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24-03-2022|Business

Putin demands 'unfriendly countries' pay for Russian gas in rubles.

Russia intends to demand ruble payments from European countries for natural gas purchases, escalating its conflict with the west and perhaps exacerbating Europe's worst energy crisis since the 1970s.

At a meeting with his government, President Vladimir Putin ordered the central bank to devise a method to make ruble payments for natural gas within a week, sending gas prices soaring by more than 30%.

Putin's action demonstrated a growing willingness on both sides to use Russian energy supply as a weapon in the conflict between Moscow and the West over Ukraine. The contents of the new agreement were not immediately known, but by insisting on payments in rubles, Putin is effectively compelling European corporations to directly support his currency, which has been in freefall due to Russian economic sanctions. The ruble rose 7% versus the dollar on Wednesday, bringing its year-to-date losses to 23%.

Germany, the largest buyer of Russian gas, said the statement on ruble payments is a breach of the contracts, and the country will consult with its European partners on how to respond, according to Economy Minister Robert Habeck. Italy, the Russian state export monopoly's second-largest customer, said it was hesitant to pay for Russian gas in rubles because it could help Putin weaken Europe's sanctions regime.

"I believe we will continue to pay in euros since paying in rubles would be a method to escape sanctions," Francesco Giavazzi, Prime Minister Mario Draghi's economic adviser, said at the Bloomberg Capital Market Forum in Milan.

The requirement that utilities pay in rubles for gas purchased from Gazprom could result in contract disputes and negotiations, threatening to impair the region's gas supply. Europe imports nearly 40% of its gas from Russia and is already dealing with the consequences of this winter's high costs. Uniper SE and RWE AG, both German energy behemoths, as well as Eni SpA of Italy, declined to comment.

"Buyers may bring the issue to arbitration if Gazprom refuses to supply gas when invoices are paid in the original contract currency, usually euros," said Anise Ganbold, an analyst at Aurora Energy Research.

Following Putin's demand, the European gas benchmark soared by as much as 34%, reaching 132.74 euros per megawatt-hour and reigniting a furious price spike. The United States, the United Kingdom, and all members of the European Union are included in the list of countries labelled "hostile."

On Wednesday, Putin declared, "I have decided to convert to ruble payments for our natural gas shipments to the so-called hostile states."

The 'hostile' states accounted for almost 70% of Gazprom's $69 billion in export revenue in 2021, according to Dmitry Polevoy, economist with Moscow-based Locko Invest. Any changes in payment arrangements, he warned, may "temporarily impair" Russia's gas export levels.

In retaliation for US and European sanctions, Putin said Russia must stop using "compromised currencies" in natural-gas deals, according to a transcript posted on the Kremlin website. "It's fairly evident that supplying our goods to the European Union, to the United States, and receiving payments in dollars, euros, and other currencies makes no sense," he said.

58 percent of its gross gas sales overseas were in euros in the third quarter of last year, according to Gazprom's most recent bond prospectus.  The remaining 39% were in US currency. Gazprom's press office declined to comment on whether the company's long-term supply contracts allow for a move to ruble payments.

"Gazprom would have to persuade customers to agree to adjust contract payment conditions," Trevor Sikorski, head of natural gas, coal, and carbon at Energy Aspects Ltd, said. "It reopens the contracts, and buyers may request shorter-term contracts, for example."

OMV AG said in an interview with Austria's Puls 24 television that its natural gas supply contracts with Russia do not require payment in rubles, and the Austrian energy company will continue to pay in euros pending a change in contract.

Russia released a list of 48 countries it considers hostile earlier this month. The United States, Japan, all European Union members, Switzerland, and Norway were among them. As a result, the vast majority of Russian gas exports now go to "hostile" countries.

Putin directed his administration to advise Gazprom to begin working on needed contract revisions, noting that no price formulae will be changed, simply the payment currency.

"I want to be clear that Russia will continue to supply natural gas in accordance with the volumes, rates, and pricing mechanisms set forth in the existing contracts," Putin stated.

For some buyers, the switch to rubles could be feasible.

"There's no risk to the supply, we investigated, and there's a counterparty in Bulgaria who can complete the transaction in rubles," said Bulgargaz EAD, a state-owned distributor and a Gazprom client. "We're expecting all kinds of strange activities, but this situation has been considered, so the payments under the existing contract are not at risk."

Gazprom shipped an average of 500 million cubic metres per day to nations beyond the former Soviet Union in the first 15 days of March, including the EU, China, and Turkey. The producer's data showed that flows to Europe totaled 384 million cubic metres per day.

"I suppose payment in rubles would be conceivable if a European bank can work with a non-sanctioned Russian bank, but that could be uncomfortable," Jonathan Stern, a research fellow at the Oxford Institute for Energy Studies, said.

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