Putin’s Gas-for-Rubles Demand Spurs Confusion in Russia, Abroad

(Bloomberg) — Neither Gazprom nor the Kremlin could shed much light Thursday on how they will implement President Vladimir Putin’s surprise announcement that Russia’s massive gas trade with Europe will be shifted into rubles.

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That may be the point.

“This decision looks at lot like it was mainly for show,” said Oleg Vyugin, a former top Russian Finance Ministry official. “The consequences aren’t completely clear and probably everyone will wind up paying differently, some in rubles, some in euros.”

European gas buyers were burning up the phones to Gazprom with questions about how the new approach is supposed to work but the gas giant had no immediate answers. Officials in Germany and Italy — among the biggest buyers — warned that the idea would violate existing contracts.

A senior Russian official, speaking on condition of anonymity, described the move as not an economic one but a response to the possible threat that Europe might try to seize Moscow’s export revenues. Another suggested Moscow might be willing to cut off supplies to customers who refused to shift to rubles.

Veiled Embargo?

But with the European Union discussing expanding sanctions over Russia’s invasion of Ukraine, possibly to the energy trade, the Kremlin has been looking for what it calls “asymmetric” ways to retaliate, where it thinks Russia may have more leverage.

“The decision on payment for Russian exports in rubles apparently amounts to a veiled fuel embargo on Europe,” Fyodor Lukyanov, head of a Kremlin-backed foreign policy think tank, wrote in Telegram. “The ruble option leaves a way out for those who desire, but in the West, that will be seen as a political concession to Putin.”

Deputy Prime Minister Alexander Novak warned in a state television appearance Wednesday that cutting off gas supplies to Europe would be “apocalyptic” for the continent.

A Gazprom executive said the company hadn’t initiated the decision and didn’t know how it would be implemented. He added that a mechanism would be found given that the order had come from Putin. Reopening long-term contracts to change their payment terms could trigger complex negotiations on other provisions, as well.

Kremlin spokesman Dmitry Peskov said Thursday the government and central bank would have to come up with a mechanism in the week that Putin gave them when he announced the switch at a government meeting Wednesday. He said the move would affect countries Russia has designated as “unfriendly” for their imposition of sanctions, a category covering most of the country’s biggest gas buyers in Europe.

Disruption Threat

A major German industry group warned Thursday the demand may disrupt deliveries.

“There are concrete and serious indications that the gas supply situation is about to deteriorate,” said Kerstin Andreae, BDEW’s chairwoman. “With Putin’s announcement that future gas deliveries will have to be paid for in rubles, an impact on gas deliveries cannot be ruled out.”

Sova Capital estimates that pipeline exports to “unfriendly” countries in January amounted to 7.4 billion cubic meters, a volume valued at $6 billion, while total gas exports were 13.8 billion cubic meters, worth $9.5 billion.

The impact on shoring up the ruble — which plunged amid the sanctions last month — would be limited because Gazprom is already obligated to sell 80% of its foreign-exchange receipts for rubles on the local market, Sova said.

“Even if a buyer is willing to pay in rubles, it may prove quite challenging given the sanctions put in place against a number of Russian banks,” Warren Patterson, head of commodities strategy at ING Groep NV, one of the biggest lenders to commodity traders, said in a report on Thursday.

Soviet Precedent

There was little evidence of preparation for Putin’s order.

Energy officials prepared a research note on ruble payments for energy exports earlier this month but it’s not clear if it was submitted to the Kremlin, according to a person familiar with the situation and speaking on condition of anonymity. The report found no notable gas sales for rubles in the past, but cited a few transactions for oil products paid in yuan.

Two years ago, Gazprom Export sold at least three spot gas batches for rubles via its electronic platform, according to company statements. The press office for Gazprom’s export arm declined to comment on whether more spot agreements were reached.

Still, the deliveries accounted just for a tiny fraction of Gazprom Export’s total 2019 sales to countries outside the former Soviet Union, which reached nearly 199 billion cubic meters.

Charging foreign buyers for Russian gas in rubles would mark a partial return to Soviet practices. The USSR supplied its closest allies with natural gas in exchange for so-called transferable rubles, a currency linked to gold.

Buyers in Western Europe were traditionally charged in hard currency, or more often agreed to barter deals.

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