Putin says Europe must pay for gas in roubles

The Russian President has opened up a new dimension to tensions over energy supplies while the war in Ukraine rages.

Russian President Vladimir Putin directed Russia’s central bank to prepare for the new payments system within a week. Picture: AFP.

Russian President Vladimir Putin said he wants his country to only accept roubles in gas deals with European countries and other customers, adding a new financial dimension to tensions over energy supplies while the war in Ukraine rages.

Mr Putin said Russia would refuse to accept payment for natural-gas supplies in currencies “that have compromised themselves,” including dollars and euros, and will switch to payments in roubles, state newswire TASS reported.

“I have decided to implement a set of measures to transfer payment for our gas supplies to unfriendly countries into Russian roubles,” Mr Putin told a government meeting.

Gas prices in Europe spiked after Mr Putin’s remarks, with Europe’s regional gas benchmark, the TTF month-ahead contract, rising 19 per cent before retreating and ending the day lower. Brent crude oil prices also rose around 5 per cent to above $US120 a barrel.

Russia supplies around 40 per cent of the EU’s natural gas, a dependency that has cast a shadow over Europe’s response to the war. European leaders have scrambled since the war broke out to reduce the region’s reliance on Russian energy. Officials announced fresh legislation Wednesday to require gas storage facilities be filled to minimum levels and proposed the creation of a task force to co-ordinate gas purchases.

Mr Putin said that Moscow would continue to supply gas in accordance with existing contracts. Russia’s list of unfriendly countries includes EU members, the UK the US and others.

German Economy Minister Robert Habeck said Wednesday that Mr Putin’s demand constituted a breach of contract. Mr Habeck said that Berlin will discuss a response with its European partners.

Most global commodity deals are conducted in dollars — and to a lesser extent euros — and it is unclear how Russia could force its biggest customers to change. Sourcing roubles for Western utilities could be difficult if not impossible. Trading in the Russian currency has been severely hampered by Western sanctions as well as Russia’s capital controls, which seek to prevent capital flight from the country.

The move could backfire for Russia. “Insisting on rouble payments may give buyers cause to reopen other aspects of their contracts — such as the duration — and simply speed up their exit from Russian gas altogether,” said Vinicius Romano, senior analyst at Rystad Energy consulting firm.

Payments for energy supplies were granted specific carve-outs in US and EU sanctions to ensure the flow of energy and dollars could continue. Western nations designed sanctions to create maximum pressure on Russia’s economy without boomeranging on themselves.

Even if buyers of Russia’s energy switched payments to roubles, there might be limited effect. Russia has already asked its companies that take payment in dollars and euros to swap 80 per cent of their revenue into roubles, a way to create demand for the currency. But it has the practical impact of putting the onus of supporting the rouble on Russia’s customers, rather than the central bank or domestic companies.

The Russian rouble gained 7 per cent to trade at around 98 roubles to the US dollar after Mr Putin’s remarks.

Russia’s government takes hold of dollars generated through energy sales. Sanctions on Russia’s central bank, however, have limited the country’s ability to use them.

Russia Foreign Minister Sergei Lavrov said Moscow was surprised by the sweep of Western sanctions.

“When the central bank’s reserves [were frozen], no one would think, out of those who made predictions, what sanctions the West might apply,“ he said on Wednesday.

Mr Putin directed the central bank and the government to determine the procedure for such transactions within a week.

Jason Tuvey, a senior emerging markets economist at Capital Economics, said that the move was likely aimed at boosting the rouble and reducing Russia’s reliance on Western financial infrastructure. However, the downside is that it would reduce Russia’s already diminished inflow of hard currencies needed to pay for imports.

“Ultimately, I guess this simply reinforces the idea that Russia will continue its drift toward autarky,” Mr Tuvey said, referring to an inward-looking economic system that seeks to diminish ties with the outside world.

Europe, meanwhile, is under heavy pressure to address concerns about the security of its energy supplies and its reliance on Russia.

The European Commission proposed legislation that would set a minimum natural-gas storage level of 80 per cent by November 1, a move that is meant to ensure enough energy supply to get through next winter’s heating season. The minimum storage level would increase to 90 per cent in subsequent years, it said.

The commission also laid out options for possible emergency measures to deal with surging electricity prices. Those could include financial compensation, either at the retail or wholesale level, or a regulatory cap for the maximum price that could be charged for gas.

Ben McWilliams, a research analyst with Brussels-based think tank Bruegel, said the EU should also be putting more emphasis on reducing its overall energy use.

“Demand has to be reduced,” Mr McWilliams said. “If we live in this world of subsidising prices and protecting consumers by artificially keeping prices low — which means demand stays high — we’re heading for a huge crunch.”

The Wall Street Journal

Germany has halted the controversial Nord Stream 2 pipeline in light of Russia‘s incursion into Ukraine.