EXPLANATION: What would it mean to pay for natural gas in rubles?
BERLIN (AP) — Already high gas prices in Europe have been swirling since Russian President Vladimir Putin announced plans to make importers pay for Russian natural gas in rubles instead of dollars and euros.
Here’s a look at some of the implications of such a move:
WHAT IS PUTIN OFFERING?
Europe imports large quantities of Russian natural gas to heat homes, generate electricity and power industry, and these imports have continued despite the war in Ukraine.
Around 60% of imports are paid for in euros, and the rest in dollars. Putin wants to change that by forcing foreign gas importers to buy rubles and use them to pay state supplier Gazprom.
Putin last Wednesday asked the Russian central bank to come up with a workable system.
WHAT EFFECTS COULD THIS PLAN HAVE?
Importers should find a bank that would exchange euros and dollars for rubles. This could be cumbersome as some Russian banks have been blocked or cut off from the SWIFT messaging system which facilitates international payments.
Still, some banks have not been cut, and for now, US Treasury sanctions banning banking transactions contain exceptions for energy payments. It is a concession to European allies who are much more dependent on Russian oil and gas and fear that a complete shutdown could plunge their economy into recession.
According to Eswar Prasad, professor of trade policy at Cornell University and former head of the International Monetary Fund, Russia would be paid for the gas in its currency. .
“Either Putin is getting terrible economic advice or he is derailed even further in his hatred of the West,” Prasad said. “It would be cheaper for foreign importers to pay for Russian exports in a currency that is collapsing in value, but it is difficult to acquire rubles and make payments in a way that avoids sanctions.”
He warned that the move “could further disrupt global energy markets by exacerbating current supply disruptions and adding to uncertainty about future supplies, which could lead to further price spikes.”
HOW IS PUTIN’S DEMAND RECEIVED IN EUROPE?
European governments and energy companies reject the idea, saying gas import contracts specify the currency and a party cannot change it overnight. They say they intend to continue paying in euros and dollars.
More broadly, major Group of Seven economies, including Japan, the United States and Canada, as well as Germany, France, Italy and Britain, have agreed to reject Moscow’s request. The European Union’s energy commissioner also agreed, according to a G-7 statement.
German Vice Chancellor Robert Habeck told reporters on Monday that “all G-7 ministers fully agree” that such a move would be “a unilateral and clear breach of existing contracts.”
WHAT IS PUTIN’S MOTIVE?
In theory, requiring payments in rubles could support demand for the currency and its exchange rate. But not many, says Prasad. At present, euros and dollars are already used to buy rubles when Gazprom exchanges its foreign income.
The Center for Oriental Studies in Warsaw has suggested that by shifting the flow of currency from Gazprom to the largely state-controlled banking system, the Kremlin will gain greater control over foreign currency which has become scarce since Western countries froze a large part of Russia’s reserves abroad. .
However, that would leave Gazprom without hard currency to pay off its foreign debt or buy supplies from abroad. As it stands, the gas supplier already has to sell 80% of its foreign currency to the Central Bank of Russia.
The dispute over the ruble has raised fears that it could lead to an interruption in the supply of natural gas. This could expose Russia to accusations of breaching long-term energy contracts, which it has done so far.
Europe’s pipeline system is highly connected, so any attempt to restrict flows to some countries would affect others, analysts at Rystad Energy say. Beyond that, energy sales are a key source of revenue for Russia.
Asked by reporters whether Russia could cut gas supplies to European customers if they reject the request to pay in roubles, Kremlin spokesman Dmitry Peskov said in a conference call on Monday that “we we’re clearly not going to provide gas for free”.
“In our situation, it is hardly possible and feasible to engage in charity work for Europe,” Peskov said.
HOW REAL IS IT?
The ruble proposal has led Germany’s utility association, BDEW, to call on the government to issue an “early warning” of a severe energy shortage.
It is the first of three energy emergency stages in European and German legislation, the highest being a shortage so severe that the government must cut off gas to industry to protect households.
The German government sees no need for such a statement, a spokeswoman said on Monday.
Putin may be bluffing. This month, Russia threatened to use rubles to pay foreign investors who hold mostly dollar-denominated government bonds. It ended up being paid in dollars after rating agencies said paying in rubles would put Russia in default.
As for gas payments, “Putin may demand rubles, but the contracts are clear,” said Carl Weinberg, chief economist and managing director of High Frequency Economics in White Plains, New York. “His only option to force change is to refuse to deliver products, and that can’t happen: he can’t stop oil and gas from coming out of the ground without plugging wells, and storage capacity will fill up very quickly if shipments stop cold. ”
“So let’s call it a bluff,” Weinberg said. “Russia can no more stop shipping than Germany and the EU can stop buying.”
WHY IS ENERGY AN IMPORTANT FACTOR IN WAR?
The European economy remains highly dependent on Russia for 40% of its gas imports and 25% of its oil.
While the United States and the United Kingdom have declared they will stop buying Russian oil, European leaders have avoided an outright boycott of Russian oil and gas. Instead, they focused on reducing their imports over the next few years through conservation, other sources, and switching to wind and solar as quickly as possible.
Estimates vary of the impact of a total gas shutdown in Europe, but they generally involve a substantial loss of economic output.