Europe’s already high gas prices have soared since Russian President Vladimir Putin announced plans to pay importers for Russian natural gas in rubles instead of dollars and euros. Let’s take a look at some of the implications of such a move:
What is Putin proposing?
Europe imports Russian natural gas in large quantities to heat homes, generate electricity and the fuel industry, and those imports have continued despite the war in Ukraine. About 60% of imports are paid for in euros and the rest in dollars. Putin wants to change this by requiring foreign gas importers to buy the ruble and use it to pay state-owned supplier Gazprom. Putin asked the Russian central bank last Wednesday to come up with a workable system.
What could be the impact of that plan?
Importers would have to find a bank that would exchange euros and dollars for rubles. This can be cumbersome as some Russian banks have either been blocked or cut off from the SWIFT messaging system that facilitates international payments.
Still, there are some banks that haven’t been cut, and for now, restrictions imposed by the US Treasury barring bank transactions include the exception of energy payments. It is a concession to European allies who are heavily dependent on Russian oil and gas and fear the overall cutoff could throw their economy into recession.
Ishwar Prasad, a professor of trade policy at Cornell University and a former International Monetary Fund official, said allowing Russia to pay for gas in its own currency would be marginal in getting around financial sanctions, raising the value of the ruble or protecting the Russian economy. Will help. ,
“Either Putin is getting terrible economic advice or he is getting derailed in his hatred of the West,” Prasad said. “It would be cheaper for foreign importers to pay for Russia’s exports in a depreciating currency, but it is difficult to acquire the ruble and pay in a way that evades sanctions.”
He warned that the move could “further impact global energy markets by exacerbating current supply disruptions and adding to uncertainty about future supply, all of which could lead to higher prices.”
How is Putin’s demand being received in Europe?
European governments and energy companies are rejecting the idea that gas import contracts specify a currency and that one party cannot change it overnight. They say they want to continue to pay in euros and dollars.
Broadly speaking, the Group of Seven major economies, including Japan, the US and Canada, as well as Germany, France, Italy and the UK, have agreed to reject Moscow’s demand. The EU energy commissioner also agreed, a G-7 statement said.
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, the need for ruble payments could support demand for the currency and its exchange rate. But not much, Prasad says. As it stands, the euro and dollar are already being used to buy the ruble when Gazprom exchanges its foreign earnings.
The Center for Eastern Studies in Warsaw has suggested that by shifting the flow of foreign exchange from Gazprom to a largely state-controlled banking system, the Kremlin would gain additional control over foreign exchange, which would allow Western countries to transfer most of Russia’s reserves abroad. The deposit has since become rare. ,
However, this would leave Gazprom without hard currency to make foreign debt payments or buy supplies abroad. As it stands, the gas supplier already has to sell 80% of its foreign currency to Russia’s central bank.
The ruble dispute has raised concerns that it could disrupt natural gas supplies. This could open Russia to charges of not complying with long-term energy contracts, which it has done so far.
Europe’s pipeline system is highly connected, so any attempt to restrict flow in some countries will affect others, according to analysts at Rystad Energy. In addition, energy sales are a major source of revenue for Russia.
Asked by journalists whether Russia could cut gas supplies to European customers if they refused a demand for payment in rubles, Kremlin spokesman Dmitry Peskov said in a conference call on Monday that “we are clearly They are not going to supply gas for free.
“In our situation, it is hardly possible and feasible to engage in charity to Europe,” said Peskov.
How real is this?
Ruble’s proposal called on Germany’s Utilities Association, BDEW, to declare an “early warning” of serious energy shortages from the government.
It is the first of three phases of an energy emergency in European Union and German law, most of which are shortfalls so severe that the government must turn off gas to industry to protect homes.
The German government does not see the need for such a declaration, a spokesman said on Monday.
Maybe Putin is bluffing. This month, Russia threatened to use the ruble to pay off foreign investors holding government bonds dominated by the dollar. Rating agencies said it went through a dollar payment after Russia defaulted from paying in rubles.
When it comes to gas payments, “Putin may demand the ruble, 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 the products, and that can’t happen: he can’t stop oil and gas from coming out of the ground without closing the wells, and if the shipments are cold.” If so, the storage capacity will fill up very quickly.”
“So let’s call it a hoax,” Weinberg said. “Russia cannot stop shipping product more than Germany and EU can stop buying it.”
Why is energy an important factor in war?
The European economy is heavily dependent on Russia for 40% of its gas imports and 25% of its oil. While the US and the United Kingdom have said they will stop buying Russian oil, European leaders have shrugged off a complete boycott of Russian oil and gas. Instead, they have focused over the next several years on conservation, reducing their imports through other sources, and switching to wind and solar as soon as possible. Estimates of the impact of a total gas shutdown in Europe vary, but they generally involve a substantial loss of economic output.
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