Italy Pipes Up Against NATO Escalation as Court Ruling Could Cut Off Russian Gas Sooner Than Expected

An opaque legal ruling could, in a roundabout way, soon halt all pipeline deliveries of Russian gas to Austria – and therefore Italy. Coupled with the ongoing disruptions in the Red Sea, the economic consequences for Europe’s second-largest industrial location could be dire.

In late May, an undisclosed European court handed down a ruling that in a roundabout way could force Austria’s main gas company OMV (Österreichische Mineralölverwaltung or Austrian Mineral Oil Administration) to stop paying for Russian gas.

Some background:

This all goes back to the West’s “freezing” of hundreds of billions of Russian foreign assets in 2022. In light of that move, Putin introduced the “gas for roubles” program so that payments and clearing on its gas exports would be under the control of the Russian Central Bank and therefore unable to be frozen or stolen by the West.

Many European countries/companies refused to comply and loudly complained that Putin was cutting off the gas.

Meanwhile, some countries and companies in central Europe were “allowed” by the EU to continue importing Russian gas due to difficulties in updating their legacy energy infrastructure or some other reason. So companies like Austria’s OMV agreed to pay in roubles and continue to import the Russian gas and often send it on to the countries that threw a fit over the gas for roubles program.

Now, here we are two years later, and it looks like OMV is going to be forced to stiff Gazprom on payments and redirect that money to European energy companies who refused to pay in roubles.  What little details of the case that are known are this from Upstream:

…European companies led by Germany’s Uniper and RWE filed arbitration claims in Sweden, Switzerland and Luxembourg against the Russian company’s European trading subsidiary, Gazprom Export, seeking multibillion-dollar compensation payouts.

OMV said on Wednesday that its remaining supplies from Gazprom may be under threat due to “a foreign court ruling” obtained by “a major European company” relating to the 2022 halt in supplies.

Neither the court nor the company was identified.

However, OMV said the court ruling contains an injunction ordering Gazprom’s remaining European customers to divert their payments for received Russian gas to the accounts of the “major European company”, as enforcement of the compensation is deemed impossible in Russia.

OMV said that, if enforced, the ruling will require its OMV Gas Marketing & Trading subsidiary “to make payments under its gas supply contract with… Gazprom Export” to “the European energy company instead of sending them to Gazprom Export”.

“However, it is currently not known to OMV whether and when such an enforcement might occur,” it added.

 Naturally, since Gazprom would not be receiving money for its natural gas, it would no longer deliver it to Austria. Despite the obviousness of that response, all the headlines read like this:

OMV of course says that it would still be able to supply customers with volumes from non-Russian sources through its “extensive diversification efforts in recent years,” but at what cost? At least one prediction has European natural gas prices jumping 18 percent, and that’s on top of the significant rises over the past two years. There’s a reason that Austria kept importing from Russia and is now the EU country that relies the most on Russian gas. As always, it’s cheap and reliable.

For comparison, OMV just signed long-term deals with BP and US-based company Cheniere Energy to import a combined nearly 2 million tons of LNG per year through a terminal in The Netherlands. The deals don’t begin until 2026 and 2029, respectively, and the contractual price will be pegged to market prices, which is the obvious disadvantage compared to set prices in long term contracts with Russia.

Sure, the increased energy prices will hit the poorest Europeans hardest and reduce their quality of life, but hey, it’s good for US LNG companies.

The fact is, this is bad news for Austria, and maybe more importantly from an EU-wide perspective, for the bloc’s second largest industrial center: Italy. Both countries have been trying to prepare for a halt to Russian gas supplies at the start of the next year when the current gas transit agreement between Russia and Ukraine expires. Officials in Kiev have repeatedly made it clear that will be the end of Russian gas flowing through Ukraine.

That the cutoff date might now come sooner than expected just adds insult to injury. As OMV talks up its diversification efforts, it only has to look to Italy to see how difficult that process can be. With the ongoing tensions in the Red Sea and the Middle East causing disruptions in LNG deliveries Rome is in a major bind despite long pretending otherwise.

Italy has Algeria to the south, which was going to increase gas and oil exports. Italy had the LNG facilities and was going to be part of “the continent’s new economic growth engine.”

