June 26, 2022

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Putin wants "unfriendly" countries to pay for Russian gas in rubles

Putin wants “unfriendly” countries to pay for Russian gas in rubles

Russian President Vladimir Putin said, on Wednesday, that Russia will seek to pay in rubles for gas sales from “unfriendly” countries, which has sent gas prices up in Europe over fears that the move will exacerbate the region’s energy crisis.

European countries’ dependence on Russian gas to heat their homes and power their economies has been in the spotlight since Moscow sent troops into Ukraine on February 24 and the subsequent imposition of Western sanctions aimed at isolating Russia economically.

With the financial noose tightened and the European Union divided over sanctions on Russia’s energy sector, Putin responded with a clear message: If you want our gas, buy our currency.

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“Russia will, of course, continue to supply natural gas in accordance with the quantities and prices … specified in the contracts concluded previously,” Putin said in a televised meeting with senior government ministers.

“The changes will only affect the payment currency, which will change to Russian rubles,” he said.

Russian gas constitutes about 40 percent of total consumption in Europe, and EU gas imports from Russia have varied between 200 million and 800 million euros ($880 million) per day so far this year. The possibility of a currency change causing chaos in this trade sent European wholesale gas prices up as much as 30% on Wednesday. Wholesale gas prices jumped in Britain and the Netherlands with Wednesday’s close.

The Russian ruble briefly jumped to a three-week high above 95 against the dollar and, despite some gains, remained well below 100 after the surprise announcement. The currency is down about 20% since February 24.

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“On the surface, this appears to be an attempt to support the ruble by forcing gas buyers to buy the previously depreciated currency in order to pay,” said Vinicius Romano, chief analyst at consultancy Rystad Energy.

Putin said that the government and the Central Bank have one week to come up with a solution on how to transfer these operations into the Russian currency and that gas giant Gazprom. (GAZP.MM) Corresponding changes to gas contracts will be required.

With major banks reluctant to trade in Russian assets, some Russian gas buyers in the European Union were not immediately able to explain how they could pay for gas in the future.

Several companies, including major oil and gas companies Eni, Shell, BP, RWE and Uniper – Germany’s largest importer of Russian gas – declined to comment.

Data from the Gascade pipeline operator showed that on the gas markets on Wednesday, eastward flows of the Yamal-Europe pipeline from Germany to Poland fell sharply.

Moscow describes its actions in Ukraine as a “special military operation” to disarm and “discredit” its neighbor. Ukraine and its Western allies describe this as an unfounded excuse that has raised fears of a broader conflict in Europe.

Breach of the rules?

According to Gazprom, 58% of its natural gas sales to Europe and other countries as of January 27 were settled in euros. The US dollar made up about 39% of the total sales and the British pound about 3%.

Russian President Vladimir Putin listens to Novgorod Region Governor Andrei Nikitin during a meeting at the Kremlin in Moscow, Russia on March 22, 2022. Sputnik/Mikhail Klementev/Kremlin via Reuters

The European Commission said it plans to reduce the EU’s dependence on Russian gas by two-thirds this year and end its dependence on Russian fuel supplies “well before 2030”.

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But unlike the United States and Britain, the countries of the European Union did not agree to penalize the Russian energy sector, given its dependence.

The European Commission, which includes 27 countries, did not immediately respond to a request for comment.

German Economy Minister Robert Habeck said on Wednesday he would discuss with European partners a possible response to Moscow’s announcement on gas payments.

“It is not clear how easy it is for European customers to convert their payments into rubles given the scale of these purchases,” said Leon Isbeki, coordinator at consultancy Energy Aspects.

“However, there are no sanctions in place that prohibit payments for Russian gas in rubles,” he said, adding that the Russian Central Bank could provide additional liquidity to foreign exchange markets that would enable European customers and banks to obtain the required amount of rubles. In the market.

However, there are questions about whether Russia’s decision would violate the rules of contracts agreed upon in the euro.

“This would constitute a breach of the payment rules included in existing contracts,” a senior Polish government source said, adding that Poland has no intention of signing new contracts with Gazprom after its current long-term agreement expires at the end of this year.

Habek also said Putin’s request was a breach of extradition contracts.

A spokesman for Dutch gas company Enico, which buys 15% of gas from Gazprom’s German subsidiary Wingas GmbH, said it has a long-term contract denominated in euros.

“I can’t imagine we would agree to change the terms of that.”

The Dutch Ministry of Economic Affairs said it was too early to comment.

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Russia has drawn up a list of “unfriendly” countries such as those that have imposed sanctions. Among other things, deals with companies and individuals from those countries must be approved by a government commission.

The list of countries includes the United States, member states of the European Union, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

Some of these countries, including the United States and Norway, do not buy Russian gas.

(1 dollar = 0.9097 euros)

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Reporting by Reuters reporters. Writing by Nina Chestney; Editing by Catherine Evans, Carmel Kremens and Jonathan Otis

Our criteria: Thomson Reuters Trust Principles.