Russia reduces gas flows to Europe as leaders show support for Ukraine

Good morning and welcome to Europe Express.

While the leaders of France, Germany, Italy and Romania were in Ukraine yesterday endorsing the country’s EU candidate status, back home, German and Italian gas companies reported dwindling Russian supplies. Even as Gazprom blamed the shortages on technical issues, we’ll explore how the timing fits with Russia’s broader gas geopolitics — and why this time around, the strategy seems to be failing.

In Luxembourg, a deal that was within reach on legislation implementing last year’s global agreement on corporate taxation has become elusive again, with the Hungarian finance minister expected to raise objections today.

Weaker blackmail

The timing of Gazprom’s “technical problems” in delivering supplies to Europe has often coincided with political developments that the Kremlin had issues with, write Valentina Pop in Brussels and Amy Kazmin in Rome.

Take last year’s energy crisis experienced by Moldova as Gazprom slashed supplies following the election of an avowedly pro-European government in Chișinău. The Russian gas giant turned the taps back on once Moldova caved on demands for looser EU ties. The blackmail didn’t last long, as today the European Commission is expected to endorse Moldova’s EU candidate status, along with Ukraine’s.

Still, Gazprom followed its well-established playbook and reduced gas supplies to Germany, Italy and Slovakia yesterday, citing technical problems — just as German chancellor Olaf Scholz and Italian PM Mario Draghi were pledging their support for Ukraine’s EU candidate status.

“It’s not a coincidence,” says Nathalie Tocci, director of Italy’s Institute of International Affairs, in reference to the timing of the gas cuts. “There is a narrative that weak western Europeans are prone to compromise . . . It’s the logic of ‘we want to nudge them to change behaviour, make them feel the pain so they are more prone to a discussion on lifting sanctions,” she added. “I don’t think it is going to work in the slightest.” 

The reason why Putin’s blackmail is starting to lose its bite is that European countries are already well under way in reducing their gas dependence on Russia.

Even though EU governments have so far shied away from banning Russian gas imports since the war began, several countries have been cut off already — Poland, Bulgaria, Finland, the Netherlands and Denmark — after they refused to comply with a new payment scheme ordered by Putin.

The recent supply issues for Italian, German, Slovak and Austrian companies, which have complied with the new payment scheme, show how little protection that compliance brings.

But Germany and Italy, while continuing to import Russian gas, have accelerated plans to wean themselves off it, including by looking for alternative gas supplies from the Middle East. The EU has also told countries to fill their gas storages in case of further disruptions this winter.

And if Putin decides to turn off the tap completely, German vice-chancellor Robert Habeck provided a solution yesterday: save energy, as “every kilowatt hour helps.”

Chart du jour: Déjà vu, but different

Read more here about why last week’s widening spreads between eurozone countries’ borrowing costs have revived memories of the financial crisis a decade ago, but also why there are big differences between then and now.

Elusive deal

Earlier this week it looked like Emmanuel Macron had the prize of a deal on an EU minimum corporate tax within his grasp after Poland signalled it was ready to drop its opposition to the measure.

But in a last-minute reversal, Hungary yesterday said it will refuse to back the tax at a meeting of finance ministers today — despite having previously endorsed it, write Sam Fleming in Luxembourg and Henry Foy in Brussels.

The volte-face by Viktor Orbán, Hungarian prime minister, is a setback for the French president and his finance minister Bruno Le Maire, who put the task of delivering the 15 per cent minimum effective corporate tax rate at the heart of their period at the helm of the rotating EU presidency, which ends this month.

But the Hungarian opposition, which officials expect Budapest to formalise at today’s Ecofin meeting, is more than just a political blow to Macron as he prepares for legislative elections this weekend in France.

It has deepened concerns among other member states that Hungary is embarked on a course of obstructionism which could roil other key EU files — especially in areas where unanimity is needed, as it is in tax matters.

The mood towards Budapest was already pretty poisonous after the fraught passage of the sixth package of sanctions against Russia earlier this month. Orbán held back agreement on an oil ban for nearly a month as he insisted on special terms in return for supporting the penalties.

Then after giving his agreement at a late-night summit in Brussels, Orbán made extra demands — including the exclusion of the Russian patriarch from the sanctions list — during what was expected to be a largely technical exercise of agreeing the detailed legislation among EU ambassadors.

Hungary’s warnings that it is willing to block EU legislation on the corporate tax rate that it previously endorsed triggered dismay among other member states. As one EU diplomat said, it’s perfectly normal to raise objections to a policy proposal, but coming up with issues at the last moment “creates a lot of frustration.” 

Budapest says the war in Ukraine and the negative economic consequences — including rising energy and food prices — has shifted its calculus, and made it unwilling to make its economy less competitive by adopting the minimum tax. Orbán’s new parliamentary majority almost certainly also played a role in the U-turn — making him more emboldened and confident about picking yet another fight with Brussels.

Some suspect that Hungary is dragging its heels not because of the merits of the tax itself, but because it hopes to use its veto as leverage in negotiations with the European Commission over its long-delayed recovery and resilience plan (something Poland was also accused of doing before it finally consented to the tax this week). 

The blockade has inevitably rekindled discussion on the need for unanimity in certain policy areas, and whether the EU needs to be more aggressive in bypassing it.

What to watch today

1. European Commission publishes its opinions on Ukraine, Moldova and Georgia’s readiness to become EU accession candidates

2. EU finance ministers meet in Luxembourg

Smart reads

• CO₂ removal: Without active CO₂ removal from the atmosphere, the EU climate goals will be very hard to achieve. This SWP paper explores the challenges ahead and the shortcomings of current removal methods and policy instruments.

• Adjusting LNG platform: The EU’s newly established energy purchasing platform needs some adjustments to work properly, writes Bruegel in this policy paper. The think-tank argues for incentives for companies to fill gas storages and for the platform to co-ordinate both demand for additional LNG and its sourcing on international markets.