But that plan to transform the country into a gas hub for Europe, already on shaky ground, started to go up in flames in the Red Sea months ago. Italian PM Giorgia Meloni’s predecessor, the unelected former Goldman Sachs man Mario Draghi, was one of the biggest proponents of the EU’s doomed Russia policy and pushed the energy hub idea, which was seamlessly picked up by Meloni.

It was never all that well thought out in the first place.

In 2021, Russian imports accounted for 23 percent of Italian fuel consumption with gas depended on more heavily (about 40 percent of imports), but it was said Italy was well-positioned to manage the loss of Russian fuels due its proximity to North Africa. Italy quickly began looking south across the Mediterranean as part of the EU-wide turn to Africa in search of energy replacements for Russian oil and gas. Algeria was going to increase the flow of gas through an existing pipeline, and the countries plan to build another pipeline.

Here were Italy’s calculations from a March 2022 piece from Hellenic Shipping News:

Italy consumed 29 billion cubic metres (bcm) of Russian gas last year, representing about 40% of its imports. It is gradually replacing around 10.5 bcm of that by increased imports from other countries starting from this winter, according to Eni.

Most of the extra gas will come from Algeria, which said on Sept. 21 it would increase total deliveries to Italy by nearly 20% to 25.2 bcm this year. This means it will become Italy’s top supplier, provide roughly 35% of imports; Russia’s share has meanwhile dropped to very low levels, Descalzi said this week.

The rest of the shortfall was to be made up of LNG shipments from Angola, Egypt, Mozambique, Qatar, and of course the United States.

Rome was using billions of euros coming from the EU’s green fund, the REPowerEU plan, and the Covid recovery fund to completely wean itself off Russian gas and turn the country into a hub, mainly with LNG storage facilities. The government rushed through a 5 billion cubic meter capacity (bcm) LNG terminal project in Tuscany with the Draghi government appointing a special commissioner with near-absolute powers that allowed the project to proceed despite court challenges.

In December, Italy’s gas grid operator Snam completed a $400 million deal for another floating 5 bcm LNG storage and regasification facility that will be based on Italy’s northeastern coast, which will bring the country’s total to 28 bcm.  In September of 2022, Reuters declared that the “energy crisis sires new European order: a strong Italy and ailing Germany.”

The Italian government patted itself on the back and said it was the “best in Europe” on energy security.

While gas made up about 51 percent of Italy’s total electricity generation in 2022 (the highest level in Europe), more than 95 percent of it was imported from overseas, and the problem was the math was overly optimistic going forward.

The Transmed system connecting Algeria and Italy wasn’t even operating at full capacity in 2022 when Italy began to believe it was going to be able to ramp up deliveries. There were major Algerian production issues, including infrastructure problems and the need to divert gas to meet increasing domestic demand for electricity.

Marco Giuli, a researcher at the Brussels School of Governance in Belgium, told Natural Gas Intelligence at the time that “the additional 9 Bcm from Algeria by 2023 is unrealistic, especially considering that Algerian supplies to Italy increased by 80% between 2020 and 2021, Giuli said.

Here we are in 2024 and Algeria’s gas exports to the EU have actually declined:

So with LNG problems due to the Red Sea disruptions and less than hoped for from Algeria,  what did Italy do in response? It started getting more gas from Russia via Austria:

Now, it looks like Russian supplies could be cut off even sooner than expected, and with Israel announcing its destruction of Gaza will continue until the end of the year, that means the Red Sea will remain a no-go zone. So Italy, Austria and others will be stuck with limited LNG options, which means prices will likely be ridiculously high due to scarce supply. Meanwhile, Italian factory activity continues to contract as it has been doing for the majority of the time for the past two years.

The vise tightening in Italy could be playing a role in Italian politicians piping up about the insanity of US/NATO escalation against Russia. Consider the following signs that Italy wants to get off the escalator in recent weeks:

  • In early May Italian Defense Minister Guido Crosetto slapped down French President’s Emmanuel Macron’s flirtation with the idea of sending Western troops to Ukraine.
  • Foreign Minister Antonio Tajani declared that Italy is not at war with Russia and will not send troops.
  • Deputy Prime Minister of Italy and Minister of Infrastructure and Transport Matteo Salvini said that NATO General Secretary Jens Stoltenberg should recant his statements about using Western weapons to attack inside Russia’s pre-2014 borders, or he should resign. The full comment: “Never attack Russia,” says Salvini, who adds: “If they want to go and fight in Ukraine, let Stoltenberg, Emmanuel Macron and all the bombers who want war go there. Ukraine or using our weapons to kill in Russia is madness. Either this gentleman who speaks on my behalf, since he speaks on behalf of NATO, either apologizes or resigns. Because the Italian people did not give you any mandate to go and shoot in Russia”.

