Vladimir Putin has demanded payment in roubles for Russian gas sold to “unfriendly” countries, setting a deadline of 31 March.
It is not clear whether he plans to tear up existing contracts that set the price in euros or dollars, but Germany, which relies on Russia for 40% of its gas supplies, is not taking any chances, warning large industrial gas users that a standoff is possible and rationing is one possible outcome.
Here we ask why payment for Russian exports in roubles has become a major issue for the Kremlin, and whether Putin could extend the plan to include exports of oil, grain, fertilisers, coal, metals and other key commodities.
Why does Putin want payment in roubles?
In the aftermath of the Russian invasion the value of the rouble fell off a cliff. It fell from about 85 to the euro last year to 110 as the tanks rolled across Ukraine’s borders. Only an intervention by the Russian central bank it stood at 94.1 to the euro.
With the rouble trading at such low levels, Russian exports were going to bring in less money to subsidise state services and fund the war than previously expected.
A higher valued rouble will not only bring in more cash, it is also a matter of pride that trading nations are prepared to pay for Russian exports in the Russian currency. A larger pool of roubles, generated by the demand from foreign countries and companies for Russian goods, would allow Moscow to challenge the US dominance, via the dollar, of global money markets, although it is not clear why China would support such a plan.
Some analysts have also speculated that dollars and euros are less useful to Moscow while sanctions are tightening. For instance, without access to dollars and euros via international exchanges, Russia is also proposing to pay the interest on its euro-denominated debts with roubles.
Which countries does Putin expect to pay for gas in roubles?
Russia’s list of “unfriendly” countries corresponds to those that have imposed sanctions. Deals with companies and individuals from those countries must be approved by a government commission.
The countries include the US, EU member states, the UK, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine. Some, including the US and Norway, do not buy Russian gas.
How big are Russian exports to the EU?
In 2020, the EU was Russia’s primary trade partner, accounting for 37.3% of the country’s total trade in goods with the world. Meanwhile, Russia was the EU’s fifth largest trade partner, representing 5.8% of the bloc’s total trade. However, this disguises the important fact that Russian gas is a major feature of those imports, most of which is paid for in dollars, euros or sterling.
According to Gazprom, 58% of its sales of natural gas to Europe and other countries as of 27 January were settled in euros. US dollars accounted for about 39% of gross sales and sterling about 3%. Commodities traded worldwide are largely transacted in dollars or euros, which together make up roughly 80% of worldwide currency reserves.
In practical terms, while gas imports to the EU from Russia are volatile, they account for up to €800m (£680m) of spending every day.
How has Putin exercised his influence?
It wasn’t enough for Russia’s central bank to buy roubles to prop up the currency in its darkest hours after the invasion. An effective ban on the central bank using the Swift payments system to access its assets held overseas meant this intervention could not last.
The central bank wanted to sell dollar and euro investments to buy roubles, increasing demand and consequently the price, but without access to Swift was unable to continue on a sufficient scale.
Another route was found. A directive was slapped on exporters, including commodity producers, forcing them to convert into roubles 80% of the foreign currency they receive on export sales.
Now the Kremlin is considering plans for all export sales to be in roubles, exploiting its near monopoly in the essential raw materials in manufacturing processes, from fertilisers to cars.
One example is palladium, which car companies use to make catalytic converters. About 40% of the world’s supply of the metal comes from Russia and 90% of Russia’s output goes to the car industry, says Paul Watters, the head of corporate research at S&P Global Ratings.
If carmakers are forced to choose between buying palladium in roubles or looking elsewhere for supplies, it is likely politicians, keen to isolate Russia, will tell them to look elsewhere. Watters fears rationing and car factory closures could be the result.
Could the plan backfire?
If the Kremlin insists current contracts in euros and dollars are changed to roubles, they will be in breach of international protocols. This is not something Gazprom has invoked, even during the cold war when tensions were heightened between the Soviet Union and the west.
Germany has said it is prepared to ration energy supplies rather than pay for gas in roubles, which is likely to plunge the EU’s largest economy into recession but deny Russia the extra cash. The Kremlin move is also likely to hasten a switch away from Russian commodities, adding to the country’s already-dramatic economic decline.
