Gazprom Export notifies Bulgargaz supplies will be suspended...
On April 26, the Bulgarian public gas supplier Bulgargaz received a notification that natural gas supplies from Gazprom Export will be suspended from 27 Apr 2022 on. According to the Ministry of Energy, Bulgaria has fulfilled its obligations and made all payments required by this gas supply contract. The analysis by Bulgargaz and Bulgarian Energy Holding stated that the new two-stage payment procedure proposed by the Russian side is not in line with the existing agreement, expiring at the end of this year, and poses significant risks for the Bulgarian side. According to the Minister of Energy, with the proposed procedure, Bulgaria would lose control over its payments: It is unclear what exchange rate will be applied and it would be possible that the Bulgarian side pays without receiving any gas supplies in return. The Ministry of Energy, the Bulgarian Energy Holding, Bulgargaz and Bulgartransgaz (gas infrastructure operator) have taken urgent steps for alternative natural gas supplies. At the end of the heating season the gas in storage should be sufficient. Thus, at present, no restrictive measures of gas consumption are required. A problem will occur if Bulgaria enters the next heating season without acquiring additional gas from existing sources.
... whilst Bulgarian dependence on Russian gas is high and gas reserves are limited
These events come against the backdrop of almost complete dependence of Bulgaria on Russian gas supplies due to unrealized diversification. In addition, the currently filled capacity of the national gas storage is about 20%, which signals weaknesses also in the operational gas management. Currently the government urgently needs to do what was not for many years. The upside in this case is that households in the country are gasified only to a very low extent. Furthermore, district heating companies are the largest consumers of natural gas, but since the heating season is over, they can switch back to burning coal and waste in this emergency. Large consumers of gas in the country are also glass, chemical, metallurgical plants, greenhouses, bakeries, etc., which can focus on alternative fuels or temporarily reduce production. The Lukoil Neftochim oil refinery uses gas as well and this could also be a problem.
|Energy and natural gas dependence in manufacturing|
Government remains confident: Additional gas from existing sources, albeit at a higher price
For now, the government is confident that it will deal with the gas crisis. In this regard, the interconnector with Greece is expected to be completed by July 1, and should start supplying gas before the new heating season. Moreover, it will be necessary to renegotiate the quantities delivered from Azerbaijan. Currently, Bulgaria supplies accounts for roughly 1 bn cubic meters and if this amount would be doubled, it would account for almost 2/3 of the gas needed. LNG supplies from neighboring countries could also be stepped up, although the prices would be higher. Bulgaria is in communication with the European Commission, where the possibilities for common supplies at EU level are in discussion. Of course, the urgency of possible measures implies a higher price of gas. According to the Minister of Energy, however, every aggressive and difficult transformation comes at a certain price.
Further inflationary pressure and industrial gas dependence warrant CPI and GDP revisions
Nonetheless, the crisis with the gas supply required a modest revisions of our forecasts. First of all, we expect an increase in inflation, which was adjusted from 9.0% to 12.6% eop. Of course, expected additional difficulties of the gas-dependent industries will contribute to a lower real GDP increase in 2022 and accordingly we modify our projection downwards from 3.0% to 2.0%, which from today's perspective, again underlines our moderately optimistic view on the economic activity during the year despite the external shocks.
Emil Kalchev has been taking responsibility for the Research at Raiffeisenbank Bulgaria since 2014 coming from the academic sphere, the New Bulgarian University, where he had been teaching Finance since 2005. Emil got PhD degree in quantitative economics from the Vienna University of Economics and has taken several professional positions: post-doc researcher at the University of Bamberg, financial consultant in Vienna and Sofia, senior expert at the Center for Economic Development, researcher for macroeconomics at the Bulgarian Academy of Science, official at the Ministry of Trade, etc. He was a guest fellow at a numerous university, political and business institutions in Europe, headed academic and commercial projects, and is author of a range academic and applied research publications. Emil has participated in many interviews and events of national and international media.
This week's US inflation report was yet another reminder of the persistence of underlying price pressure across the Atlantic, with markets reacting swiftly by rising yields, also in Europe. Looking ahead more business cycle data, particularly for industry, are scheduled next week and FOMC minutes are certainly good for a surprise. In Central and Eastern Europe, apart from the ongoing focus on politics and the situation in Ukraine, the data highlights will be the inflation results in Poland and Czechia following this week's upside surprise in Hungary. After central bank rate hikes in Poland (50 bp), Romania (50 bp) and Russia (100 bp) this week, central bankers take a week off.