European Gas Prices On The Decline

Early start of summer and ample LNG supply push gas prices down

European natural gas prices have been on the slide for several days now as an early start of summer combines with ample LNG supplies to quench supply worries. According to a Bloomberg report, natural gas prices in Europe have been on the decline for five days now as demand eases while supply remains strong thanks to LNG and continued deliveries by Gazprom via Ukraine and the Nord Stream 1 pipeline.

Europe became the biggest buyer of U.S. liquefied natural gas a few months ago as it sought to reduce its dependence on Russian gas even before Russia’s invasion of Ukraine. This has led to a spike not only in gas prices but also in LNG carrier rates, which recently hit the highest in a decade.

Despite the lower demand, gas prices in Europe remain quite elevated as importers seek to refill their reserves ahead of the next heating season. Some of these might be worse off than others as Gazprom suspended deliveries to Poland, Bulgaria, the Netherlands, and Denmark over their refusal to pay for the gas in rubles.

Still, most of the large gas buyers that supply European countries with natural gas from Gazprom have accepted the latter’s payment terms, ensuring the uninterrupted supply of gas. According to unnamed sources cited by Bloomberg today, Gazprom was unlikely to cut off supplies to any other European buyers for now.

Russia to choose between using its scarce dollars for debt repayment or facing a sovereign default

Helping Russia may worry foreign banks about the risk of U.S. financial sanctions

On Tuesday, the U.S. Treasury tightened the financial pressure on Vladimir Putin by prohibiting U.S. financial institutions from facilitating dollar-denominated debt payments to investors. Simply put, it made it much harder for Russia to pay its bondholders, raising the risk that Russia will default on its sovereign debt. Usually, governments that default on their debts face serious consequences. However, it is possible that Russia may be less worried about this action than other governments would be.

Russia, like other countries, borrows money by selling bonds. The bondholders provide it with money now in exchange for the promise to pay it back at a set date, paying interest along the way. The new U.S. government action doesn’t make it absolutely impossible for Russia to pay back its bondholders, but it makes it much harder. The idea is to force Russia to choose between using its scarce dollars for debt repayment (rather than other purposes), or facing the consequences of a sovereign default.

The U.S. decision means that if Russia wants to pay its bondholders, it will have to use dollars that are held outside U.S. institutions. Even that may be hard. Foreign banks may worry about the risk of U.S. financial sanctions and decide that the legal and reputational risks of helping Russia are too high for them to want any involvement.

Germany Gets Ready For Gas Rationing

Emergency plan in case the supply from Russia is interrupted

Germany is preparing for a potential disruption of natural gas supply from Russia and activated an emergency plan on Wednesday, ahead of the Thursday deadline Vladimir Putin has ordered for gas-for-ruble payments.

Germany triggered an emergency plan in case the supply from Russia is interrupted. The plan could see rationing of gas supply. Other EU member states, including Greece and the Netherlands, have also placed their systems and stakeholders on high alert. Italy and Latvia also issued warnings of potential disruptions. Putin has set a March 31 deadline for the government, Gazprom, and the central bank of Russia to make the arrangements for payments in rubles from the so-called “hostile” countries.

The Russian President—whose list of “hostile” states includes the United States, all EU member states, Switzerland, Canada, Norway, South Korea, Japan, and many others—ordered last week the central bank to develop a system for payments in rubles within a week. The EU and G7 rejected the Russian gas-for-rubles idea, saying that changing the currency of the payments would be a breach of contract and that Europe would not be blackmailed into buying gas with rubles. Yet, the emergency plan in Europe’s biggest economy, and warnings in other European markets, signal that the EU is preparing for a worst-case scenario of disrupted gas supply from Russia.

Russia hikes interest rates to 20% as rouble dives in value

Western sanctions on reserves prevent further support of rouble

Russia’s central bank more than doubled interest rates on Monday in an attempt to steady the country’s financial markets, after unprecedented western sanctions sent the rouble tumbling as much as 29 per cent. The central bank boosted its main interest rate to 20 per cent from 9.5 per cent in an emergency decision, saying “external conditions for the Russian economy have drastically changed”.

The rouble dropped to almost 118 against the dollar in offshore trading on Monday, according to Bloomberg data, after Russian president Vladimir Putin put his nuclear forces on high alert and the United StatesEurope and UK unleashed sanctions aimed at cutting the country off from the global financial system. Trading in shares and derivatives on the Moscow Exchange was suspended, Russia’s central bank confirmed on Monday. However, Russia-focused shares traded on other markets around the world dropped heavily.