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Putin Demands Ruble Payment for Gas, Escalating Energy Fight

Russia says ready to keep supply, doesn’t want euros, dollars. European gas prices surged more than 30% after the news.

Putin Demands Ruble Payment for Gas, Escalating Energy Fight
Unleaded fuel drips from a petrol pump at an ASDA Group Ltd. supermarket gas station in this arranged photograph in Croydon, U.K. (Photographer: Luke MacGregor/Bloomberg)

Russia plans to demand ruble payments for natural gas purchases from European nations, deepening its standoff with the west and potentially aggravating Europe’s worst energy crunch since the 1970s.

Gas prices surged more 30% after President Vladimir Putin ordered the central bank to develop a mechanism to make ruble payments for natural gas within a week at a meeting with his government. 

Putin’s move showed a growing willingness on both sides to use Russian energy supplies as a weapon in the struggle between Moscow and the west over the war in Ukraine. The specifics of the new arrangement weren’t immediately clear, but by demanding payments in rubles, Putin is essentially forcing European companies to directly prop up his currency after it was sent into free-fall by sanctions placed on the Russian economy. The ruble gained 7% against the dollar Wednesday, trimming its losses this year to 23%.

Putin Demands Ruble Payment for Gas, Escalating Energy Fight

Germany, the biggest buyer of Russian gas, said the announcement on ruble payments is a breach of the contracts, and the nation will speak to its European partners on how to respond, according to Economy Minister Robert Habeck. Italy, the second-biggest customer of Gazprom PJSC, the Russian state export monopoly, said it wasn’t inclined to pay for Russian gas in rubles because it could help Putin weaken Europe’s sanction regime. 

“My view is is that we pay in euros because paying in rubles would be a way to avoid sanctions, so I think we keep paying in euros,” Prime Minister Mario Draghi’s economic adviser Francesco Giavazzi said at the Bloomberg Capital Market Forum in Milan.

For the utilities who buy gas from Gazprom, the demand to pay in rubles could lead to disputes and contract negotiations, threatening to disrupt the smooth supply of gas to the region. Europe gets about 40% of it gas from Russia and is already grappling with fallout of record prices this winter. German energy giants Uniper SE and RWE AG declined to comment, as did Italy’s Eni SpA.

“If Gazprom refuses to deliver gas when buyers pay their invoices in the original contract currency, usually euros, buyers may bring the case to arbitration,” said Anise Ganbold, an analyst at Aurora Energy Research.

European gas benchmark surged as much as 34% after Putin’s demand, climbing as high as 132.74 euros a megawatt-hour and reigniting a wild rally in prices. The measure applied to country’s deemed “hostile” include the U.S, U.K. and all members of the European Union. 

“I have taken a decision to switch to ruble payments for our natural gas supplies to the so-called hostile states,” Putin said on Wednesday.

The ‘hostile’ states accounted for some 70% of Gazprom’s 2021 export revenue amounting to some $69 billion, Dmitry Polevoy, economist at Moscow-based Locko Invest, said in an emailed note. Any changes to the payment procedures could  “temporarily affect” Russia’s gas export volumes, he said.

Russia needs to stop using “the compromised currencies” in natural-gas transactions in retaliation to the U.S. and European sanctions, Putin said, according to a transcript published on the Kremlin website. “It’s pretty clear that it makes no sense for us to supply our goods to the European Union, to the U.S. and receive payments in dollars, euros, other currencies,” he said.

Within a Week

Some 58% of Gazprom’s gross gas sales abroad were in euros as of the third quarter of last year, according to the producer’s most recent bond prospectus. Another 39% were in U.S. dollars. The press office of Gazprom declined to comment on whether its long-term supply agreements allow a switch to ruble payments.

“Gazprom would need to ask buyers to agree to change the payment terms in contracts,” said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd. “It reopens the contracts, and buyers could ask for shorter-terms for instance.”

OMV AG said its natural gas supply contracts with Russia don’t stipulate payment in rubles, and the Austrian energy company will continue paying in euros pending change in contract, Alfred Stern, chief executive officer, said in an interview with Austria’s Puls 24 television.

Russia announced earlier this month a list of 48 states deemed hostile. They included the U.S., Japan, all European Union members, Switzerland and Norway. As a result, the bulk of Russian gas exports now go to “unfriendly” nations.

Putin ordered his government to instruct Gazprom to start working on needed amendments to current contracts, adding that there’s no plan to change price formulas -- only the currency of the payments.

“I want to emphasize that Russia will definitely continue to supply natural gas in line with the volumes and prices and pricing mechanisms set forth in the existing contracts,” Putin said.

For some buyers, the switch to rubles could be feasible.

“That’s no danger for the supply, we’ve checked, there’s a counterparty in Bulgaria that can realize the transaction in rubles,” state-owned distributor Bulgargaz EAD and a Gazprom client said. “We’re expecting all kinds of actions on the verge of the unusual but this scenario has been discussed, so there’s no risk for the payments under the existing contract.”

In the first 15 days of March, Gazprom exported an average of 500 million cubic meters per day to countries outside the former Soviet Union, including those in the EU, China and Turkey. Of the total, flows toward Europe averaged 384 million cubic meters per day, the producer’s data showed.

“I guess payment in rubles might be possible if a European bank can get cooperation with a Russian, non-sanctioned, bank but this could be awkward,” said Jonathan Stern, a research fellow at the Oxford Institute for Energy Studies.

©2022 Bloomberg L.P.

With assistance from Bloomberg