Russia appears to soften its gas-for-rubles demand
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Gazprom brand end caps on section of pipework are being adjusted by workers during the pipeline laying operation for Gazprom Power of Siberia between the Kovyktinskoye-Chayandinskoye natural gas fields, near Irkutsk on Tuesday April 6, 2021.
Andrey Rudakov | Bloomberg via Getty Images
Russia seems to have relented demands from European companies that they pay in rubles for gas supplies starting Thursday. This temporarily reduces the possibility of disruptions.
This comes as Russia’s President Vladimir Putin demanded repeatedly that “unfriendly” countries pay gas prices in rubles and not in dollars or euros. He was referring to those who are behind heavy economic sanctions meant to punish Russia for its actions. unprovoked onslaught in Ukraine.
Putin instructed Gazprom (the state-controlled giant of gas), the central bank, and the government to make proposals on how the policy should be executed by Thursday. Major G-7 countries had rejected the currency swap for gas supply.
In an interview with Olaf Scholz, the German Chancellor, Putin indicated that European businesses could pay in euros and dollars for supplies of gas.
Gazprom will pay the funds into Gazprom bank and transfer in rubles to Russia via Deutsche Well, a German broadcaster. reported.
According to the report, Scholz refused to agree to this process in talks. However, he requested written information to help him better understand it.
After several hours of talks, the German Chancellor Olaf Scholz and Russian President Vladimir Putin stand up. Scholz met Russian President Vladimir Putin to discuss the Ukrainian-Russian border situation.
Getty Images| picture alliance | Getty Images
According to the Kremlin, the Bank of Russia’s foreign currency reserves had been frozen by EU members states. This made the currency change necessary. According to the Russian statement, experts from Germany and Russia agreed to continue negotiations on this issue.
A separate statement was made by Dmitry Peskov, a Kremlin spokesperson, Wednesday. He confirmed that Russia will not seek gas payments in rubles immediately and said instead that the change would likely be a gradual process.
Germany and the G-7 have both indicated that agreements for gas supplies cannot be unilaterally changed. European buyers of Russian natural gas claim the Kremlin doesn’t have the right not to redraw contracts over the long term.
Currently, most countries pay Russian gas in dollars or euros.
How do you get started?
Gas-for-rubles was a threat that gas supplies would be cut off to European countries. This included Germany and Austria. taking precautionary stepsTo avoid any possible suspension of deliveries in the midst of the dispute, toward gas rationing
Analysts at Eurasia Group, a political risk consulting firm, believe it unlikely that Gazprom would violate existing contracts and refuse to sell gas to Russian customers who are unwilling to pay in rubles.
“More likely, Gazprom will instead seek to renegotiate existing contracts — a time-consuming process at the best of times — in the context of periodic reviews which most long-term contracts allow for. In a research note, analysts from Eurasia Group stated that Gazprom would insist on new contracts reflecting the policy change once renewed.
They stated that Russia could move faster, which could lead to a greater chance of short-term gas supply disruptions. However, a lengthy negotiation is much more probable.
The dependence of European countries on Russian energy exports is now in focus since the Kremlin attacked Ukraine on Feb. 24. This was especially because energy-importing countries are continuing to stockpile oil and gas revenues for Putin. on a daily basis.
Russian oil-and gas revenues were indeed substantial seenapproximately 43% of Kremlin’s federal government budget for 2011-2020, which highlights how central fossil fuels are to the Russian government.
Around 40% of the European Union’s gas comes from Russian pipelines, many of which pass through Ukraine.
Risk of ‘Lengthy Arbitration’
CNBC spoke with Anne-Sophie Corbeau a Columbia University research scholar who said that failure to solve the stand-off over ruble payments could lead to a long arbitration process.
Gazprom offers long-term contracts to companies. Corbeau suggested that if there’s a clause in these contracts that allows companies to change currencies and pay in rubles then this might be an outcome. If there is no clause, however, the terms of the contract prevail, most likely in either euros or dollars — and this cannot be changed.
Corbeau stated that Gazprom would need to request a formal renewal of contract terms. However, I wouldn’t expect buyers to accept, so you might end up having a long arbitration.
Over 7% was seen in the Dutch TTF hub’s front month gas prices, which is a European benchmark in natural gas trading. The price per megawatt-hour traded at 111 euro ($123.9) on Thursday. according to New York’s Intercontinental Exchange.
In recent weeks the TTF-month forward index traded at higher levels partly because of persistent geopolitical worries.
Vinicius Romano (senior analyst at Rystad Energie), stated in a research paper that renegotiations should begin at Russia’s insistence. He said it was likely that Russian importers would be given value elsewhere in the deals they make with Russia for change to ruble payments.
The challenge in putting this into practice is that buyers might have differing terms, and others may not want to modify contractual terms. Negotiations may take time which could mean that there’s no deadline to pay rubles.
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