Russian gas threat: Will Putin cut Europe off if payments aren't made in roubles?

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By Alasdair Sandford  with AP
Russian President Vladimir Putin attends a meeting with young award-winning culture professionals via videoconference in Moscow, Russia, Friday, March 25, 2022.
Russian President Vladimir Putin attends a meeting with young award-winning culture professionals via videoconference in Moscow, Russia, Friday, March 25, 2022.   -  Copyright  Credit: AP

Russian officials said on Friday that their demand for natural gas to be paid for in roubles does not mean supplies will be immediately interrupted.

The previous day Vladimir Putin said buyers of Russian gas from "unfriendly" countries would have to pay in roubles from accounts in Russia from April 1, or face the "consequences".

European countries have rejected the demand, saying contracts stipulate that payments be made in euros or dollars.

"They (the buyers) must open accounts in roubles in Russian banks. And from these accounts they will have to pay for the gas delivered and that as of tomorrow," the Russian leader declared on television after signing a decree on Thursday.

In the event of refusal, “the current contracts will be stopped,” he added. "It will be considered as a breach of obligations on the part of the buyer, and this will have all the necessary consequences."

However, on Friday Kremlin spokesman Dmitry Peskov said “payments on shipments in progress right now must be made not this very day, but somewhere in late April, or even early May.”

Gas used for heating and electricity was still flowing from Russia to Europe on Friday.

Moscow published a list of "unfriendly" countries in early March, which includes the United States, members of the European Union, the United Kingdom, Canada, Japan, Switzerland, Taiwan, South Korea, Norway and Australia.

Russian gas is crucial for the EU, which since the Russian invasion has been accelerating its search to shed its dependence and find alternative energy sources.

How have European countries responded?

Western companies and governments have rejected Putin's demand as a breach of existing contracts, which are set in euros or dollars.

European countries will continue to pay for Russian gas in euros and dollars as it is "written in the contracts", was German Chancellor Olaf Scholz's response to Putin on Thursday.

"I made it clear to the Russian president that it would stay that way" and "companies want to be able to pay in euros and will do so," he said during a news conference with his Austrian counterpart, Karl Nehammer.

German Economy Minister Robert Habeck said Russia had not been able to divide Europe and said Western allies were determined to not be "blackmailed" by Russia.

France echoed the German stance. "The contracts provide for a currency in which they are executed and therefore the contracts must be executed in the currency provided," French Finance Minister Bruno Le Maire said on a visit to the German capital.

Several German and other European companies with Russian contracts had no immediate comment.

Neither Poland's PGNiG nor the government commented immediately. There was no word either from Italian energy firm Eni, another major European buyer of Russian gas.

Germany and Austria have activated early warning plans amid concerns that Moscow could cut natural gas deliveries. Together with France, they also urged consumers to conserve energy.

What does the Russian plan involve?

At the moment around 60% of Europe's gas imports are paid in euros, and the rest in dollars. Putin wants to change that by requiring foreign gas importers to purchase roubles and use them to pay state-owned supplier Gazprom.

The decree Putin signed 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.

The buyers will pay in foreign currency and authorise the bank to sell that currency for roubles, which are placed in the second account, where the gas is formally purchased.

Importers would have to find a bank that would exchange euros and dollars for roubles. Some Russian banks have been either blocked or cut off from the SWIFT messaging system that facilitates international payments.

But other Russian banks haven't been cut off, and for now, sanctions imposed by the US Treasury barring bank transactions contain exceptions for energy payments — a concession to European allies reliant on Russian oil and gas.

Some European leaders appeared to be left confused after speaking with Putin this week. Italian Premier Mario Draghi said he had received assurances from Russia's leader that Europe would not have to pay for natural gas in roubles.

On Wednesday the German government said Putin had also told Olaf Scholz that Berlin could continue paying in euros to Gazprom Bank which would then convert the currency into roubles.

What's Putin's logic for demanding payments in roubles?

The decision to switch to invoicing in roubles should allow Russia to support its national currency, hit by sanctions, but will deprive it of a source of foreign exchange.

Already, Russia obliges its exporters, including Gazprom, to convert 80% of their turnover into roubles.

These measures and an interest rate of 20% have enabled the Russian currency to recover. After dropping considerably at the start of the war, it is almost back to levels seen before the invasion.

The Russian leader said the measure was a response to the freezing of some $300 billion (€270 billion) of foreign currency reserves that Russia had abroad, under Western sanctions in retaliation for the Russian war in Ukraine.

Eswar Prasad, professor of trade policy at Cornell University and a former official at the International Monetary Fund, said the move would at best help marginally in getting around financial sanctions.

“Either Putin is getting terrible economic advice or he is going further off the rails in his hatred for the West,” Prasad said.

“It would be cheaper for foreign importers to pay for Russia’s exports in a currency that is collapsing in value, but it is difficult to acquire roubles and make payments in a manner that avoids the sanctions."

In theory, requiring rouble payments could support demand for the currency and its exchange rate. But not by much, Prasad says.

Will Russia actually switch off the taps?

Despite Vladimir Putin's insistence on Thursday that contracts would be terminated if buyers did not start paying in roubles from Friday, fears of an immediate interruption in supplies have since faded.

Speaking earlier this week, Kremlin spokesman Dmitry Peskov told reporters that “we clearly aren’t going to supply gas for free” if European countries rejected Moscow's demands.

However, he acknowledged later that switching currency arrangements could take time — confirming that stance on Friday with his statement that payments for current supplies could be made in around a month's time.

Some analysts say it is easier said than done for Russia to switch off gas supplies to Europe.

Europe's pipeline system is highly connected, so any attempt to restrict flows to some countries would affect others, according to analysts at Rystad Energy. Beyond that, energy sales are a key source of revenue for Russia.

“Putin may demand roubles, but the contracts are clear," said Carl Weinberg, chief economist and managing director at High Frequency Economics in New York.

"His only option to force change is to refuse to deliver products, and that cannot happen: He can’t keep oil and gas from coming out of the ground without capping wells, and storage capacity will get filled very fast if shipments stop cold.”

“So let’s call it a bluff,” Weinberg said. “Russia cannot stop shipping product any more than Germany and the EU can stop buying it.”

This article published on Thursday March 31 has been updated.

Additional sources • AFP, Reuters