Putin wants Europe to pay rubles for Russian gas

Putin wants rubles for gas

I have decided to implement a set of measures to transfer payments for our gas supplies to unfriendly countries into Russian rubles,

Putin said, ordering the changes to be implemented within a week, the Moscow Times reported.

Russia named last week which countries it now considers unfriendly for voting in favour of sanctions against Russia, including the United States, the United Kingdom, all European Union member states, including Hungary, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

The measures are part of Russia’s response to the West’s unprecedented sanctions leveled on Moscow in response to the attack on Ukraine.

Russia deems all countries that have hit it with sanctions following its invasion of Ukraine as “unfriendly.” Hungary is one of them although Prime Minister Viktor Orbán's government is not letting through arms slated for Ukraine, and it is also against a no-fly zone over its eastern neighbour and severely opposes sanctions on Russian energy due to its massive dependence on Russian gas and oil.

Europe imports around 40% of its natural gas from Russia, with contracts typically priced in euros. Orbán said earlier that 85% of all gas entering Hungary comes from Russia, and fuel is produced from oil, 64% of which comes from Russia.

It doesn’t make sense to deliver our goods to the EU or U.S. and receive payments in dollars or euros,

Putin said in the meeting with government officials.

In response, the rouble rose on the Moscow Exchange.

Russia will continue, of course, to supply natural gas in accordance with volumes and prices ... fixed in previously concluded contracts,

Reuters cited Putin as saying.

"The changes will only affect the currency of payment, which will be changed to Russian roubles," he added.

Putin said the government and central bank had one week to come up with a solution on how to move these operations into the Russian currency and that gas giant Gazprom would be ordered to make the corresponding changes to gas contracts.

According to Gazprom, 58% of its sales of natural gas to Europe and other countries as of 27 January were settled in euros. U.S. dollars accounted for about 39% of gross sales and sterling around 3%.

The European Commission has said it plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies of the fuel "well before 2030".

Analysts trying to make sense out of Putin's move

Analysts see Putin’s move as Moscow’s attempt to put pressure on Europe over its sanctions — or “turn the tables on the EU,” as Elina Ribakova, deputy chief economist and sanctions expert at the Institute of International Finance, told the Moscow Times.

If Putin’s order is implemented, Europe would have to buy hundreds of millions of euros’ worth of rubles every day to pay for its substantial gas deliveries. From Russia’s perspective, that would provide an inflow of much-needed hard currency and boost demand for the beleaguered Russian currency, the paper added. 

It noted, however, that transactions could prove tricky for Europe as many Russian state banks, including the Central Bank itself, are under sanctions which prohibit direct transactions.

He is basically trying to get Western countries who sanctioned the Central Bank to transact with it,

said Timothy Ash, Emerging Market Credit Analyst at BlueBay Asset Management in London.

But this will just make it more difficult to transact with Russia for energy supplies.

The Russian ruble, whose value cratered in the wake of the sanctions, jumped on Putin’s announcement, strengthening by almost 4% against the U.S. dollar in trading in Moscow. Prices for gas in Europe rose 8%.

Russia is currently requiring exporters to sell 80% of their hard currency earnings — effectively using its extensive export earnings to replace the Central Bank’s frozen reserves and stop the Russian ruble from falling even further.

Maria Shagina, a visiting senior research fellow at the Finnish Institute of International Affairs, branded the announcement an “unexpected turn from the Kremlin.”

I tend to think this is another bluff.

"Receiving hard currency from hydrocarbons is much more important now than forcing all ‘unfriendly’ countries to purchase rubles,” she told the Moscow Times. 

Some analysts also questioned whether switching the payment currency would be permitted under existing contracts signed between Gazprom, Russia’s monopoly gas exporter, and customers in Europe.

“The very tight gas market will force European customers to abide by this. There is a lack of alternatives: buy rubles or stay without Russian gas,” said Shagina.

Europe has come under heavy pressure to stop buying Russian oil and gas — a key source of income for the Russian economy — since the invasion of Ukraine began. 

Moscow has also sought to use energy prices to pressure Europe, with several politicians, including Putin himself, saying Western sanctions have created a cost of living crisis in the West by way of soaring energy prices.

Cover photo: Shutterstock