Putin Says Hostile States Will Be Made to Pay for Gas in Rubles
Big if true
Editor’s note: Ingenious as it would force EU to have to circumvent its own sanctions, and to strengthen the ruble which it has been working to tank.
I also like that it would potentially force fiscal discipline on Moscow and preclude ruble printing. That is, if new ruble-denominated contracts are eventually signed. However it’s more likely that Moscow would simply demand whatever is the momentary ruble equivalent of the contractual euro price. Not just in the short term but also in the long-term.
Let’s see if Russia is serious enough about this to make it happen or if this is a bluff.
Euroweenies are complaining that this is a “breach of contract,” meanwhile they have “frozen” hundreds of billions of euros that Russia earned from previous gas sales.
At the same time, it should be said that Gazprom was already converting 80% of its earnings into rubles so going to 100% rubles isn’t going to have a massive impact on the ruble valuation, but it is a nice troll move against the Europeans indeed.
Russia plans to demand ruble payments for natural gas purchases from European nations, deepening its standoff with the west and potentially aggravating Europe’s worst energy crunch since the 1970s.
Gas prices surged more 30% after President Vladimir Putin ordered the central bank to develop a mechanism to make ruble payments for natural gas within a week at a meeting with his government.
Putin’s move showed a growing willingness on both sides to use Russian energy supplies as a weapon in the struggle between Moscow and the west over the war in Ukraine. The specifics of the new arrangement weren’t immediately clear, but by demanding payments in rubles, Putin is essentially forcing European companies to directly prop up his currency after it was sent into free-fall by [the theft of $300 billion in Russia’s reserves] sanctions placed on the Russian economy. The ruble gained 7% against the dollar Wednesday, trimming its losses this year to 23%.
Germany, the biggest buyer of Russian gas, said the announcement on ruble payments is a breech of the contracts, and the nation will speak to its European partners on how to respond, according to Economy Minister Robert Habeck. Italy, the second-biggest customer of Gazprom PJSC, the Russian state export monopoly, said it wasn’t inclined to pay for Russian gas in rubles because it could help Putin weaken Europe’s sanction regime.
#BREAKING: Germany says Russia's demand for gas payment in rubles is a 'breach of contract'
— Instant News Alerts (@InstaNewsAlerts) March 23, 2022
Italy isn’t inclined to pay Rubles for Russia gas: Draghi
— Ragıp Soylu (@ragipsoylu) March 23, 2022
“My view is is that we pay in euros because paying in rubles would be a way to avoid sanctions, so I think we keep paying in euros,” Prime Minister Mario Draghi’s economic adviser Francesco Giavazzi said at the Bloomberg Capital Market Forum in Milan.
For the utilities who buy gas from Gazprom, the demand to pay in rubles could lead to disputes and contract negotiations, threatening to disrupt the smooth supply of gas to the region. Europe gets about 40% of it gas from Russia and is already grappling with fallout of record prices this winter. German energy giants Uniper SE and RWE AG declined to comment, as did Italy’s Eni SpA.
“If Gazprom refuses to deliver gas when buyers pay their invoices in the original contract currency, usually euros, buyers may bring the case to arbitration,” said Anise Ganbold, an analyst at Aurora Energy Research.
European gas benchmark surged as much as 34% after Putin’s demand, climbing as high as 132.74 euros a megawatt-hour and reigniting a wild rally in prices. The measure applied to country’s deemed “hostile” include the U.S, U.K. and all members of the European Union.
“I have taken a decision to switch to ruble payments for our natural gas supplies to the so-called hostile states,” Putin said on Wednesday.
The ‘hostile’ states accounted for some 70% of Gazprom’s 2021 export revenue amounting to some $69 billion, Dmitry Polevoy, economist at Moscow-based Locko Invest, said in an emailed note. Any changes to the payment procedures could “temporarily affect” Russia’s gas export volumes, he said.
Russia needs to stop using “the compromised currencies” in natural-gas transactions in retaliation to the U.S. and European sanctions, Putin said, according to a transcript published on the Kremlin website. “It’s pretty clear that it makes no sense for us to supply our goods to the European Union, to the U.S. and receive payments in dollars, euros, other currencies,” he said.
