Europe’s Gas Supply Crisis Escalates Following Russian Sanctions

By Joseph Nasr and Markus Wacket

BERLIN – On Thursday, pressure mounted on Europe to secure alternative gas supplies as Russia imposed sanctions on European subsidiaries of its state-owned energy giant, Gazprom. This move came just a day after Ukraine halted a major gas transit route, exacerbating concerns over Europe’s energy security amid its heavy reliance on Russian gas.

Gas prices experienced a significant spike, with the primary European benchmark increasing by 12% as buyers reacted to the escalating threats to supply. Moscow has already cut gas supplies to Bulgaria and Poland, prompting various countries to scramble to replenish their gas reserves ahead of the winter season.

Late Wednesday, Russia placed sanctions primarily on Gazprom’s European subsidiaries, including Gazprom Germania, which is involved in energy trading, storage, and transmission. Germany had previously placed this entity under trusteeship last month to ensure a steady supply.

Additionally, sanctions were imposed on the owner of the Polish section of the Yamal-Europe pipeline, which is essential for transporting Russian gas to Europe. Kremlin spokesperson Dmitry Peskov stated that there can be no relations with the affected companies, preventing them from participating in Russian gas supplies.

The sanctioned entities largely comprise businesses located in countries that have imposed sanctions on Russia in response to its invasion of Ukraine, most of which are European Union members. Germany, Russia’s largest customer in Europe, noted that some Gazprom Germania subsidiaries were no longer receiving gas due to these restrictions.

"Gazprom and its subsidiaries are affected," said German Economy Minister Robert Habeck to the Bundestag. "This means some subsidiaries are getting no more gas from Russia. However, the market is offering alternatives."

The list of affected entities includes Germany’s largest gas storage facility located in Lower Saxony, which has a capacity of 4 billion cubic meters, alongside Wingas, a trader supplying industry and local utilities. Wingas indicated it would continue operations, though it would face potential shortages. Other companies like Uniper, VNG, or RWE may serve as alternative supply sources. Despite the sanctions, Russian gas continues to flow into Germany via the Nord Stream 1 pipeline under the Baltic Sea.

In the event that sanctioned firms cannot operate, other companies, including gas utilities, may step in to take over contracts, likely needing to negotiate new terms with Gazprom, according to Henning Gloystein from Eurasia Group. He suggested that this might be part of Gazprom’s strategy, also serving as a retaliatory message in light of EU sanctions.

As for gas transit issues, Gazprom announced it would no longer be able to export gas through Poland using the Yamal-Europe pipeline following the sanctions against EuRoPol Gaz, the Polish section’s owner. The pipeline connects Russian gas fields to Poland and Germany through Belarus, featuring a capacity of 33 billion cubic meters, equivalent to about one-sixth of Russia’s gas exports to Europe.

Interestingly, gas has been flowing eastward through the pipeline from Germany to Poland for several weeks, allowing Poland, which was cut off from Russian supplies last month for refusing a new payment mechanism, to build up its gas reserves. Data also showed that exit flows into Poland were slightly reduced on Thursday.

German Minister Habeck noted that Russia’s sanctions appeared aimed at increasing prices but expressed confidence that the anticipated 3% drop in Russian gas deliveries could be compensated for at a higher market cost. Dutch gas prices rose by as much as 20% before settling 12% higher, continuing a yearlong surge that has increased pressure on households and businesses.

While Germany’s gas storage levels are about 40% full, this remains low for this time of year, making it critical to enhance inventories ahead of winter.

The sanctions from Russia came shortly after Ukraine suspended a gas transit route due to interference from Russian forces, marking the first disruption since the invasion. Ukraine’s gas transit operator mentioned that flows would not resume until Ukraine regains full control over its pipeline system, adding that gas flows at an alternative transit point could be redirected, though Gazprom disputed this.

Concerns about winter supply are now intensifying, as heating demand typically increases during the colder months. Analysts have varying assessments on the adequacy of current storage levels, with some believing they are sufficient for the immediate future but becoming increasingly pessimistic about long-term supply prospects.

Additionally, Finnish officials have reportedly been alerted that Russia may cease gas supplies to Finland, which relies on gas for about 5% of its energy needs. Confusion continues among EU gas companies regarding a payment scheme mandated by Moscow, which the European Commission has indicated would breach EU sanctions.

Germany’s leading power producer, RWE, anticipates that Berlin will soon clarify whether payments for Russian gas can proceed under Moscow’s proposed terms, as a deadline approaches at the end of the month. Most European gas buyers have rejected Russia’s demand for payment in roubles, raising fears of potential supply disruptions and their broad impacts on Europe, particularly for Germany’s heavy reliance on Russian gas.