Russian gas: the 7 questions raised by payment in rubles

1. What does Moscow want?

Vladimir Putin created a surprise a week ago by decreeing that deliveries of Russian natural gas to “unfriendly countries” (including the United States, the United Kingdom and all of the European Union) should be settled in rubles in as part of a “new payment system” put in place from this Thursday. Objectives: to support the Russian currency over the long term, which has been shaken up by Western sanctions and to reconstitute Moscow’s foreign currency assets, part of which is now frozen.

The measure could also apply to other exports, implied the Russian president. What the Kremlin and the Duma mentioned again this Wednesday: “Fertilizers, cereals, edible oil, oil, coal, metals, wood”, listed Vyacheslav Volodin, the president of the lower house of the Russian parliament. Cultivating ambiguity, the Kremlin then added that it would not immediately demand that its gas be paid for in the national currency, without however specifying a timetable.

2. How did the Europeans react?

The Europeans have rejected the Russian request, and they are not the only ones. “All G7 ministers have agreed that this is a unilateral and clear breach of existing contracts,” Robert Habeck, Germany’s Minister for Economy and Climate, told the Bundestag on Monday. from a meeting with his counterparts from the group of the most powerful nations on the planet.

Emmanuel Macron repeated it on Tuesday by telephone to Vladimir Putin. The French president affirmed that “it was neither possible nor contractual”, according to the report of the conversation by the Elysée, while the head of the Kremlin hammered the opposite.

A sign that tension is rising, Germany and Austria triggered the first level of a three-level alert system on Wednesday to prepare for a possible stoppage of gas deliveries with, at the last stage, the definition of priority sectors and actors to be supplied.

3. What does Russian gas represent for Europeans?

Since the beginning of tensions over Ukraine, Vladimir Putin has brandished a powerful weapon: the European Union’s energy dependence on Russia. This has increased in recent years, with Gazprom’s market share rising from 25% to almost 40% in less than ten years. Hence the Europeans’ refusal to impose an embargo as the United States and the United Kingdom have done.

By cutting off the gas, Moscow would put the continent in great difficulty for next winter. For the coming months, however, current stocks, although abnormally low, should be enough to warm Europeans, even in the event of a late cold snap. Renouncing deliveries of gas or oil from Russia “overnight” would amount to “plunging our country and all of Europe into recession”, German Chancellor Olaf Scholz warned last week. Berlin estimates that it will not be able to do without Russian gas before mid-2024.

Despite their efforts, it is difficult for European countries to quickly find alternatives. The other gas pipelines that supply it, from Norway or Algeria, are already running at full speed. The Europeans have been looking for alternatives to replace Russian gas in the longer term – the Italians with Algeria, the Germans with Qatar and the Emirates, etc. – and contain the surge in prices. The Twenty-Seven have thus given a mandate to the European Commission to carry out joint purchases. They have also concluded a vast agreement with Washington to increase deliveries of American liquefied natural gas (LNG).

4. How does the gas market react?

The price of gas had jumped to more than 130 euros per megawatt hour following the announcement of the Russian request last Wednesday. Since then, European importers seem to be waiting. If Gazprom wants to change the currency of payment for gas deliveries, now denominated in euros or dollars, the contracts will have to be modified. But to renegotiate a contract, both parties would have to come to an agreement…

European groups could then take advantage of this to try to obtain a revision of the price, duration or volume. “This decision must not lead to a deterioration in the conditions of the contracts of European companies that import Russian gas,” Vladimir Putin said on Wednesday.

Above all, given the political pressure exerted by the European Union, it seems unlikely at the present time that the groups will comply with payment in rubles against the advice of their government. The risk would then be to see Russia cut off the gas tap. But it would thus deprive itself of essential resources to maintain its economy. Faced with this risk, on Wednesday, gas prices again took nearly 8.5% in the Netherlands, exceeding 124 euros per megawatt hour in the morning, before returning to around 117 euros at the end of the day.

5. What is the interest for the ruble?

Having collapsed by more than 30% since the start of the war – reaching 138 rubles to the dollar on March 7 – the ruble immediately rebounded by more than 8% after Vladimir Putin’s announcement last Wednesday . It had ended the day at 96 rubles to the dollar.

A progression that takes place in a very particular context. As the ruble market lacks liquidity, due to a lack of international players, the Russian currency is experiencing brutal movements. The Russian central bank is doing everything it can to support its currency. In particular, it demanded that Russian exporters pay it 80% of their income in foreign currencies in rubles. This capital control, accompanied by the hopes linked to the Russian-Ukrainian negotiations of recent days, has enabled the ruble to return almost to its pre-war level.

6. What is the advantage for the Russian central bank?

“By forcing European customers to buy roubles, this above all allows Vladimir Putin to open up the central bank and make the Russian money market more fluid,” said Serge Assouline, managing director of Forex Finance, a risk management consulting firm. financial. By freezing the Bank of Russia’s assets in euros and dollars, the West had almost succeeded in putting it out of the game of the global financial system.

“But if tomorrow gas importers are forced to pay for their deliveries in rubles, commercial banks in all countries will have to buy rubles, transfer rubles… and therefore reintegrate Russian banks and their central bank into international financial markets” , explains Serge Assouline. “And if we allow the central bank to operate again by asking it to provide rubles, it becomes more complicated to block the counterpart flows in euros and dollars and therefore its assets,” he continues.

7. What consequences could this measure have for banks?

Banking establishments have suspended or severely limited their operations on the rouble, for fear of finding themselves “stuck” with the Russian currency on their accounts. If Western banks have to obtain it to satisfy the demand for Russian currency from European importers, they will therefore have to sell euros to buy roubles. And for that they should then turn to Russian banks.

“Banks operate, when they deal with currencies, through correspondent banks,” explains Serge Assouline. Correspondent Russian commercial banks will therefore again deal with international banks in order to provide them with rubles.” A way for Russia to limit the risk that new banks will be excluded from Swift, explains a banker. At this stage, Gazprombank and Sberbank are not sanctioned by the European Union.

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