Putin has pulled the gas from Poland and Bulgaria in a break from the geopolitical brinkmanship regarding energy witnessed over the last few months. This comes after Russia had threatened to cut supplies if countries did not pay in rubles – which the EU has so far rejected. The subsequent decision from the Kremlin saw gas prices surge as much as 24% as the market speculated on Putin doing the same for other European states. While many analysts consider that Poland and Bulgaria will manage in the short term (given their relatively high energy reserves), the longer-term implications of the loss of Russian gas will need to be addressed given that Moscow supplies Warsaw and Sofia with 55% and 90% of their gas, respectively. Unsurprisingly, Bulgaria have already stated that Russia’s move is in breach of their contracts and that they will refuse to pay anything in rouble. Meanwhile, Poland have agreed to speed up their LNG infrastructure projects which will enable them to receive a greater level of gas imports from markets such as the USA and Qatar thus reducing their demand on Russian energy. Under existing plans, Poland is aiming to have built these terminals by 2027 however given recent developments they will now seek to have these completed by 2025.The Independent has more:
Putin’s latest move will also be particularly alarming for Berlin, Vienna and the Baltic states who are equally heavily reliant on Russian gas imports. Thus far, EU member states have been resolute in paying existing contracts in EUR and USD (which account for 97% of all EU contracts), however given the Kremlin’s inability to utilise much of these currency holdings, they have put increasing pressure on states to pay contracts in RUB. Russia’s petrodollar predicament is thus increasingly problematic given that their oil and gas receipts account for around 1/3rd of the Kremlin’s budget and their inability to access dollars and euros has complicated foreign currency denominated sovereign debt repayments. While Russia’s debt to GDP ratio stands at a low 17%, the Credit Derivatives Determination Committee rejected an interest payment on a portion of its $40bn of sovereign debt going over to the US earlier this month because it attempted to pay in rubles. This development happened on 4th April and given that there is a 30-day grace period, there is now a real chance that Russia defaults by 4th May – which would be the first time since 1918 that the country has defaulted on foreign owned debt.
Sticking with the Russian-European energy relationship, Europe Beyond Coal has estimated that the EU has sent over €40bn in payments for fossil fuels since the full-scale invasion happened on 24th February. Additionally, just this morning the UK government has requested that Drax (a power generation company) keep their coal burning furnaces open for longer given the prospect of greater energy insecurity. Given the precarious situation vis-à-vis gas, oil prices have increased with Brent currently trading at above $105dpb and WTI climbing past $101dpb after it dipped below $96dpb on Monday.
Given the ongoing geopolitical climate, in addition to the increasing disparity in the interest rate differential between the Eurozone and Federal Reserve, the euro has fallen to five-year lows against the dollar. Accordingly, consumer sentiment in the Eurozone has also fallen to record levels given soaring inflation and the war in Ukraine. For example, in France, data released this morning suggests that consumer morale fell to its lowest point in over three years with French households also expressing a greater concern over unemployment. This data has not helped the CAC 40 index which has sunk to a six-week low. This is indicative of the trend seen across the European equities market with this morning’s session seeing the German Dax down 0.4% and European technology shares declining 1% yesterday. The shock to technology was driven in part by Alphabet reporting a $1.5bn fall in quarterly profits – which also fed into the Nasdaq falling just under 4% yesterday.
Sterling also fell against the dollar to levels that we have not seen since June 2020 as investors weigh on Threadneedle Street’s policy in combating inflation, poor prospects of growth and the rising cost of living eating into consumer sentiment and spending.
Elsewhere, the prevailing risk-off sentiment and hawkish tones from the Fed have fed into dollar strength with the DXY index passing above 102. This is the first time the DXY has hit this level since March 2020, when the world braced as the pandemic caused economies to go into lockdown and investors turned to the greenback.
Have a great day.