From the Editor: Putin’s rubles-for-gas threat proves hollow [Gas in Transition]

In response to sanctions that he said amounted to economic warfare against Russia, president Vladimir Putin unnerved already volatile markets on March 23, announcing that “unfriendly” countries would have to pay for their Russian natural gas in rubles. However, the subsequent decree announced by the Kremlin on March 31 made no such demand.

Rather, gas buyers in European countries that have supported the sanctions regime against Russia can continue paying for Russian gas in euros and other foreign currencies. But they will have to open two accounts at Russia’s state lender Gazprombank: one in a foreign currency and one in rubles. According to the decree, customers can pay in foreign currency, and then Gazprombank will convert the sums into rubles and then transfer them to Gazprom.

The move is one of the number of measures Russia’s government and central bank have implemented to prop up the ruble, which slumped from a prewar level of under 80 to the US dollar to nearly 136 on March 10. Those measures, which have included forcing many banks and companies to swap in their foreign currencies for rubles, have clearly worked, with the ruble now trading at close to the level before Moscow launched its invasion of Ukraine.

Another motivation may have been to protect Gazprombank, one of the few major Russian banks that has so far avoided the more severe Western sanctions, from future restrictions. If European buyers have to keep paying into the bank, then the bank is shielded.

Gas prices eased back when it became clear exactly what Moscow was asking for. However, some European buyers have still said they will refuse to follow the new payment instructions. For example the Netherlands, which meets 15% of its gas needs with Russian supply, has told its energy companies to refuse any new gas-payment terms proposed by Moscow. The Dutch government is aligning itself with European Commission president Ursula von der Leyen, who said on March 24 that following Russia’s new instructions would be a violation of sanctions.

Brussels wants to present a united front against Russia’s demand, even if it would only mean European customers paying into a different account. But significant buyers of Russian gas including Germany and Italy appear open to accepting it. Some states including Hungary, which gets about 70% of its gas from Russia, have gone further. Hungarian prime minister Viktor Orban, who has opposed stricter sanctions against Russia, seemed to suggest his country would even be willing to pay in rubles.

“We have no difficulty at all paying in rubles,” he told reporters on April 6, fresh from a crushing victory in general elections. “So if the Russian asks for it, we’ll pay in rubles.”

His government has said that it does not consider doing so a violation of EU sanctions against Moscow.

Slovakia, which gets close to 85% of its gas from Russia, has also said it would be willing to pay the bill in rubles.

“In order to not lose the imports, we will pay for them in Russian currency if we won’t reach a different deal,” economy minister Richard Sulik said on April 4. He added that while he supports diversification of supply, achieving this would take several years.

Russia’s decree covers gas supplies from April 1, meaning most buyers will have only the next few weeks to decide whether to follow it. The decree orders Gazprom to cut off supply if its customers fail to comply. At this stage, it would appear that most are likely to agree to the new terms.

However, with the war in Ukraine still raging, making predictions is very difficult. If Russia’s standoff with the West escalates, Putin could very well demand ruble payments. What is clear is that the majority of Europe is simply not in a position to do without Russian without causing devastating economic damage. As such, European proposals for a bloc-wide embargo on Russian oil and gas are unlikely to go anywhere, as those member states with the most to lose will prevent it. Russia, whose economy is already crippled by sanctions with a possible default looming, would also consider severing gas supplies to Europe as one of its last resorts.