The Kremlin demands rubles for gas and leaves a monetary loophole
Russian President Vladimir Putin issued a decree on Thursday requiring payment for natural gas in rubles, but appeared to temper the order by allowing payments in dollars and euros through a designated bank, the latest twist on the energy supply on which Europe counts for heating homes and producing electricity.
The measure has received a cautious welcome from European leaders who insist payment will remain in euros and dollars and want to see the fine print of how the decree will be implemented.
Countries deemed ‘unfriendly’ for imposing sanctions on Russia over its war in Ukraine can continue to pay in foreign currency through a Russian bank which will then convert the money into roubles, according to a Kremlin decree released Thursday by state media. It came a day after Italian and German leaders said they had received assurances from Putin regarding gas supplies.
Putin spoke harsher, saying Russia will start accepting ruble payments on Friday and contracts will be terminated if buyers don’t agree to new terms, including opening ruble accounts in Russian banks.
“If these payments are not made, we will consider this as the buyer’s failure to fulfill his obligations, with all the ensuing consequences,” Putin said.
His proposal has caused a spike in natural gas prices and raised fears it could be the prelude to a disruption in supplies to Europe, which relies heavily on Russian natural gas and would be struggling with a sudden cut.
See also: War in Ukraine: Heavy fighting rages near kyiv as Russia appears to be regrouping
The German government declared an early warning of an energy emergency on Wednesday, the first step towards allowing government-mandated gas rationing for industry to spare homes and hospitals.
At the same time, Russia depends on oil and gas sales for much of its government revenue at a time when its economy is under severe pressure from Western sanctions.
Economists say the switch to the ruble would do little to prop up the Russian currency’s exchange rate, as gas exporter Gazprom has to sell 80% of its foreign currency earnings for rubles anyway.
The decree signed by Putin and published by state news agency RIA Novosti says a designated bank will open two accounts for each buyer, one in foreign currency and one in roubles. Buyers will pay in foreign currency and allow the bank to sell it in rubles at the Moscow exchange office. The rubles would then be placed in the second account, where the gas is officially purchased.
People “are wondering what Putin is doing,” said Tim Ash, senior sovereign emerging markets strategist at BlueBay Asset Management. Putin may have interpreted the German government’s reluctance to boycott Russian energy “as a weakness and is now trying to create this energy crisis…the solution here is to call Putin’s bluff and say, of course, cut off the energy supply and see who breaks first”.
Speaking shortly after Putin’s announcement, German Chancellor Olaf Scholz gave an initial noncommittal response to Russia’s new terms. He said gas contracts stipulate payment mainly in euros and sometimes in dollars. He said he made it clear to Putin in a phone call on Wednesday “that it will stay that way.”
“What his ideas about how this can happen is what we will now examine closely,” Scholz told reporters in Berlin. “But in any case, what applies to companies is that they want and will be able to pay in euros.”
Putin announced last week that Russia would require “unfriendly” countries to pay for natural gas only in Russian currency, asking the central bank to develop a procedure for buyers to acquire rubles in Russia. Major Group of Seven economies, including Italy and Germany, rejected the request.
Ahead of the decree’s announcement on Thursday, Italian Prime Minister Mario Draghi said on Thursday he had received assurances from Putin that Europe would not have to pay in rubles and played down fears Moscow could cut supplies.
Draghi said Putin told him in a 40-minute phone call Wednesday evening that “existing contracts remain in place. … European companies will continue to pay in dollars and euros.
Draghi said he had referred the discussion of how it would work to experts and that analysis was underway “to understand what this means”, including whether “European companies can continue to pay as planned, if it means anything for the ongoing sanctions”.
“The feeling is one I’ve had from the start, that it’s absolutely not straightforward to change the currency of payments without breaching contracts,” Draghi said.
The French and German finance ministers also said after meeting in Berlin that the contracts cannot simply be changed and that they would consider what Putin has proposed.
Meanwhile, Draghi also told the foreign press that Europe was pushing for a cap on gas prices with Russia, saying its payments were funding the war in Ukraine and the prices paid by Europe did not match. to the world market.
“We – Germany and Italy, as well as other countries importing gas, coal, grain, corn – are financing the war. There is no doubt,” Draghi said. “For this reason, Italy and other countries are pushing for a gas price cap. There is no substantial reason for the gas price to be so high for Europeans.
Draghi noted that Russia has no other market for its gas, which gives Europe some breathing room. Asked about the risk that Russia reacts by turning off the taps, Draghi replied: “no, there is no danger”.
The prospect of continued deliveries of gas in exchange for euros aroused a cautious reception from German industry.
“This is good news, at least in the short term, because Russian gas supplies cannot be replaced in the short term,” Achim Dercks of the Association of German Chambers of Commerce and Industry told RBB24 Inforadio. .
He noted that businesses are concerned that any cuts will affect the industry in particular, “but ultimately it would have serious economic effects for all of us”.