Russia’s Gazprom has told customers in Europe it cannot guarantee gas supplies because of “extraordinary” circumstances, according to a letter seen by Reuters, upping the ante in an economic tit-for-tat with the west over Moscow’s invasion of Ukraine.
Dated 14 July, the letter from the Russian state gas monopoly said it was declaring force majeure on supplies, starting from 14 June.
Known as an “act of God” clause, a force majeure clause is standard in business contracts and spells out extreme circumstances that excuse a party from their legal obligations.
So, Europe and Germany get gas in exchange for rubles. But Russia can’t spend those rubles for most of what it needs from the West.
The question is, does Europe, especially Germany, need gas more than Russia needs rubles and an increased exchange rate (not always a good thing)?
Everyone has been concentrating on the winter and assuming Germany didn’t need much gas until then, but a great deal of Germany’s electrical grid is supplied by natural gas plants, and as you may have heard, there’s a heat wave in Europe and most of the rest of the world.
So much for air-conditioning. And if much of Germany’s industry will have to shut down as well.
Germany can lose a huge chunk of its industrial base if this continues. The whole “keep buying gas from Russia until we can transition off of it” idea was always dubious, because other gas is much more expensive, but it also rested on the idea that Russia was desperate to keep selling; that there was a symmetry of needs.
But Russia will suffer a lot less without sales than Europe will without gas, and in any case, a shutoff will likely increase the price of gas they are selling elsewhere, making up some of the losses.
The fact is that Germany, an industrial state without a lot of resources, and Russia, a resource state, are natural economic allies, but Germany needs Russia more than Russia needs Germany.
The companies who have been given notice that of force majeure are saying they don’t accept it, but what are they going to do?
The grace period for payments on two of Gazprom’s international bonds expires on 19 July, and if foreign creditors are not paid by then the company will technically be in default.
This is a non-threat threat, because Russia has already defaulted on loans, as it is largely shut out from the Western banking system and thus can’t even transfer the money. (As happened to Argentina.) More defaults theoretically mean that Russia will be unable to access Western loans and so on, but they already can’t, and they have access to the Chinese banking system, which is larger than any Western country’s and perfectly capable of keeping Russia and Russian companies afloat.
Understand clearly that most Germans and Europeans support the anti-Russia sanctions. This is a popularly backed policy: Europeans are paralyzed by fear of Russia and were long before Ukraine. I had a friend in Austria tell me how he scared he was of Putin back in 2016.
We will, however, see what the result of this is. I would guess that in the short-term, it will stiffen opposition to Russia, but I’m less sure about the medium- and long-term. German elites, especially, will feel a need to end the Ukraine war and get back to a steady Russian supply.
No matter what, however, it highlights the price Europe is paying for its anti-Russia stance.