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On March 23, local time, Russian President Vladimir Putin announced that natural gas transactions with all “unfriendly countries” would be settled in rubles instead. The ruble appreciated sharply and the price of natural gas rose rapidly.
For a long time, international energy transactions were priced and settled in dollars or euros. Experts believe the move could allow Russia to circumvent some sanctions and could boost the country’s currency, the ruble.
Some practitioners said that they have “no clue” on how to operate it, and it remains to be seen.
Some experts believe the move could also hurt Russia’s ability to pay its debts, cutting its imports and making the economy even more difficult.
Putin said, “For us, it no longer makes sense for us to deliver goods to the EU and the United States and to accept payments in dollars, euros and some other currencies. That’s why I decided to implement a set of measures to transfer payments in the shortest possible time. , starting with our gas, converting payments for gas we supply to so-called unfriendly countries into Russian rubles.”
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Several Russian banks are currently under sanctions.
Putin added, “That is, to stop using all currencies that destroy their credibility in such payments.”
Previously, the Russian Federation approved a list of unfriendly countries, including more than 20 countries and regions including the United States, Canada, the European Union, and the United Kingdom.
Putin asked Russia’s central bank and government officials to work out within a week an operational plan for converting payments to rubles. Gazprom was also asked to amend the contract to accommodate the move.
Why is Russia doing this?
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Germany has suspended the operation of the Nord Stream 2 gas pipeline.
After Russia invaded Ukraine, countries such as Europe and the United States jointly froze the foreign exchange accounts of the Russian government and the central bank. Of the more than $600 billion in international reserves of the Russian Central Bank, more than $400 billion in foreign exchange reserves are in foreign-issued securities or cash and deposits in foreign banks.
Russian Finance Minister Anton Siluanov recently said, “Our total reserves are about $640 billion, and about $300 billion is currently in a state that we cannot use.”
The sanctions have affected the foreign exchange and gold reserves available to the Russian central bank, greatly weakening Russia’s ability to maintain the stability of the ruble, which once plunged 85% against the dollar.
After the announcement, the ruble rebounded against the dollar, immediately rising to 95 rubles to the dollar, the highest point in the past three weeks. The ruble also appreciated by 3.5 percent against the euro, at 110.5 rubles per euro.
If Russia exports natural gas in rubles, it could also circumvent some financial sanctions. Almost all Russian gas purchase contracts are denominated in euros or dollars, said Claudio Galimberti, senior vice president at consultancy Rystad Energy. Therefore, it is possible for Russia to create new contracts requiring payment in rubles, but this would require central banks of governments to hold rubles, or buy them on the open market.
“Contracts are made between two parties, usually in dollars or euros. So if one party says ‘no, you’re going to pay in this currency next’, there’s no contract,” said UTS Institute for Public Policy Governance chief. Economist Tim Harcourt said.
“It’s not clear how serious the Russian side is with this request,” said Susan Sakmar, a visiting professor at the University of Houston and a consultant to the LNG industry, noting the ruble’s rise against the dollar on Wednesday and a jump in wholesale gas prices in Europe. Maybe that’s the point. This transition will take a long time, and at the same time, the price of natural gas remains high, which is in Putin’s interest.
As one of the “unfriendly” countries, Japan’s Finance Minister Shunichi Suzuki said that Japan has no clue as to how Russia will implement the sale of natural gas in rubles. “Right now, we’re looking at the situation with the relevant authorities because we don’t quite understand what (Russia’s) intentions are and how they’re going to do it,” he told Congress.
specific impact
About 40% of Europe’s natural gas supply comes from Russia, and European countries have to pay Russia 200 million to 800 million euros a day.
image source,Reuters
The Russian pipe-laying vessel Fortuna conducts subsea pipeline laying operations in the Baltic Sea as part of the Nord Stream 2 project.
In view of the particularity of energy supply, the two have long established a symbiotic relationship. Russia transports oil and gas to Europe through a huge pipeline network. However, large-diameter and long-distance pipelines have high construction costs and long periods of time. Once completed, the supply and demand sides are interdependent and difficult to separate.
Germany appears to be the country most affected by the news. The country is a major importer of Russian natural gas. S&P Global’s analysis report believes that Germany’s demand for natural gas is high but domestic production is low. In 2021 alone, Germany’s net imports of natural gas will be about 84 billion cubic meters, while imports from Russia will account for about 60%.
In response, German Chancellor Olaf Scholz said in a speech to parliament that Europe would end its energy dependence on Russia, but doing so overnight would endanger hundreds of thousands of jobs and entire industrial sectors.
Capital Economics’ emerging European capital economist Liam Peach believes that the move will reduce Russia’s solvency and cut Russia’s imports, which will further damage its economy.
A Reuters analysis said that for the United States, a series of sanctions will force the ruble, the yuan or other currencies to be increasingly used in trade. If the transition is successful, it may weaken the dollar’s role in global trade, lending and borrowing to the United States. The cost of financing will have a long-term impact.