On Thursday, the Russian president signed a decree stating that nations considered “unfriendly” must start paying for gas supplies from April onwards, using a ruble account at Gazprombank, otherwise Moscow would stop supplies. In retaliation for Western sanctions blocking access to half of his country’s foreign exchange reserves, Putin is actually aiming to force the West to break its own rules by forcing it to interact with the central bank and its banking system.
Why does Russia want to be paid in rubles?
In practical terms, it makes little difference to Moscow. Russia’s gas sales to Europe – estimated at $ 350 million a day by energy adviser ICIS – are already seriously undermining the impact of Western sanctions in response to the country’s invasion of Ukraine, no matter what the markets. Whether the West pays for Russian gas in euros or rubles, Moscow is gaining a foreign exchange reserve, which is useful for buying imports or supporting the ruble. Either European companies buy gas directly in euros, in which Russia already insists all exporters convert 80 percent of their revenue into rubles, or all money is converted first, most likely with the Russian central bank, which is under sanctions. . at some stage. The main impact is political. Bas van Geffen, a senior macro-general at Rabobank, summed it up: “In a show of support for Ukraine, the West has stepped up its sanctions against Russia. “Russia, in return, will soon accept payments only in rubles for natural gas, which can only be received through the Russian central bank, which has been sanctioned,” he said. “This will either force the West to avoid its own sanctions or it will effectively mark the end of Russia’s gas supplies to Europe.” Suddenly, Moscow has more leverage. He managed to exploit the hole in the central bank sanctions caused by the exclusion of energy supplies. Putin described the move as a step towards “strengthening” Russian sovereignty. The headquarters of the Russian Central Bank in the center of Moscow © Dimitar Dilkoff / AFP / Getty Images “This is a political issue, not a commercial one, and it seems to have been designed to return some of the discomfort from central bank restrictions on European companies and to partially reverse those restrictions,” said Ron Smith, a senior oil analyst. and gas. at BCS in Moscow.
Will it undermine the dollar and the euro in world trade?
One of the reasons countries around the world (including Russia) each hold hundreds of billions of dollars in central bank or investment fund reserves is that the dollar is the default currency in world trade and markets. In a crisis, when governments have to back up a currency or repay debt, it is vital for countries, often in emerging markets, to keep a reserve of dollars, euros and a handful of other world currencies. But Goldman Sachs put it this week: “If foreign investors become more reluctant to meet US obligations – for example due to structural changes in world commodity trade – the result could be a devaluation of the dollar and / or higher real interest rates in order to prevent or slow down the devaluation of the dollar. ” The same goes for the euro area. Russia is ready to face Western sanctions that have frozen the country from the dollar and euro financial system. Countries unfriendly or hostile to the US or the EU may follow suit and be tempted to devote more of their rainy day funds to the currencies of more geopolitically aligned countries. “The increasing use of US economic sanctions as a foreign policy tool undoubtedly creates an incentive for third countries to differentiate themselves from perceived over-reliance on dollar-denominated trade,” Goldman Sachs added.
When and how will the transition to payments in rubles be made?
In its new decree, the Kremlin said that buyers in countries considered hostile to Russia should open an account in both foreign currency and rubles at Gazprombank, which has been targeted by British sanctions but has escaped US and EU because it is a major player in the gas trade. Putin gave the Russian central bank, customs authorities and the government 10 days to implement the new system. A similar change in payments for other commodities, such as oil, metals and fertilizers, is also being considered. Analysts say Europe is safe to pay in euros for another month, as payments for most April deliveries do not have to be paid until May.
What do supply contracts and customers say?
EU countries are pushing back. Delivery contracts, which are mostly priced in euros and dollars, will “remain that way,” said German Chancellor Olaf Solz. As a result, they are preparing to cut off Russian gas supplies. Germany has warned its industry that it may need to renew its electricity supply. Gazprom usually has the right to renegotiate the terms of the contracts every three years, according to analysts. But imposing a new currency on existing contracts is controversial. If the two sides do not reach an agreement, the matter goes to the Stockholm Arbitration Court. Gazprom has dozens of different contracts that would have to be renegotiated, so the review would be a long process. The Kasimovskoye underground gas storage facility, operated by Gazprom: Gazprom could cut off supplies to Europe almost immediately without much difficulty © Andrey Rudakov / Bloomberg “Based on the principle of the sanctity of the contract, if there is a major dispute under a Gazprom gas export contract, the gas should continue to flow until the matter is settled in an arbitration in Stockholm,” said Morten Frisch. a negotiator for the gas contract.
Will Russia stop supplying gas to Europe?
A pause would mean a loss of revenue for Gazprom and its owner, the Russian state. However, in theory, the gas exporter could cut off supplies to Europe almost immediately without major operational difficulties. “Gas fields, unlike oil fields, are generally relatively easy to deactivate and activate without causing damage. [them]”, Smith told BCS. A limited volume of gas could be rerouted to places like Central Asia or Turkey, but Russia would probably put some gas in storage. Russia’s vast network of thousands of kilometers of pipelines could also act as a containment system, and older gas fields could be shut down. Russia’s internal storage capacity is limited – less than half of what it exports to Europe annually. Gazprom would fill it in four and a half months, instead of the standard seven, if there were no pipeline exports to the EU, Tom Marzec-Manser told ICIS. Once full, Gazprom will then have to stop pumping gas, because a quick reorientation of pipeline deliveries to other markets is not easily possible. There is no gas pipeline connection between Western Siberia – where Gazprom supplies gas to Europe – and China. Completion of the planned 50 bcm pipeline per year via Mongolia to China will take about three to four years, Smith said.
