Russia refuses gas payment from Germany as Putin seeks to divide EU over sanctions

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Vladimir Putin refused payment from a German state-controlled utility firm on April 28 sparking fears the EU’s biggest economy could be next on the his list of countries to be cut off from gas supplies. German economy ministry said the payment only concerned a “marginal gas volume of about 0.2 percent of the Russian import volumes to Europe”.

But German Chancellor Olaf Scholz said his government is preparing for the eventuality Russia stops gas exports given it can only speculate about what the Kremlin will decide to do.

Speaking in Japan, he said: “One has to prepare for it and, as I said, we started that before the war broke out and we know what we have to do.”

It comes as the European Commission warned buyers of Russian gas they could breach sanctions if they converted gas payments into rubles, as officials struggled to clarify the EU’s stance on Moscow’s payments scheme, which has sowed confusion in the bloc.

Russian gas giant Gazprom cut supplies to Poland and Bulgaria on Wednesday, April 27, after they refused to pay for gas in rubles, marking Moscow’s toughest response yet to sanctions imposed by the West over the conflict in Ukraine.

Bulgaria and Poland had already said they would not renew contracts with Gazprom after they expired at the end of this year and say they can secure supplies from other sources.

The escalation follows a decree issued by President Putin last month requiring that countries Moscow deems “unfriendly” must pay for gas in rubles under a new payment scheme.

Under the mechanism, buyers are obliged to deposit euros or dollars into an account at Gazprombank, which has then to convert them into rubles, place the proceeds in another account owned by the foreign buyer and transfer the payment in Russian currency to Gazprom.

European Union energy ministers will meet on Monday, May 2, to discuss the situation, which has left member states divided over whether sanctions would be broken if they used Russia’s mechanism.

Speaking at a briefing on Thursday a senior EU official said that if EU buyers declare their payments for gas are completed once the payment has been made in euros and before it is converted into rubles, sanctions would have been respected.

The difficulty for European buyers is that the decree requires buyers to also open a ruble account at Gazprombank into which their euro or dollar payments would be deposited after conversion into the Russian currency.

Russia’s decree would only consider the payment to be complete after the gas-to-rubles conversion is done – a transaction that would involve Russia’s central bank, which is subject to EU sanctions.

“What we cannot accept is that companies are obliged to open a second account and that between the first and second account, the amount in euros is in the full hands of the Russian authorities and the Russian Central Bank, and that the payment is only complete when it is converted into rubles,” the senior EU official said.

“This is [an] absolutely clear circumvention of the sanctions.”

Opening a rubles account at Gazprombank in itself may breach the EU sanctions, the official added, without providing a conclusive assessment.

Thursday’s clarifications followed a demand on Wednesday from EU country ambassadors for clearer advice on the issue.

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Poland and Bulgaria said in the meeting the Commission’s guidance was confusing, while countries including Denmark, Finland, Greece, Slovakia and Spain said more clarity was needed, EU officials told Reuters.

Both Bulgaria and Poland opposed the new payment mechanism and stuck to their original contracts to pay for gas. Bulgaria’s deputy prime minister said the U.S. dollars intended to use to pay Gazprom for April supplies had been returned.

Officials also said countries disagreed on whether sending euros to Gazprombank that would then be converted into rubles by a Russian bank would amount to a breach of sanctions, as the Commission has said.

The Kremlin has said payments for deliveries that took place after Putin’s decree last month were expected in May and a source who requested anonymity named May 20 as “validation” date for payments.

Some EU gas traders have reportedly opened rubles accounts, but Commission officials said they had not been notified of any gas buyers doing this.

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