What does paying gas with rubles mean?

What is Putin proposing?

Europe imports large amounts of Russian natural gas to heat houses, produce electricity and other imports, and these imports have continued despite the war in Ukraine.

About 60 percent of imports are paid by euros, while the rest are paid by dollars. Putin wants to change this by urging foreign gas importers to buy rubles and use them to pay the state supplier, Gazprom.

Putin told the Russian Central Bank last Wednesday to create a applicable system.

What effect can this plan have?

Importers would have to find a bank that would exchange euros and dollars for rubles. This may be serious because some Russian banks have been blocked or removed from the SWIFT transfer system that facilitates international payments.

However, there are several banks that have not stopped working and currently, sanctions imposed by the US Treasury prohibiting bank transactions include exemptions for energy payments.

This is a concession for European allies who are far more dependent on Russian oil and gas and fear that a total disruption could lead their economy into recession.

If Russia is paid for gas in the best case, it would help avoid financial sanctions, supporting the value of the ruble or protection of the Russian economy, said Eswar Prasad, professor of trade policy at Cornell University and a former official at the International Monetary Fund.

“OOse Putin is receiving terrible economic advice or is further leaving the track with his hatred of the West”, Prasad said.

“would be cheaper for foreign importers to pay for Russia's exports with a currency whose value is dropping, but it is difficult to buy ruble and pay in a way that avoids sanctions”, he said.

He warned that the “measure could further shock global energy markets by exacerbating current supply cuts and adding uncertainty to future supplies, all of which could add more to the rising price of”.

How was Putin's request expected in Europe?

European governments and energy companies are rejecting the idea, saying that gas import contracts specify currency and that one side cannot change it overnight. They say they aim to continue paying in euros and dollars.

More widely, the Group of the Seven main economies, including Japan, the US and Canada, as well as Germany, France, Italy and Britain (G7), have agreed to reject Moscow's request. The European Union's Energy Commissioner also agreed, said in a G7 statement.

German Vice-Kancellar Robert Habeck told reporters Monday that “all G7 ministers fully agreed” that such a step would be “a unilateral and clear violation of existing contracts”.

What's Putin's motive?

In theory, the demand for ruble payments can support its currency and exchange rate.

But not much, Prasad said. Euro and dollar are already being used to buy rubles when Gazprom exchanges revenues from abroad.

The Centre for Eastern Studies in Warsaw has suggested that by moving the flow of foreign currency from Gazprom to the state-controlled banking system, the Kremlin will gain increased control over foreign currency that has become the most rare since Western countries froze most of Russia's reserves abroad.

However, it would leave Gazprom without strong currency to make external debt payments or buy supplies abroad. As it stands, the gas supplier must now sell 80 percent of its foreign currency to the Russian Central Bank.

The ruble dispute has raised concerns that it could lead to a break in natural gas supply. This could expose Russia to accusations of disrespecting long-term energy contracts, which it has done so far.

The European pipeline system is highly linked, so any attempt to limit flows in some countries would affect others, according to analysts at Rystad Energy. Beyond that, energy sales are a key source of income for Russia.

Asked by journalists whether Russia can cut gas supplies to European customers if they refuse to pay in rubles, Kremlin spokesman Dmitry Peskov said at a conference Monday that “we will certainly not supply free gas”.

In our situation, it is difficult and feasible to engage in charity for Europe”, Peskov said.

How real is the threat?

The rubla proposal made that Germany's municipal services association, BDEW, called on the government to announce an early <x0 warning “for a serious lack of energy.

This is the first of three emergency energy phases in EU and German law, where the highest is the absence so severe that the government must shut down gas for industry to protect households.

The German government does not see such a statement necessary, a spokeswoman said Monday.

Putin's bluffing. This month, Russia threatened to use rubles to pay foreign investors who carry letters of government value dominated in dollars. He passed with a payment in dollars after rating agencies said paying the ruble would put Russia back.

When it comes to gas payments, “Putin can require rubles, but the contracts are clear”, said Carl Weinberg, chief economist and manager at the High Frequency Economics in White Plains, New York.

His only option to force change is to refuse to offer products and this cannot happen: It cannot stop the extraction of oil and gas from the ground without cover wells and storage capacity will be filled very quickly if remittances stop”.

So let's call it bluff”, Weinberg said.

“Russia cannot stop sending products more than Germany and the EU can stop buying it”.

Why is energy an important factor in war?

The European economy remains highly dependent on Russia for 40 percent of its gas imports and 25 percent of its oil.

While the US and UK have said they will stop buying Russian oil, European leaders have avoided a total boycott of Russian oil and gas. Instead, they have focused on reducing their imports over the next few years through storage, other resources and transition to wind and sun energy as soon as possible.

The estimates are different for the impact of a total gas closure in Europe, but these generally include a significant loss of economic output. / REL/