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Markets react as Russia announces sanctions on Europe and US

The full extent of the impact will unfold over time.

By: Dipa Tank – Risk Management Specialist, Consultus International Group

Until last week, the Kremlin’s toughest economic response had been to cut off gas supplies to Poland and Bulgaria and demand a new payment scheme by rubles for European buyers of gas. Last Wednesday, the Russian government-imposed sanction measures on Europe and the US, including the German and Polish sections of the Yamal pipeline. This is seen to be the biggest step in curtailment of gas flows from Russia to Europe. Furthermore, as tensions mount Russia could demand payment by roubles for other commodities including oil, grain, fertilisers, coal, and metals, raising the risk of recession in Europe and the United States.

European Commission announces ‘REPowerEU’

The EU has today announced the so called ‘REPowerEU’ package of nearly €300 billion ($315 billion) to support the drive for greater fuel efficiency and renewables growth, in a bid to strengthen EU climate polices and relieve its dependency on Russian energy. The commission has devised a solar energy plan, with plans to double photovoltaic capacity by 2025, alongside a proposed phased-in obligation to install solar panels on new buildings. Around €2 billion has been earmarked for oil-investment funding for those member states, like Hungary, highly dependent on Russian oil. An EU ban on coal from Russia is due to start in August. The European Commission has recognised the need to improve the administrative burden and red tape associated with approval times of project applications, stating that approval times need to fall to as little as a year or less. The package supports the European Unions blueprint – the so called ‘Fit for 55’ package – to slash pollution by at least 55% from 1990 levels and to reaching climate neutrality by 2050.

Russia’s Sanctions imposition – Significance

The 3rd May Presidential Decree explicitly forbade All Russian entities from exporting products, raw materials and making deals with those on the sanctions list, or even to fulfil obligations under existing deals. The list by and large covers those countries that have imposed sanctions on Russia following the invasion of Ukraine.

Europe imports greater than a third of its gas from Russia and the advanced curtailment of gas flows from Russia to Europe heightens uncertainty over future gas supplies. This has fuelled bullish impetus across gas markets, with prices tracing back much of the losses from earlier in the week. European markets are grappling with soaring energy prices, forcing governments to announce fiscal relief measures. A growing concern for Germany, and much of the Eurozone, is a period of stagflation with surging inflation and stalling growth combining. The UK Inflation measure, Consumer price index CPI, stands at 9% today.

Despite a period of low consumer demand, gas storage facilities are merely at c40% spurring mounting pressure for European gas stores to be ramped up ahead of this winter.

Focus on Germany

Last month Gazprom ceased involvement with Gazprom Germania, which then fell under the German Regulators authority as trustee. Russian gas accounted for 55% of Germany’s imports last year. The move will impact Russian gas production for the entire gas value chain from pipeline transmission, energy trading to storage. Impacting supplies across industry, wholesalers, retailers and households.

Europe’s biggest economy, Germany, continues to prepare a framework for an emergency package to support industry during the energy crisis, by granting further loans and guarantees. The prospect of emergency gas rationing is a credible option currently under examination, with industry being prioritised over households, contrary to current German policy arrangements. Under the plans, government could also take control over critical entities such as refineries in a bid to reduce reliance on Russian imports, thereby lowering dependence on Russian gas to c30% by year end.

German Legislation was passed last week allowing the government authority to nationalise energy companies as a last resort, with any such justification being based on the grounds of energy security as opposed to punitive measures toward Russia.

The PCK refinery, operated by Russia’s Rosneft in Schwedt near Poland, accounts for most of Germany’s remaining Russian oil imports, which could be hit by tighter EU rules on Russian oil sales and imports.

The German network regulator has advised that Russian gas alternatives were now being sourced and supplied to the market, thereby limiting any adverse impacts of Russian sanctions.

Markets will continue to factor in risk premium to prices until the full extent of the impacts of Russian imposed sanctions becomes clearer. The market remains open to volatility due to the ongoing energy crisis and as Europe transitions to become less reliant on Russia for its energy.

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