Unfortunately for the Italian people and especially the working class who have to bear the brunt of the pain from the economic war against Russia, the pushback against further escalation is too little, too late.

The Italian public has consistently shown some of the lowest support levels in Europe for Project Ukraine, and those numbers have been consistently falling as research shows that half of Italians are struggling to make ends meet.

Productive sectors of the economy have never been on board, and some political figures on the right like Salvini’s League and Berlusconi’s Forza Italia have periodically spoken out against escalation, but any attempts at a rational cost-benefit analysis or even maintaining some sort of cultural dialogue with Russians is met with hysteria from the liberal centrists in Italy (the real left has been mostly stamped out).

It’s a major shift for Italy, which long enjoyed close ties with Russia. The two countries remained strong business partners until recent years. For example, Italy shared manufacturing know-how, such as on civil aircraft and helicopter projects, as well as the modernization of rail transportation, and Russia had the energy. Many mid-sized Italian businesses, especially in areas like agricultural manufacturing, were also eager to get into the emerging Russia market. They’re now doing what they can to stay there. Italian exports to Türkiye, for example, have jumped 87 percent over the last two years with much of that increase likely attributable to the effort to bypass sanctions.

But now the gas is soon to be completely cut off and the US is cracking down on countries like Türkiye and their role in sanctions evasion.

The whole Project Ukraine has always been a lose-lose proposition for Italy. Go against it and fall victim to EU Commission President Ursula von der Leyen’s “tools,” which would have likely included yanking the nearly $200 billion in Covid recovery funds going to Rome along with other financial difficulties orchestrated from Brussels. Despite a big part of her appeal being her earlier pro-sovereignty positions, Meloni pledged fealty to the EU, NATO, and the US after her 2022 election. That decision, too, now has Italy in a massive bind. And despite Meloni rolling over, von der Leyen’s “centrist” pro-Project Ukraine coalition partners in Brussels are now threatening to block the latter from a second term running the EU Commission if she tries to bring Meloni’s party into the center-right European People’s Party in the EU Parliament.

And that pretty much sums up Italy’s past thirty years of involvement in the European project.

For three decades Italy has been one of the most eager adopters of EU-prescribed neoliberal reforms. Leaders in Rome complain but say there’s no choice.

For decades public assets have been sold off. American private equity is currently feasting on the country with CIA-connected KKR nearing completion of its acquisition of Telecom Italia’s fixed line network. More are to come as the sell-off must go on, the leaders in Rome complain but obey.

Most Italians’ standard of living keeps falling, but that only proves more market-friendly reforms are needed, Brussels says. Italian leaders complain but oblige. One can only wonder why.

Dipartimento delle Finanze

And now what was left of Italian manufacturing is being killed so that US energy companies can make a killing delivering LNG, but Russia bad, they say.

And no doubt, despite these recent protestations over further escalation with Russia, when the US demands its European vassals wade ever deeper into the Ukrainian morass, the government in Rome will moan and wail as they order working class Italians to the front lines.

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  1. zagonostra

    For three decades Italy has been one of the most eager adopters of EU-prescribed neoliberal reforms. Leaders in Rome complain but say there’s no choice.

    Much longer than three decades.

    When I speak to family that still live there, they realize that Italy is a “U.S. vassal,” but they still are enjoying vacations to the beach side, fine food, expressos, and the conviviality of friends and family. When they are having dinner together they avoid politics . And so they can for a little longer…

    1. Camelotkidd

      “For three decades Italy has been one of the most eager adopters of EU-prescribed neoliberal reforms. Leaders in Rome complain but say there’s no choice.”
      Operation Gladio springs to mind

  2. Fritz

    Fifth paragraph down is when I came to “Austria’s OMV”. Since the author felt it was
    unimportant to explain what the acronym OMV stood for, I decided at that point the article
    was not important enough to read any further, so I left the rest unread.

    1. BillS

      OMV = Österreichische Mineralölverwaltung, One of the major importers of NG from Russia (since Soviet times). I presume the article’s author assumed that Europeans would understand the acronym, since there are OMV filling stations everywhere. It is a shame that you did not read the whole article. It presents a very good picture of Italy’s energy quandry. My compliments to Conor for his consistently excellent reporting.

