GP Short Notes # 626, 3 April 2022
On 31 March, President Vladimir Putin signed a decree mandating that countries purchase gas from Russia pay for their supplies in rubles. The decree says: from 1 April, buyers of Russian gas, mostly the Western European countries, would have to set up special 'K-accounts' to transfer their payments which will then be exchanged into rubles. The entire payment facility will be set up and run through Russia's Gazprombank, a subsidiary of state energy giant Gazprom. Kremlin also added that the gas supplies will not be stopped immediately, but if such payments are not made, it will be a default on the part of the buyers. "Nobody sells us anything for free…existing contracts will be stopped," Putin said in a televised statement in Moscow.
On 31 March, the EU spokesperson said: "the EU will respond in a united manner to attempts by Russia to circumvent sanctions." The G7 countries have rejected Moscow's demand, describing it as a breach of contract. German Chancellor Olaf Scholz said the gas contracts stipulate payment mostly in euros and sometimes in dollars, and he had made clear to Putin in a phone call on 30 March "that it will stay that way." Italian Prime Minister Mario Draghi received assurances from Putin that Europe would not have to pay in rubles. Similarly, Britain does not plan to pay for Russian gas in rubles, said the spokesperson of Prime Minister Boris Johnson. Dutch energy firm Eneco responded that "it has a long-term contract with Wingas, a German subsidiary of Gazprom, for delivery until 2030 and expects its current contract for payment in euros to be honoured."
What is the background?
First, the rising energy prices in Europe. Europe remains the largest importer of oil; gas from Russia has witnessed an increase in prices of 7 to 10 per cent since the decree. British and Dutch gas prices were up to five per cent after Putin's announcement. It is the fifth straight month of inflation in the eurozone. The Eurostat reported: "Annual inflation in the eurozone has reached 7.5 per cent in March, up from 5.9 per cent in February." With the highest inflation, Germany and Austria have set up emergency plan-details on ways to conserve gas and secure steady fuel supplies to every household.
Second, the plunging of Russia's ruble. The trading in ruble plunged since the 24 February invasion in Ukraine. The US ,and the EU have removed Russia from global payment systems, cut off its central bank from capital markets, and froze hundreds of billions of dollars of its reserves. The US Treasury Department announced a slew of new sanctions against hundreds of members of the Russian State Duma, dozens of Russian defense companies, and the CEO of Sberbank, which is Russia's largest financial institution. This has, in turn depreciated the ruble, lowering Russia's global economic position.
Third, the energy dependency between Europe and Russia. Europe receives 40 per cent of its natural gas from Russia, through pipelines from Belarus, Ukraine, and Poland or under the Baltic Sea. Although energy exports remain Putin's leverage against western sanctions, the room for maneuver is limited because Europe is still Moscow's strong market. But, the ruble payment plan cements Gazprom's position at the heart of Russian gas trading. Amid the invasion of Ukraine and the sanctions, the ruble has had a freefall triggering difficulties to fund the military attacks. The Bank of Russia has already hiked its interest rates to 20 per cent to halt the ruble's depreciation.' Therefore, Putin's decree brings Russia's central bank back into the global financial system as major gas payments from Europe are due in May. Meanwhile, Denmark's Orsted, Poland's PGniG and Italy's Eni groups have received a demand from Gazprom Export to pay gas supplies in rubles.
What does it mean?
The climate of uncertainty has led many European countries to look for alternate partners and alternate energy source such as green hydrogen that could replace coal as a steady energy source. With countries like Germany, France and several east European countries installing renewable energy circuits at the local level, Qatar, UAE and Saudi Arabia have emerged to be viable partners for hydrogen and natural gas. German economy minister Robert Habeck made a spontaneous visit to UAE on 21 March to set up an economic dialogue to purchase alternative green resources. Similarly, Boris Johnson's visit to Saudi Arabia on 16 March looked to channel an alternate partner for energy diplomacy.