Russian President Vladimir Putin said he wanted his country to only accept rubles in gas deals with European countries and other customers, adding a new financial dimension to tensions over energy supplies as the war in Ukraine rages on.
Mr Putin said Russia will refuse to accept payments for natural gas shipments in currencies “that have compromised itself,” including the dollar and euro, and will switch to ruble payments, the state-run news service TASS reported.
“I have decided to implement a number of measures to transfer payment for our gas supplies to unfriendly countries to Russian rubles,” Putin said at a government meeting.
Gas prices in Europe shot higher after Putin’s comments, with Europe’s regional gas benchmark, the TTF month-ahead contract, rising 19% before declining to end the day lower. Brent crude oil prices also rose about 5% to over $120 a barrel.
Russia supplies about 40% of the EU’s natural gas, a dependency that has overshadowed Europe’s response to the war. European leaders have sought to reduce the region’s dependence on Russian energy since the outbreak of war. Officials on Wednesday announced new legislation requiring gas storage facilities to be filled to minimum levels and proposed setting up a task force to coordinate gas purchasing.
Mr Putin said Moscow will continue to supply gas in accordance with existing contracts. Russia’s list of unfriendly countries includes EU members, UK, US and others.
Federal Economics Minister Robert Habeck said on Wednesday that Putin’s demand was a breach of contract. Mr. Habeck said that Berlin will discuss an answer with its European partners.
Most global commodities deals are done in dollars – and to a lesser extent in euros – and it is unclear how Russia could force its largest customers to switch. Obtaining rubles for Western utilities could be difficult, if not impossible. Trade in the Russian currency has been severely hampered by Western sanctions as well as Russia’s capital controls aimed at preventing capital flight out of the country.
The move could backfire for Russia. “Insisting on ruble payments may prompt buyers to reopen other aspects of their contracts – such as tenure – and speed up their overall exit from Russian gas,” said Vinicius Romano, senior analyst at consultancy Rystad Energy.
Payments for energy deliveries were made under US and EU sanctions with specific exceptions to ensure the flow of energy and dollars could continue. Western nations have designed sanctions to put maximum pressure on the Russian economy without boomeranging themselves.
Even if Russian energy buyers switched their payments to rubles, the impact could be limited. Russia has already asked its companies that accept payments in dollars and euros to convert 80% of their earnings into rubles to create demand for the currency. But it has the practical implication of putting the responsibility for supporting the ruble on Russia’s customers, not the central bank or domestic companies.
The Russian ruble rose 7% to trade at around 98 rubles per dollar following Mr Putin’s comments.
Russia’s government grabs dollars made from energy sales. However, sanctions against Russia’s central bank have limited the country’s ability to use them.
Russia’s Foreign Minister Sergei Lavrov said Moscow was surprised by the wave of Western sanctions.
“If the reserves of the central bank [were frozen]None of those who made predictions would think what sanctions the West might impose,” he said on Wednesday.
Mr Putin instructed the central bank and the government to determine the procedure for such transactions within a week.
Jason Tuvey, senior emerging markets economist at Capital Economics, said the move is likely aimed at strengthening the ruble and reducing Russia’s reliance on Western financial infrastructure. The downside, however, is that Russia’s already lower inflow of hard currencies needed to pay for imports would be reduced.
“Ultimately, I think this just reinforces the notion that Russia will continue its drift towards self-sufficiency,” Mr Tuvey said, referring to an inward-looking economic system that seeks to reduce ties with the outside world.
Europe, meanwhile, is under intense pressure to address concerns about its energy security and dependence on Russia.
The European Commission proposed legislation that would set a minimum storage rate of 80% for natural gas by November 1, a step aimed at ensuring sufficient energy supply to survive next winter’s heating season. The minimum storage level will increase to 90% in the following years, it said.
The Commission also presented options for possible immediate measures to cope with rising electricity prices. These could include financial compensation at either retail or wholesale level, or a regulatory cap on the maximum price that could be charged for gas.
Ben McWilliams, a research analyst at Brussels-based think tank Bruegel, said the EU should also place more emphasis on reducing its overall energy use.
“Demand has to be reduced,” said Mr. McWilliams. “If we live in this world where prices are subsidized and consumers are protected by keeping prices artificially low – which means demand stays high – we are headed for a major crisis.”
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