    2. Kouros

      But if it were Exxon you wouldn’t have had problems, eh?!

      Most countries have one lead oil/gas/energy related activities. France/Total, Italy/ENI, etc…

      American like provincialism is not becoming. And the reaction against clarity is also overblown when it takes less than 5 secs to identify the party.

    3. Jokerstein

      Maybe a later edit, but I saw OMV defined in para two.

      Jes’ tryin’ to halp, but if you’re a troll, kiss my chuddies!

  3. OnceWere

    I happened to read an article just the other day that put Italy as one of the very worst-performed economies of the 21st century. Not just in Europe, or the OECD, but in the entire world. Excluding countries like Afghanistan and Syria which have been through major wars, and countries like North Korea for which there’s no reliable information, the list went 1. Zimbabwe 2. Greece 3. Central African Republic and 4. Italy – which had only 1% real GDP growth since the year 2000. With an energy crisis piled on top of that bad can only get worse for the Italian economy.

    1. ISL

      If you have a link I would love to read that article (and share with my Italian from Italy wife).

  4. ebolapoxclassic

    Why isn’t Russia the one cutting off the gas? Granted Italy isn’t the worst among the EU/NATO bunch, but it’s nevertheless very hostile toward Russia (especially now under Meloni).

    Zoltan Poszar pointed out during the corona epidemic that semiconductor imports into Japan, which were cut off by the supply chain disruptions, made up a small part of Japan’s total imports. (And yes, for whatever reason Japan couldn’t or didn’t want to make these particular chips themselves.) However, they led directly to 40% of auto manufacturing having to shut down, corresponding to a huge part of the economy. It was like an upside-down pyramid.

    He also made the comparison between that and how (in monetary terms) quite small Russian energy exports were supporting a huge manufacturing sector in the EU (especially in Germany). In other words, Russia is making sure the EU can continue to function industrially and socially for in the context very little support to its balance of payments.

    Yet the West are the ones insisting this arrangement must end and Russia has consistently been fighting that tooth and nail. And this even as the Western countries not just steal Russia’s money (this being money they previously had paid for Russia for oil and gas) but openly (and gleefully) give Ukraine permission to fire missiles which they provided into Russian territory. I can’t make any sense of that.

  5. The Rev Kev

    Meloni was all for going against Russia after she got into power, in spite of what most Italians thought themselves. She was happily taking part in sanctions and sending weapons but seems to have gone quite on the subject lately. It seems that Conor’s article provides some answers. As Austria is forced to have their gas cut off, so will Italy as a secondary result. The fact that they were buying so much was a bit of a revelation but as that is grinding to a halt, it will have a severe effect on the Italian economy. And I believe that Italy has one of the worse performing economies in the EU as it is. Apart from the fact that a very large spanner is about to be thrown into the Italian economy, even worse – for Meloni – is the realization that this will have a severe effect on her political support. So maybe she has kept quiet about Russia so that when this war ends, she has a chance of making nice with the Russians if they can get deliveries going again.

    1. CA

      From 2000 through 2022, real per capita GDP in Italy has grown a mere 2.9%. Essentially Italy stopped growing in 2000:

      August 4, 2014

      Real per capita Gross Domestic Product for United States, United Kingdom, Germany, France and Italy, 2000-2022

      (Percent change)

      August 4, 2014

      Real per capita Gross Domestic Product for United States, United Kingdom, Germany, France and Italy, 2000-2022

      (Indexed to 2000)

  6. ciroc

    I thought this would never happen until Robert Fico was shot, but since going against NATO and EU policy would result in assassination, the leaders of the West have virtually no choice.

  7. Revenant

    It seems legally incomprehensible that a customer of Gazprom who refuses to accept the new arrangements, whether or not they are justified in refusing them, can obtain an award of compensation against Gazprom that interferes in a third party’s contract with Gazprom. You cannot rob Peter to pay Paul.

    I can understand an argument that payments to Gazprom in the new manner are forbidden by sanctions and must be paid into a central trust fund (for future seizure by Von der Lying) but logically there would then be no compensation available to the first party, whose payments would also be unlawful and whose contractual right to gas is thus unenforceable for force majeure. The contract cannot stand in one direction and not the other and a court cannot arbitrarily seize third party property to make one side unilaterally whole.

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