German and Hungarian energy companies have confirmed their intention to comply with Vladimir Putin’s demand that buyers of Russian gas pay for contracts in roubles. But the EU has warned there is a risk companies could breach sanctions banning transactions with Russia’s central bank. The stakes are high, because the Kremlin has already cut off supplies to Poland and Bulgaria.
What did Russia demand?
Putin said buyers from “unfriendly” countries should start paying for their gas in roubles. Usually, the vast majority of buyers would pay in euros or dollars. Their bill from Russian state energy group Gazprom would be considered paid once the payment is made.
Under Decree 172, which he issued in March, buyers must participate in a new payment system that requires opening two accounts at Gazprombank.
The money would be paid into an account in euros and dollars before being converted by the bank into rubles and disbursed to Gazprom from the second account. Only then will the buyer be deemed to have fulfilled his legal obligation to pay for the gas.
Who agrees and who doesn’t?
Hungary said it was happy with the plan and reports said two of Europe’s biggest gas companies, Germany’s Uniper and Austria’s OMV, are also preparing for ruble payments, while Italy’s Eni l would consider.
Until this week, it was unclear whether Putin would follow through on his threat to cut off buyers who refused his request. But on Wednesday, Gazprom suspended gas deliveries to Bulgargaz (Bulgaria) and PGNiG (Poland) after refusing to pay in roubles.
What about everyone else?
This is where it gets tricky. European leaders, including European Commission President Ursula von der Leyen, have said they will not follow Putin’s orders.
The EU’s preliminary analysis, published earlier this month, concluded that this would constitute a breach of sanctions imposed on the Kremlin. Indeed, the currency conversion process at the heart of it involves Russia’s central bank, which is subject to sanctions.
“As the conversion process can take an indefinite time, during which the foreign currency is entirely in the hands of the Russian authorities, including the central bank, it can even be considered as a loan from EU companies”, the commission said. .
On Thursday, EU officials confirmed that any company agreeing to open a ruble account in Russia and thus pay for the gas would breach the sanctions.
But is there an escape?
Perhaps. According to new guidelines issued by the EU last week, the Kremlin decree does not prevent gas importers from asking Gazprom to agree that the purchase is legally complete once the first payment, in euros or dollars, was deposited in Gazprombank.
Any conversion to rubles would take place afterwards, meaning the buyer would technically not have breached the sanctions. According to the guidelines, another option is for buyers to publicly declare that they consider the purchase complete once their payment in dollars or euros has been made.
The only obstacle to this, according to the guidelines, is the need for “confirmation from the Russian side” that it all complies with Decree 172.
In other words, Gazprom – or indeed the Kremlin – must be on board. Gazprom and Gazprombank are not subject to EU sanctions, so buyers are allowed to negotiate such labyrinthine proposals without breaching sanctions.
This apparent legal loophole significantly clouds the picture of the true nature of compliance with Putin’s demand. For example, responding to reports that OMV was preparing to make ruble payments, Austrian Chancellor Karl Nehammer insisted that was not the case.
Why does Russia want ruble payments?
Putin’s “weaponization” of Russian gas exports is part of a strategy designed to support the economy that was announced soon after the war began.
The West’s decision to impose sanctions led to a sharp drop in the value of the ruble and increased the threat of hyperinflation. In response, Russia imposed strict capital controls under which exporting companies were forced to convert their foreign currency earnings into rubles.
Liam Peach, emerging markets economist at Capital Economics, said capital controls had made the ruble a one-way bet for traders, helping explain why it had returned to pre-invasion levels against the dollar. .
Peach said this week’s action against Poland and Bulgaria would not have a major economic impact on Russia.
“European importers will continue to pay the Gazprom bank in euros, which it will then convert into rubles. It doesn’t make a big difference,” he said. “Politically, Putin is trying to show that Russia is resistant to sanctions and is able to exert a little pressure.”
Why doesn’t Russia want euros and dollars?
There are two possible explanations for this. The first is that payments in euros or dollars would add to Russia’s foreign currency reserves, frozen since the start of the war. Ruble payment for Russian gas is supporting the economy at a time when it is facing a deep recession.
The second reason is that Russia has gradually moved away from dollar and euro settlement since it annexed Crimea in 2014. Russia has sought to increase payments in rubles and yuan for its energy, and the war in Ukraine has accelerated this trend.