Kremlin demands rubles for gas, leaves currency loophole

Countries deemed “unfriendly” for imposing sanctions on Russia over its war in Ukraine can continue to pay in foreign currency through a Russian bank that will then convert the money into rubles, according to a Kremlin decree published by state media Thursday. It came a day after the leaders of Italy and Germany said they received assurances from Putin about gas supplies.

Putin talked tougher, saying Russia will start accepting ruble payments Friday and contracts will be stopped if buyers don’t sign up to the new conditions, including opening ruble accounts in Russian banks.

“If these payments are not made, we will consider it a failure of the buyer to fulfill its obligations, with all the ensuing consequences,” Putin said.

His proposal has caused natural gas prices to gyrate and raised fears it could be a prelude to an interruption of supplies to Europe, which is heavily dependent on Russian natural gas and would struggle with a sudden cutoff.

See also: War in Ukraine: Heavy fighting rages near Kyiv as Russia appears to regroup

The German government on Wednesday declared an early warning of an energy emergency, the first step toward authorizing government-imposed 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 its economy is under severe stress from Western sanctions.

Economists say the switch to rubles would do little to support the battered Russian currency’s exchange rate, since gas exporter Gazprom has to sell 80% of its foreign currency earnings for rubles anyway.

The decree Putin signed and state news agency RIA Novosti published says a designated bank will open two accounts for each buyer, one in foreign currency and one in rubles. Buyers will pay in foreign currency and authorize the bank to sell it for rubles on Moscow’s currency exchange. The rubles would then be placed in the second account, where the gas is formally purchased.

People are “wondering what Putin is up to,” said Tim Ash, senior emerging markets sovereign strategist at BlueBay Asset Management. Putin may have read the German government’s unwillingness to boycott Russian energy “as weakness and is now trying to engineer this energy crisis … the solution here is to call Putin’s bluff and say, sure, cut off energy supplies and see who breaks first.”

Speaking shortly after Putin’s announcement, German Chancellor Olaf Scholz gave a noncommittal initial response to Russia’s new conditions. He said gas contracts stipulate payment mostly in euros and sometimes in dollars. He said he made clear to Putin in a phone call Wednesday “that it will stay that way.”

“What his ideas are for how this can happen is what we will now look at closely,” Scholz told a reporters in Berlin. “But in any case, what goes for companies is that they want to and will be able to pay in euros.”

Putin announced last week that Russia will demand “unfriendly” countries pay for natural gas only in Russian currency, instructing the central bank to work out a procedure for buyers to acquire rubles in Russia. The Group of Seven major economies, including Italy and Germany, rejected the demand.

Before the decree was announced Thursday, Italian Premier Mario Draghi said Thursday he had received assurances from Putin that Europe would not have to pay in rubles and played down fears that Moscow would cut off supplies.

Draghi said Putin told him during a 40-minute phone call Wednesday evening that “existing contracts remain in force. … European companies will continue to pay in dollars and euros.”

Draghi said he referred the discussion about how it would work to experts and that analysis was underway “to understand what it means,” including whether “European companies can continue to pay as foreseen, if this means something for the ongoing sanctions.”

“The feeling is one I have had since the beginning, that it is absolutely not simple to change the currency of payments without violating the contracts,” Draghi said.
The French and German finance ministers also said after meeting in Berlin that contracts can’t simply be altered and that they would examine what Putin has proposed.

Meanwhile, Draghi also told the foreign press corps that Europe is pushing for a cap on gas prices with Russia, saying its payments are funding the war in Ukraine and the prices being paid by Europe are out of line with the global market.

“We — Germany and Italy, along with other countries that are importers of gas, coal, grains, corn — are financing the war. There is no doubt,” Draghi said. “For this reason, Italy along with other countries, are pushing for a cap on the price of gas. There is no substantial reason that the price of gas is so high for Europeans.”

Draghi noted that Russia has no other market for its gas, giving Europe room to maneuver. Asked about the risk that Russia would respond by turning off the taps, Draghi said, “no there is no danger.”

The prospect of continued gas deliveries in exchange for euros drew a cautious welcome from German industry.

“It’s good news at least in the short term, because Russian gas deliveries can’t be replaced in the short term,” Achim Dercks of the Association of German Chambers of Commerce and Industry told RBB24 Inforadio.

He noted that companies are concerned that any cutoff would affect industry in particular, “but ultimately that would have severe economic effects for us all.”