What is behind Putin’s demand for Russian gas be paid in roubles?

Moscow threatens to halt contracts supplying Europe with a third of its gas unless they are paid in Russian currency.

A model of the natural gas pipeline is placed on Russian rouble banknote and a flag in this illustration taken, March 23, 2022.
Russia says it will enforce rouble payments for gas from Friday [File: Illustration via Reuters]

President Vladimir Putin has signed a decree requiring buyers of Russian gas from countries deemed hostile to pay in roubles from Friday using a special account at a Russian bank, or see their contracts halted.

His move was rejected by European governments, with Germany – Europe’s industrial powerhouse – calling it “political blackmail”.

Here is what to know:

What is behind Putin’s order?

Putin’s order is in retaliation to unprecedented Western sanctions imposed on Russia over its invasion of Ukraine, which Moscow says are akin to an economic war.

“If such payments [in roubles] are not made, we will consider this a default on the part of buyers, with all the ensuing consequences. Nobody sells us anything for free, and we are not going to do charity either – that is, existing contracts will be stopped,” Putin said on Thursday.

The rouble plunged to historic lows after Putin sent his troops into Ukraine on February 24 as the United States and its allies moved to remove Russia from global payment systems, cut off its central bank from capital markets and froze hundreds of billions of dollars of its reserves.

The currency, however, has recovered following Putin’s decision to enforce rouble payments. On Thursday, more than a week after the Russian president first said Moscow would start selling its gas to “unfriendly countries” in roubles, the currency traded at 81.7 to the US dollar, almost the same level as February 23.

So far this year, Europe has spent 200 million to 800 million euros ($880 million) a day on Russian gas. These sales already greatly weaken the effect of the sanctions, regardless of how the payments are made – and while converting the sums into a stronger rouble will boost Russia’s coffers, there also seems to be a political goal, leaving Western countries with the prospect of either being forced to circumvent their own sanctions by having to deal with Moscow’s blacklisted central bank, or have their supplies cut.

Why is this important?

Europe is heavily reliant on Russia for its energy needs, with about 40 percent of its gas coming from the country. If Moscow decides to turn off the taps it could trigger supply shortages, factory closures and crippling energy costs across the region.

The stakes are particularly high for Germany, Europe’s largest economy and industrial powerhouse. Before the war began, 55 percent of its gas imports came from Russia, with the figure dropping to 40 percent in the first quarter of 2022.

The German government, which has accelerated plans to wean itself off Russian gas and diversify its supplies, has already activated the first phase of a three-step emergency plan which could mean power rationing if gas supplies get too low.

Dutch gas prices, the European benchmark, have already hit record highs this year on supply concerns, stoking inflation in the region and raising the risk of recession.

Which countries does Russia expect to make the switch?

The list of “unfriendly” countries is made of those that have rolled out sanctions.

They include the United States, European Union member states, Canada, Japan, Norway, Singapore, South Korea, Switzerland, Ukraine and the United Kingdom. Some, including the US and Norway, are not buyers of Russian gas.

What will foreign buyers do?

So far, it looks unlikely that foreign buyers will make the switch.

Western countries have said payment in roubles would breach contracts that can take months or more to renegotiate.

“There’s not much chance of Europe directly paying in roubles,” said Christian Lawrence, senior market strategist at Rabobank.

“Putin has been quite clear that he needs roubles for that gas. So if it does happen, I think he goes via a third party. But we’ll have to wait and see how it pans out.”

If they do switch, how will it work?

Putin’s order makes Gazprombank the intermediary in the gas trade.

A foreign buyer is now obliged to transfer foreign currency to one special, so-called “K”, account at the lender. Gazprombank would then buy roubles on behalf of the gas buyer to transfer roubles to another special “K” account, the order said.

Britain put Gazprombank on its list of banned entities earlier this month. It was not included in the European Union’s order excluding some Russian banks from the SWIFT messaging system.

“Potentially, the Kremlin is acting from a fear that Gazprombank will soon be sanctioned too, amid a wider bid by the European Union to cut energy ties with Russia completely,” analysts at Fitch Solutions said.

“The long-term contracts for natural gas purchases from Russia are denominated in EUR (euros) and therefore, without contract renegotiation, there is no legal basis for Russia to enforce this demand.”

What happens next?

It is unclear. Russia would have to physically halt gas flows to the EU to force the issue, which would mark “a major escalation not even performed at the height of the Cold War”, according to Fitch Solutions.

In the meantime, the bloc may up the ante by putting curbs on Russian energy exports.

The European Commission is reportedly preparing new sanctions against the Kremlin, with the magnitude of the new measures depending on Moscow’s stance on gas payments in roubles.

What has been the reaction to Putin’s order?

Below is a round-up of statements following Russia’s move:

Olaf Scholz, German chancellor

“By all means, it remains the case that companies want, can and will pay in euro.”

Robert Habeck, German economy minister

“With regard to the threat, demand or consideration – one doesn’t know how to call it any more – to be made to pay in rouble, it is crucial for us that the contracts are respected.

“It is important for us not to give a signal that we will be blackmailed by Putin.”

Christian Lindner, German finance minister

“We are convinced that contracts are contracts. The contracts are based on euro and so we will continue to pay for energy imports in euro.

“We will look in detail into what is being proposed and demanded. But it is clear for us there can be no political blackmail.”

Bruno Le Maire, French economy minister

“Contracts are contracts.”

Dutch gas trading corporation Gasterra

“International agreements contain clauses about payments and currency. Sticking to the agreement remains our position.”

Dutch energy firm Eneco

“Eneco has a long-term contract with Wingas, a German subsidiary of Gazprom, for delivery until 2030. Eneco expects its current contract with Wingas in euros to be honoured.”

Polish gas company PGNiG

“PGNiG doesn’t provide detailed comments on contractual clauses. The company remains in current contact with Gazprom,” the company press office said.

Source: Al Jazeera and news agencies