Kremlin demands rubles for gas, but leaves monetary loophole

Russian President Vladimir Putin issued an executive order requiring payment for natural gas in rubles, but appeared to temper the order by allowing payments in dollars and euros through a designated bank.

This is the latest twist on the energy supply that Europe relies on to heat homes and generate electricity.

The measure has received a cautious welcome from European leaders who insist payment will remain in euros and dollars and want to see the fine print of how the decree will be implemented.

German Chancellor Olaf Scholz (Annegret Hilse/Pool Photo via AP)

Countries deemed ‘unfriendly’ for imposing sanctions on Russia over its war in Ukraine can continue to pay in foreign currency through a Russian bank which will then convert the money into roubles, according to a Kremlin decree released by state media.

It came a day after Italian and German leaders said they had received assurances from Mr Putin regarding gas supplies.

Mr Putin spoke more harshly, saying Russia will start accepting ruble payments on Friday and contracts will be terminated if buyers do not agree to new terms, including opening ruble accounts in Russian banks.

“If these payments are not made, we will consider this as a breach of the buyer’s obligations, with all the consequences that flow from it,” Putin said.

His proposal has caused a spike in natural gas prices and raised fears it could be the prelude to a disruption in supplies to Europe, which relies heavily on Russian natural gas and would be struggling with a sudden cut.

Italy Politics
Italian Prime Minister Mario Draghi (Domenico Stinellis/AP)

The German government declared an early warning of an energy emergency on Wednesday, the first step towards allowing government-mandated gas rationing for industry to spare homes and hospitals.

At the same time, Russia depends on oil and gas sales for much of its government revenue at a time when its economy is under severe pressure from Western sanctions.

Economists say the switch to the ruble would do little to prop up the Russian currency’s exchange rate, as gas exporter Gazprom has to sell 80% of its foreign currency earnings for rubles anyway.

The decree signed by Mr Putin and published by the state news agency RIA Novosti says that a designated bank will open two accounts for each buyer, one in foreign currency and one in roubles.

Buyers will pay in foreign currency and allow the bank to sell it in rubles at the Moscow exchange office. The rubles would then be placed in the second account, where the gas is officially purchased.

Speaking shortly after Mr Putin’s announcement, German Chancellor Olaf Scholz said gas contracts stipulate payment mainly in euros and sometimes in dollars. He said he made it clear to Mr Putin in a phone call on Wednesday “that it would stay that way”.

“What his ideas are about how this can happen is what we will now examine closely,” Mr Scholz told reporters in Berlin. “But in any case, what applies to companies is that they want and will be able to pay in euros.”

Mr Putin announced last week that Russia would require “unfriendly” countries to pay for natural gas only in Russian currency, asking the central bank to develop a procedure for buyers to acquire rubles in Russia.

Major Group of Seven economies, including Italy and Germany, rejected the request.

Ahead of the announcement of the decree, Italian Prime Minister Mario Draghi said on Thursday he had received assurances from Mr Putin that Europe would not have to pay in rubles and played down fears Moscow could cut supplies.

Mr Draghi said Mr Putin told him in a 40-minute phone call on Wednesday evening that “existing contracts remain in place. European companies will continue to pay in dollars and euros.

Mr Draghi said he had referred the discussion of how it would work to experts and that analysis was underway “to understand what this means”, including whether “European companies can continue to pay as expected, if that means anything for ongoing sanctions.”

“The feeling is one I’ve had from the start, that it’s absolutely not straightforward to change the currency of payments without breaching contracts,” Draghi said.

The French and German finance ministers also said after meeting in Berlin that the contracts cannot simply be changed and that they would consider what Mr Putin has proposed.

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