Russia Cuts Off Gas To Europe, Pulls Itself Out Of The Petrodollar

There is the risk of an energy crisis and it is worrying that the move comes about at a time of increased maneuverings and posturing by NATO and the Russian army and deepening conflict in Ukraine.

Ukraine lurched back toward full-scale conflict today as troops loyal to the new Ukraine government battled with pro-Russian forces for control of an eastern airport.

Ukraine said yesterday that cease fire violations have surged to a new record, while the nation’s security council warned the unrest may spark a “continental war” and German Chancellor Angela Merkel called for emergency talks.

Back in November, before most grasped just how serious the collapse in crude was (and would become, as well as its massive implications), we wrote “How The Petrodollar Quietly Died, And Nobody Noticed“, because for the first time in almost two decades, energy-exporting countries would pull their “petrodollars” out of world markets in 2015.

This empirical death of Petrodollar followed years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

We added that in 2014 “the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

The problem was compounded by its own positive feedback loop: as the last few weeks vividly demonstrated, plunging oil would lead to a further liquidation in foreign  reserves for the oil exporters who rushed to preserve their currencies, leading to even greater drops in oil as the viable producers rushed to pump out as much crude out of the ground as possible in a scramble to put the weakest producers out of business, and to crush marginal production. Call it Game Theory gone mad and on steroids.

Ironically, when the price of crude started its self-reinforcing plunge, such a death would happen whether the petrodollar participants wanted it, or, as the case may be, were dragged into the abattoir kicking and screaming.

It is the latter that seems to have taken place with the one country that many though initially would do everything in its power to have an amicable departure from the Petrodollar and yet whose divorce from the USD has quickly become a very messy affair, with lots of screaming and the occasional artillery shell.

As Bloomberg reports Russia “may unseal its $88 billion Reserve Fund and convert some of its foreign-currency holdings into rubles, the latest government effort to prop up an economy veering into its worst slump since 2009.”

These are dollars which Russia would have otherwise recycled into US denominated assets. Instead, Russia will purchase even more Rubles and use the proceeds for FX and economic stabilization purposes.

“Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.“

Call it less than amicable divorce, call it what you will: what it is, is Russia violently leaving the ranks of countries that exchange crude for US paper.

Vladimir Putin ordered the Russian state energy giant Gazprom to cut supplies to and through Ukraine amid accusations, according to The Daily Mail, that its neighbor has been siphoning off and stealing Russian gas. Due to these “transit risks for European consumers in the territory of Ukraine,”Gazprom cut gas exports to Europe by 60%, plunging the continent into an energy crisis “within hours.” Perhaps explaining the explosion higher in NatGas prices (and oil) today, gas companies in Ukraine confirmed that Russia had cut off supply; and six countries reported a complete shut-off of Russian gas. The EU raged that the sudden cut-off to some of its member countries was “completely unacceptable,” but Gazprom CEO Alexey Miller later added that Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey; and Russian Energy Minister Alexander Novak stated unequivocally, “the decision has been made.”

As Bloomberg reports,

Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey, a surprise move that the European Union’s energy chief said would hurt its reputation as a supplier.

 

The decision makes no economic sense, Maros Sefcovic, the European Commission’s vice president for energy union, told reporters today after talks with Russian government officials and the head of gas exporter, OAO Gazprom, in Moscow.

 

Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions. About 40 percent of Russia’s gas exports to Europe and Turkey travel through Ukraine’s Soviet-era network.

 

…

 

Sefcovic said he was “very surprised” by Miller’s comment, adding that relying on a Turkish route, without Ukraine, won’t fit with the EU’s gas system.

 

Gazprom plans to deliver the fuel to Turkey’s border with Greece and “it’s up to the EU to decide what to do” with it further, according to Sefcovic.

Which, as The Daily Mail reports, has led to a major (and imminent) problem for Europe…

Russia cut gas exports to Europe by 60 per cent today, plunging the continent into an energy crisis ‘within hours’ as a dispute with Ukraine escalated.

 

This morning, gas companies in Ukraine said that Russia had completely cut off their supply.

 

Six countries reported a complete shut-off of Russian gas shipped via Ukraine today, in a sharp escalation of a struggle over energy that threatens Europe as winter sets in.

 

Bulgaria, Greece, Macedonia, Romania, Croatia and Turkey all reported a halt in gas shipments from Russia through Ukraine.

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As Bloomberg goes on to note, Gazprom has reduced deliveries via Ukraine after price and debt disputes with the neighboring country that twice in the past decade disrupted supplies to the EU during freezing weather.

“Transit risks for European consumers on the territory of Ukraine remain,” Miller said in an e-mailed statement. “There are no other options” except for the planned Turkish Stream link, he said.

 

“We have informed our European partners, and now it is up to them to put in place the necessary infrastructure starting from the Turkish-Greek border,” Miller said.

 

Russia won’t hurt its image with a shift to Turkey because it has always been a reliable gas supplier and never violated its obligations, Russian Energy Minister Alexander Novak told reporters today in Moscow after meeting Sefcovic.

 

“The decision has been made,” Novak said. “We are diversifying and eliminating the risks of unreliable countries that caused problems in past years, including for European consumers.”

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That helps to explain today’s epic meltup in NatGas futures…

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“They [the Russians] have reduced deliveries to 92million cubic metres per 24 hours compared to the promised 221million cubic metres without explanation,” said Valentin Zemlyansky of the Ukrainian gas company Naftogaz.

 

“We do not understand how we will deliver gas to Europe. This means that in a few hours problems with supplies to Europe will begin.”