Vladimir Putin has finally made good on his threat to punish “unfriendly countries” that stubbornly and defiantly refused to pay for Russian natural gas in rubles. The first casualties – Poland and Bulgaria – saw their gas supplies cut on Wednesday (April 27), coincides with a sharp rise in tensions between Western powers and Russia as the war in Ukraine enters its third month.

Gazprom, Russia’s giant state-owned energy company, says both NATO members are being targeted because they have refused to pay for its gas in Russian currency. It has also warned both countries – which are transit states for Russian gas – that any “unauthorised withdrawal” of gas intended for other European nations would see supplies reduced by an equivalent amount.

The Russian’s retaliation was met with furious criticisms. Bulgarian Prime Minister Kiril Petkov, who had sacked his defence minister Stefan Yanev in February for stating the Russian invasion of Ukraine should not be called “war”, has described the Moscow’s latest move as “blackmail” and said any halt in supplies would be a breach of contract.

Poland’s state-owned oil and gas company PGNiG confirmed that Gazprom’s supplies into the country had been halted and warned that it reserved “the right to seek compensation” and would use “all available contractual and legal means to do so”. Polish President Andrzej Duda, who called the Russian Federation as “an evil empire”, said the move violated “basic legal principles”.

European Commission President Ursula von der Leyen said – “The announcement by Gazprom to stop delivery of gas to customers in Europe is yet another attempt by Russia to use gas as an instrument of blackmail. This is unjustified and unacceptable“. The U.K.’s deputy prime minister, Dominic Raab, said the decision would further isolate Russia and lead to it becoming “an economic pariah”.

Poland, imported around 61% of its Natural Gas from Russia in 2021, receives its Russian gas through the Yamal-Europe pipeline from Russia’s huge gas fields in the Arctic far north, which continues west to supply Germany and other European countries. Bulgaria, on the other hand, imported almost 90% of its natural gas from Russia through pipes over Turkey.

However, in the first quarter of 2022, Polish PGNiG managed to reduce its gas dependence to 53% by building a liquefied natural gas terminal in Swinoujscie – where it receives tankers from Qatar. A new pipeline that will allow Poland to directly import gas from Norway – replacing Russian deliveries – will be fully operational by the end of the year.

Even though Poland government claims that it has enough gas in storage, in reality, the country still needs to secure alternative supplies for the rest of the year in an already tight global market. Bulgaria’s situation is worse than Poland, saying it is in talks to try to import liquefied natural gas through Turkey and Greece. In general, Europe depends on Russia for more than a third of its gas needs.

President Putin appeared to be well prepared before launching what he called a “special military operation” to de-Nazify against Ukraine “neo-Nazis”. To boost the Russian currency, which experienced a sudden collapse after the U.S. and Europe imposed economic and financial sanctions on Moscow due to Ukraine invasion, the strategy was to limit ruble selling and force ruble buying.

First, Russia’s central bank immediately hiked interest rates to 20% from 9.5% to limit withdrawal as fresh sanctions by Western countries put pressure on the country’s financial system. Next, it capped the amount of dollars (US$10,000 limit) that every Russian can withdraw from foreign-currency bank accounts. Then, local banks were barred from selling foreign currencies to customers for the next 6 months (till Sept 9).

At the same time, brokerages are not allowed to let foreign clients sell securities. The capital controls kicked in to fight the U.S. and its allies’ attempt to isolate Putin and Russia, hoping the economic disaster would trigger an uprising and regime change. But instead of public uprising, the sanctions backfired as Putin has so far managed to rally the people behind him.

In retaliation against the European Union’s economic and financial sanctions, Putin has demanded last month that “unfriendly countries” pay for Russian natural gas in rubles, clearly designed to boost the value of the currency. The list of unfriendly countries includes the U.S., E.U., Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

Russian gas accounts for some 40% of Europe’s total consumption and EU gas imports from Russia contributes up to US$1 billion – every day – to Moscow even during the ongoing war. About 58% of its sales of natural gas to Europe and other countries were settled in Euros, while US dollars accounted for about 39% of gross sales and British pound sterling around 3%.

Moscow’s unexpected retaliation saw the ruble hit 95 last month against the greenback as the plan will push demand for the Russian currency. Today, the ruble is 74 to US dollar, more valuable than pre-war level. The strategy of demanding payment in ruble has not only boosted the currency, but creates more havoc and trouble for Europe and even the United Kingdom.

When Putin first delivered his message – “if you want our gas, buy our currency” – some European and British wholesale gas prices up to 30%, sparking the risk of inflation and escalating cost of living. Now, after Moscow cuts off gas to Poland and Bulgaria, European and Britain’s gas prices skyrocket to as much as 24% to €117 per megawatt-hour.

The move also saw the Euro plunged to a 5-year low against the US dollar. Of course, Moscow has dismissed accusations that it has used natural gas supplies as a tool for blackmail. Russia could also argue that any contract is void the moment the U.S. and EU unilaterally seized its US$630 billion foreign reserves – effectively emptying its coffers critical to support the rubles.

Exactly why can the U.S., U.K. and European Union break the laws by confiscating US$630 billion belonging to the Russians, but Moscow cannot demand gas exports to be paid in ruble? The EU, together with the U.S., was responsible for making ruble a “pariah” currency, the same Russian currency that Putin now wants it to accept in exchange for oil and gas.

On March 28, the Kremlin said it will not supply gas to Europe for free if they refused to pay in ruble – suggesting that President Putin was ready to shut down the supply. But the decision to punish Poland coincides with the Polish government’s decision to send tanks to Ukraine. On Tuesday, it also announced a sanctions list targeting 50 Russian oligarchs and companies – including Gazprom.

If Putin decides to escalate further by cutting gas supplies to more E.U. nations, it would would spell economic pain for Europe, which heavily relies on Russian natural gas to heat homes, generate electricity and fuel industry. Not only the European Union depends on Russia for 40% of its gas, it also relies 27% of its oil imports and 46% of coal imports from the country.

Essentially, Putin has very little to lose since Russia is already being isolated by the Western powers anyway. It could be another another game of brinkmanship to see the reactions of other European nations, especially Germany. As the biggest economic powerhouse in the E.U., Germany would enter a sharp recession if Russian natural-gas deliveries are cut off abruptly.

In the same breath, Moscow has to strike when the iron is hot – either to create economic havoc or to trigger a public uprising – before the E.U. can find alternatives or substantially reduce dependency on Russian energy. It could be a “divide and rule” tactic to divide the U.S. allies and undermine their unity. At the very least, it sends shivers of worry through the 27-nation European Union.

The last thing Germany wants is the need to resort to rationing and closing factories. Germany is now under tremendous pressure after the Moscow’s retaliation. While the European Union insisted that it will not comply with Mr Putin’s demands that payments be made in Russian currency, several European nations, including Slovakia and Hungary have agreed to pay for Russian gas in rubles.

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