Currency compromise: how Russia will trade gas for rubles

Russian President Vladimir Putin’s demand to switch to ruble payments for gas supplied to unfriendly countries has raised many questions from both Gazprom’s customers in Europe and the Russian expert community. Traditionally, commodities, including natural gas, are quoted and traded in world reserve currencies, and settlements in national currencies are not widespread.

According to the Federal Customs Service (FCS), in 2021 Russia supplied 130 billion cubic meters of pipeline gas to unfriendly countries with a total value of $ 37 billion, which accounted for 7.5% of all Russian exports.

Reasons

The decision has several main motives.

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First, it is the desire of the Russian side to reduce the risks of sanctions. Translating gas payments into rubles reduces the risks of freezing and blocking Gazprom’s accounts with foreign banks in the event of new sanctions. Currently, Gazprom is not limited by sanctions in foreign currency settlements – gas is supplied, payments are made. However, the risks remain. The transfer of payments to Russian jurisdiction transfers these risks to European buyers.

Secondly, the desire to support the ruble is obvious. Currently, the rule of mandatory sale of 80% of export earnings applies to all exporters, including Gazprom, and the new order of gas trade brings this share to 100%. According to the Institute of Energy and Finance, at current prices, this means an additional inflow to the foreign exchange market of about $ 1 billion a month. However, although this is a significant macroeconomic value, it is not able to fundamentally affect the value of the Russian currency.

Third, the political connotation is also important. After Western countries imposed a series of unprecedentedly tough sanctions, the Russian authorities needed to give some impressive response.

Risks

However, the payment currency is part of a long-term contract and cannot be changed unilaterally. In the worst case, a buyer who disagrees with the Russian proposal may refuse to continue buying gas. At the same time, the system of long-term contracts in the current political environment just protects the position of Russian gas in Europe. Standard contracts contain a requirement for a minimum amount of gas to be paid. That is, even if the European Union starts to reduce gas purchases from Russia, existing long-term contracts will protect Russian exports within the framework of European legislation. So it is simply unprofitable for Gazprom to abandon the system of long-term contracts that has been under construction for the past 50 years.

European politicians have opposed the new settlement scheme, arguing that changing the currency of payment is contrary to the contracts. At the same time, Russia’s ability to force buyers to change the terms of trade is quite limited and by and large is reduced to the threat of completely or partially closing the pipeline.

However, in the current environment, such a threat may not work. The heating season in Europe is coming to an end and gas consumption is falling. We estimate that the EU will be able to survive the next three to four months without Russian pipeline gas, although this will require significant efforts to replace coal and possibly fuel oil generation, maximum liquefied natural gas purchases, hard gas savings and other measures. And Gazprom, by limiting supplies, will itself act as a violator of contracts and undermine confidence in Russia’s gas exports.

Compromise scheme

As a result, the Russian side has clearly compromised. The proposed scheme of payments for gas, on the one hand, does not require a change in the currency of payment in long-term contracts and thus reduces the risk of their cancellation. In fact, European companies can continue to pay for gas in dollars and euros.

On the other hand, a requirement is introduced to open a foreign currency account with a Russian authorized bank and transfer funds for gas to this account. This reduces the sanctions risks for both Gazprom and Gazprombank. All incoming funds are accumulated within one financial institution under a single scheme. The decree allows you to open an account remotely, so additional costs for European companies will be minimal. This is important, because among the concerns raised by the initiative to trade in gas for rubles, experts was the question of increasing the cost of buyers, which could accelerate the already planned withdrawal of EU gas from Russian countries.

The new settlement scheme seems to be acceptable and workable for European energy companies. The main restrictions on the part of European counterparts lie in the political sphere.

The opinion of the editors may not coincide with the point of view of the author

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