The Kremlin demands a ruble for gas and the European Union leaders back off

Russian President Vladimir Putin insisted on Thursday that natural gas must be paid for in rubles.a request that appears intended to help boost the Russian currency, but one that European leaders say they will not comply with because it violates contract terms and sanctions.

Putin said that Russia will start accepting ruble payments on Friday and gas supplies will be cut off if buyers do not agree to the new terms, including opening ruble accounts in Russian banks, through which gas payments will be made.

“If these payments are not made, we will consider them to be the buyer’s failure to fulfill his obligations, with all the ensuing consequences,” Putin said.

European leaders cautiously insisted that they will continue to pay for natural gas in euros and dollars and want to see the finer details of how the Kremlin implements its decree. This came a day after the leaders of Italy and Germany announced that they had received assurances from Putin about gas supplies.

Putin announced last week that countries he deemed “unfriendly” for imposing sanctions on Russia over its war in Ukraine Natural gas must be paid only in Russian currency. His proposal has sent natural gas prices fluctuating and raised fears that it could be a precursor to supply disruptions to Europe, which is heavily dependent on Russian natural gas and will suffer a sudden outage. At the same time, Russia relies on oil and gas sales for much of its government revenue at a time when its economy is under severe pressure from Western sanctions.

Putin’s request appeared to be part of Russia’s efforts to increase the ruble after the currency’s plunge under Western sanctions. After dropping to 143 rubles to the dollar in early March, it took 82 rubles on Thursday to buy a dollar, roughly the same level on the day Russia launched its invasion.

Economists say converting gas payments into rubles will do little to prop up the Russian currency, as gas-exporting Gazprom has to sell 80% of its foreign currency earnings for the ruble anyway. The White House said Thursday that the ruble is no longer a reliable measure of the Russian economy because it is being artificially supported.

Analysts at Evercore ISI said Putin’s primary motive appears to be “to demonstrate his ability to persuade EU leaders of his will”. They also said that even if Russia could force the EU to pay for gas in rubles, European countries might respond by imposing more tariffs on Russian oil imports or banning them altogether. Analysts said that while Russia may eventually sell the oil, the price is likely to be at a steep discount.

The decree signed by Putin and published by the state news agency RIA Novosti states that each buyer will open two accounts for each buyer, one in foreign currency and the other in rubles. Buyers will pay in foreign currency and allow the bank to sell it for rubles on the Moscow Currency Exchange. Then the rubles are put into the second account, where gas is officially purchased.

People “are wondering what Putin intends to do,” said Tim Ash, senior emerging markets sovereign analyst at BlueBay Asset Management. Putin may have read the German government’s unwillingness to boycott Russian energy “as weakness and is now trying to engineer this energy crisis… The solution here is to call Putin’s hoax and say, sure, cut off the energy supply and see who breaks first.”


D’Emilio from Rome contributed. Associated Press reporter Colleen Barry contributed in Milan.

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