Russian President Vladimir Putin insists that natural gas from the country must be paid for in rubles. This demand is apparently meant to boost the Russian currency, but European leaders have stated that they won’t comply because it breaches contracts and sanctions.
Putin stated that Russia will begin accepting ruble payments Friday. If buyers do not agree to the new conditions (including opening ruble accounts at Russian banks from which gas payments will be made), gas supplies will be cut.
Putin stated that if these payments are not made we will consider it a failure by the buyer to meet its obligations and all the consequences that follow.
European leaders remained cautiously consistent in their insistence that they will continue to pay natural gas in dollars and euros, and demanded to be shown the details of how the Kremlin will execute its decree. This was just a day after leaders of Germany and Italy claimed they had received assurances about gas supplies from Putin.
Putin declared last week that countries considered “unfriendly” for imposing sanctions against Russia over its war with Ukraine must now pay natural gas in Russian currency. The proposal has caused natural gas prices and raised concerns that it could lead to an interruption in supplies to Europe. Europe is heavily dependent upon Russian natural gas and would be severely affected by a sudden cutoff. Russia is dependent on oil and gas sales to generate a large portion of its government income, even though its economy is suffering from severe sanctions from the West.
Putin’s request appeared to be part Russia’s attempts to boost ruble following the currency’s plunge under Western sanctions. It took only 82 rubles to purchase a dollar on Thursday, a level that was similar to when Russia launched its invasion.
Economists believe that switching gas payments to rubles will do little to support Russia’s currency. Gazprom, a gas exporter, has to sell 80% its foreign currency earnings to rubles. Thursday’s White House statement stated that the ruble was no longer reliable as a measure of Russia’s economy, due to its artificially inflated status.
Evercore ISI analysts said Putin’s main motive is to “prove he can bend EU leaders” and that Russia could force the EU into paying for gas in rubles. However, they also suggested that the European countries could respond by increasing tariffs or banning Russian oil imports. Analysts said that while Russia could sell oil eventually, it would likely be sold at a steep discount.
According to the decree Putin signed, state news agency RIA Novosti published that a designated bank would open two accounts for each buyer: one in foreign currency and one with rubles. The bank will be authorized to sell the gas for rubles at Moscow’s currency exchange. Buyers will pay in foreign currencies. The rubles would be transferred to the second account where the gas will be officially purchased.
According to Tim Ash, BlueBay Asset Management’s senior emerging markets sovereign strategist, people are “wondering about Putin’s plans,” he said. Putin might have misinterpreted the German government’s refusal to boycott Russian energy as weakness, and now he is trying to engineer an energy crisis. The solution is to call Putin’s Bluff and say “sure, cut off all energy supplies and let us see who breaks first.”