Nina Chestney

LONDON (Reuters – On Thursday, President Vladimir Putin made a directive directing foreign buyers to either pay roubles or their gas contracts would be canceled. The move has been called “blackmail” by European countries.

What is the underlying cause of this change?

This is in response to Western sanctions against Russia for its invasion of Ukraine.

Moscow says that it is conducting “special military operations” in Ukraine. It describes Western-led measures as an economic conflict.

The West could encourage their countries to pay in rubles, which would reduce the negative impact of Russia’s curbs on foreign reserves. This would also boost the rouble.

Europe spent between 200 and 800 million euro ($880 million per day) on Russian gas this year. It would benefit greatly if it could convert that money into rubles.

WHY IS IT MATTTERING?

Russia is a major energy source for Europe, accounting for around 40% of the region’s gas imports. Moscow may shut off its gas supply, which could lead to shortages of energy and factories closing. This would also result in crippling energy costs for the entire region.

Germany is Europe’s biggest economy and has activated an emergency plan that could lead to power rationing in the event of low gas supplies.

The European benchmark for gas prices in Holland, Dutch, has already reached record levels this year due to supply worries. This is causing inflation and increasing the chance of recession.[G/EU]

WILL FOREIGN BUYERS TURN TO ROUBLES

It seems unlikely. Western countries claim that payment in rubles would be a breach of contracts, which can take several months to renegotiate.

How would it work if they did switch?

Gazprombank becomes the intermediary for gas trade under Putin’s directive.

The foreign buyer must now transfer foreign currency to a “K” special account at the lender. Gazprombank, on behalf of the gas buyer, would buy roubles and transfer them to a special “K”, according to the order.

Gazprombank was added to the UK’s list of prohibited entities in early March. This bank was not exempted from EU’s SWIFT messaging service ban.

WHAT IS NEXT

It’s unclear. To force this issue, Russia would need to stop gas flow to the European Union.

The European Union might increase pressure on Russia by curbing its energy exports.

Sources in the EU told Reuters Wednesday that the European Commission was preparing new sanctions for the Kremlin. However, this will be determined by Moscow’s stance towards gas payments made in roubles.

($1 = 0.9087 euros)