Within a Week
Some 58% of Gazprom’s gross gas sales abroad were in euros as of the third quarter of last year, according to the producer’s most recent bond prospectus. Another 39% were in U.S. dollars. The press office of Gazprom declined to comment on whether its long-term supply agreements allow a switch to ruble payments.
“Gazprom would need to ask buyers to agree to change the payment terms in contracts,” said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd. “It reopens the contracts, and buyers could ask for shorter-terms for instance.”
OMV AG said its natural gas supply contracts with Russia don’t stipulate payment in rubles, and the Austrian energy company will continue paying in euros pending change in contract, Alfred Stern, chief executive officer, said in an interview with Austria’s Puls 24 television.
Russia announced earlier this month a list of 48 states deemed hostile. They included the U.S., Japan, all European Union members, Switzerland and Norway. As a result, the bulk of Russian gas exports now go to “unfriendly” nations.
Putin ordered his government to instruct Gazprom to start working on needed amendments to current contracts, adding that there’s no plan to change price formulas — only the currency of the payments.
“I want to emphasize that Russia will definitely continue to supply natural gas in line with the volumes and prices and pricing mechanisms set forth in the existing contracts,” Putin said. [So the price is still calculated in euros. This isn’t a true petro-ruble.]
For some buyers, the switch to rubles could be feasible.
“That’s no danger for the supply, we’ve checked, there’s a counterparty in Bulgaria that can realize the transaction in rubles,” state-owned distributor Bulgargaz EAD and a Gazprom client said. “We’re expecting all kinds of actions on the verge of the unusual but this scenario has been discussed, so there’s no risk for the payments under the existing contract.”
In the first 15 days of March, Gazprom exported an average of 500 million cubic meters per day to countries outside the former Soviet Union, including those in the EU, China and Turkey. Of the total, flows toward Europe averaged 384 million cubic meters per day, the producer’s data showed.
“I guess payment in rubles might be possible if a European bank can get cooperation with a Russian, non-sanctioned, bank but this could be awkward,” said Jonathan Stern, a research fellow at the Oxford Institute for Energy Studies.
The European Union reacted to Russia’s decision to transfer payment for gas supplies into rubles. According to TASS , German Vice Chancellor, Minister for Economic Affairs and Climate Protection Robert Habek believes that Russia’s decision to switch to rubles will be a violation of existing contracts for the supply of blue fuel.
“We will discuss with our European partners how to respond to this,” Habek said at a press conference in Berlin.
“This statement about payments in rubles is a violation of contracts,” he said. According to the German minister, Moscow’s position shows that Russia is allegedly not a “stable partner” in the matter of energy supplies.
At the same time, the publication reports, citing the head of the Bundestag committee on energy and climate protection, Klaus Ernst, that payment for the supplied Russian natural gas in rubles is technically possible, but this will force the EU to bypass its own sanctions and warm up discussions about the boycott of energy carriers from the Russian Federation.
The head of the industry association Zukunft Gas, Timm Köhler, said that the German gas industry was confused by this statement .
“We took the message that Russia wants the payment for gas supplies only in rubles with great confusion,” he said. “What specific implications this will have for the gas trade, we can’t predict at this time,” Koehler added.
The opinion that payment for Russian gas supplies in rubles is a way to circumvent sanctions was also expressed by economic adviser to the Italian Prime Minister Francesco Javazzi.
“My opinion is that you need to pay in euros, because paying in rubles would mean circumventing the sanctions, so I think we will continue to pay in euros,” the agency quoted him as saying. However, he clarified that the government has not made any decision.
OMV is going to pay for gas to Russia in accordance with the current contract in euros. This was announced on Wednesday by the head of the Austrian oil and gas company OMV Alfred Stern.
“I also saw a message in the media. No one has called us yet, and we have valid contracts, nothing of the kind was stipulated there. I will now wait if someone will contact us,” Stern said.
Asked if the company would continue to pay Russia in euros, Stern said: “Of course. We have no other contractual basis, I could not do otherwise.”