among the ruins. One man named Pavel placed a bowl and spoon as a tribute on a makeshift grave in a patch of grass, marked with a plain wooden cross.

“Our friend. March 16. Driving in a car. A bullet hit him in the throat. He was dead in five minutes,” he said.

Elsewhere, there was evidence of Ukraine’s successful counterattack in Trostyanets, an eastern town recaptured this week. Burnt-out Russian tanks and abandoned ammunition littered the wrecked town while dazed civilians and a few Ukrainian soldiers roamed muddy streets.

“We spent 30 days in the basement, with small children. The children are shaking, even still. They ask: ‘When will we go to kindergarten? When will we go to school?’ They don’t understand what has happened,” said a woman named Larisa.

Western countries say Putin’s true aim was to swiftly topple the government in Kyiv, and that its failure is a strategic catastrophe, bringing economic ruin and diplomatic isolation.

U.S. officials have declassified intelligence which they said showed a rift between Putin and top advisors who failed to warn him of the poor performance of his military or the economic impact of Western sanctions.

U.S. President Joe Biden will announce the release of 1 million barrels of oil a day for the next six months from the U.S. Strategic Petroleum Reserve, the largest release ever, to try to bring down gasoline prices, the White House said.

(Reporting by Reuters bureaux; Writing by Peter Graff and Andrew Cawthorne; Editing by Frank Jack Daniel, Alexandra Hudson)