Putin’s Rubles for Gas, Europe and Japan will bear the cost of currency conversion

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Joseph P Chacko
Joseph P Chacko
Joseph P. Chacko is the publisher of Frontier India. He holds an M.B.A in International Business. Books: Author: Foxtrot to Arihant: The Story of Indian Navy's Submarine Arm; Co Author : Warring Navies - India and Pakistan. *views are Personal

Unfriendly Countries will transfer payments for gas supply to Russia in rubles, said Russian President Vladimir Putin during a meeting with the government officials on Wednesday, March 23.

“I have decided in the shortest possible time to implement a set of measures to transfer payments. Let’s start with this for our natural gas supplied to the so-called unfriendly countries, to Russian rubles,” the president said. He asked the government and companies to refuse all currencies that have ‘compromised themselves’. 

Putin added that the Russian Federation would continue to supply gas in volumes previously fixed by contracts. The Central Bank will determine the procedure for paying for gas in rubles within a week. This news markedly strengthened the ruble against the dollar and the euro. At the same time, the gas price in Europe crossed $1,500 per 1,000 cubic meters for the first time since the beginning of March.

The head of state also instructed Gazprom, the only exporter of pipeline gas from Russia, to quickly convert all contracts for gas supplies into rubles.

As Russia gradually responds to the SWIFT and U.S. Dollar sanction, it leaves the Europeans in a bind. European Union was quick to support the SWIFT ban against Russia except for energy payments. Putin’s move is also expected to shore up the falling rubble. Accumulating Euros and Dollars makes no sense to Russia if the majority of its trade is to be conducted in Rubles and the local currency of the trading partner. 

Confusion in Europe

The Union of German Industrialists said that the German gas industry was confused by the decision of Russian President Vladimir Putin to transfer payment for supplies into rubles. According to Timm Köhler, head of the Zukunft Gas industry association, the news was received ‘with great confusion’. The Italian authorities are also concerned about this decision.

German Chancellor Olaf Scholz spoke about the reverse effect of the sanctions. The economic consequences for the European Union must be overcome, which is why Germany opposed the embargo on Russian energy carriers, Scholz said. He also added that many other E.U. members who buy oil, gas, coal, and other raw materials agree with the proposal of Germany.

On March 19, Germany warned of a possible gas shortage in the country next winter. German Economic Minister Robert Habeck did not rule out that a failure in gas supplies to industrial enterprises could negatively affect other areas.

Serbian President Aleksandar Vucic said that Russia’s statement was unexpected for the European Union and could bring a lot of problems.

On March 11, the head of the European Commission, Ursula von der Leyen, announced that the European Commission would present by mid-May a plan to eliminate the E.U.’s dependence on Russian gas, oil and coal by 2027.

The Austrian oil and gas company OMV will pay for Russian gas per the current contract in Euros. Austria has remained neutral amid the current crisis. 

Klaus Ernst, head of the German Bundestag committee on energy and climate protection, said that the transition to rubles is technically possible, but this will force Europe to bypass its sanctions imposed on Russia. What sanctions will have to be circumvented, Ernst did not specify. The ruble is not banned in Europe, and it can be traded. 

The ‘hostile nations’ will have to open a rouble account with Moscow based bank and then transact. 

How will it be implemented?

Earlier, Gazprom was obliged, as it received foreign currency for gas supplies, to sell 80% of the proceeds on the stock exchange. Now foreign companies will first buy rubles in the Russian market and then pay Gazprom. 

According to the Federal Customs Service (FCS), in 2021, Gazprom sold gas worth $55.5 billion abroad. Total exports amounted to 203.5 billion cubic meters. Non-CIS countries accounted for 185 billion and the volume includes supplies to Turkey and China. According to the International Energy Agency (IEA), the European Union accounted for 145 billion cubic meters of pipeline gas, just over 71% of the total. For Europe, the CIS countries, Turkey and China, delivery prices are different. But since they were initially higher for the European Union, deliveries to the E.U. amounted to a minimum of $39.4 billion. Previously, Gazprom would have been obliged to sell only $31.5 billion of its proceeds in the Russian market, but now it doesn’t have to.

Europe might argue that the transition to rubles boils down to the fact that this violates the terms of contracts and label Russia as an unreliable supplier. But, since Russia has not stopped the gas volumes, the argument does not hold. Russia has the right to change the currency option, and Gazprom has to agree to the sovereign order.

How does it affect the Dollar and Euro?

The transition to rubles in gas trade with the European Union will reduce the trading in the western currencies, especially the dollar. It affects the system of trading energy resources for dollars, hence the dollar’s influence on the world market. Russia is not alone. Saudi Arabia is negotiating with India for rupees and China for yuan for the oil trade.

The Europeans can be forced to pay in dollars if they want rubles. Japan will be worse affected as Russia does not need Yen as the Japanese sanctions continue. Japan will have to pay in dollars if Russia refuses to accept euros from Japan. Currency conversion and paying for gas are two different transactions and unrelated and hence cannot be challenged in court. But, the underlying point is the importance of the Dollar in Russian payments may become less but not stop. The conversion is not impossible as the U.S. itself has given the directions for such conversions. Russia will not have to bear the cost of the currency conversion. 

But the impact of this decision on the ruble should not be overestimated as the volume of currency in the Russian market will increase by only 20%.


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