Mark Trevelyan, Joseph Nasr

BERLIN/LONDON – Russian President Vladimir Putin demanded foreign buyers to pay in roubles for Russian gas starting Friday. This move was rejected by European capitals and Berlin called “blackmail.”

Putin’s move, via a decree signed on Thursday, leaves Europe facing the prospect of losing more than a third of its gas supply. Germany, which is most dependent on Russia’s energy, has initiated an emergency plan, that could cause rationing in Europe’s biggest economy.

Putin sees energy exports as the most important lever to hit back at Western sanctions against Russian businesses, banks and businessmen. These were imposed in response to Russia’s invasion of Ukraine. Moscow refers to its Ukraine operation as a “special military action”.

Putin stated in televised comments that Russian gas buyers “must have rouble accounts with Russian banks.” Payments for gas delivery starting in April, from the future will come from these accounts.

We will treat any non-payments as default by buyers and impose all consequences. He stated that nobody sells anything to us for free and they aren’t going to donate any existing contracts.

Although it was unclear whether foreign companies could continue to pay without the use of roubles in practice, this is something that both G7 and EU have rejected.

The Russian currency has seen a significant increase in liquidity since his decision to make rouble payments. It was at its lowest point after the February 24th invasion. In recent years, much has been gained by the rouble.

Governments and companies from Western countries have rejected attempts to modify their gas supply contracts in order to alter the payment currency. Most European buyers use euros. According to executives, it could take several months or more to negotiate terms.

The impact of Western restrictions on Moscow’s foreign currency access would be diminished if payment in rubles is made.

Despite the fact that supplies are already scarce, European countries have raced to find alternative sources of energy, even though they know there is no other option. Although the United States offers more LNG (liquefied natural gas) than Russia, it is not enough to completely replace Russia.

Robert Habeck, Germany’s Economy Minister, stated that Russia has not been able divide Europe. He also said that Western allies are determined not to be “blackmailed by Russia.”

Berlin stated that it will continue to pay in euros for Russian energy imports.

FROZEN PAYMENTS

Bruno Le Maire (France’s Economy Minister) said France was preparing for a scenario in which Russian gas flow could be stopped.

Le Maire did not comment on the technical aspects of Russian latest demands for rouble payments.

Putin signed an order allowing payments via Gazprombank special currency and rouble accounts. The foreign currency will be converted to roubles through currency auctions at a Moscow exchange.

Putin stated that Russia would be strengthened by the switch, pointing out that Western countries used the financial system for their own purposes and that it was absurd for Russia to trade dollars and euros in the face of assets being frozen in the currencies.

What is happening now, and what was already done? European customers have received our gas resources. They paid us euro and received it. Then they frozen the gas themselves. “In this respect, we have every reason to believe we delivered some of the gas supplied to Europe virtually free of charge,” said he.

This cannot go on.

Putin claimed that Russia valued its business reputation.

“We comply and will continue to comply with obligations under all contracts, including gas contracts, we will continue to supply gas in the prescribed volumes – I want to emphasise this – and at prices specified in existing, long-term contracts,” he said.

Many European firms with Russian contracts didn’t immediately comment on the announcement by Putin or respond.

Due to rising tensions with Russia, European gas prices have risen in the last months. This has increased the chance of a recession. Companies, such as steel- and chemical producers, have had to reduce production due to rising energy costs.

The PGNiG of Poland, which is a party to a long-term contract with Gazprom, Russia’s pipeline export monopoly Gazprom, (MCX:), expires in the middle of this year. There was no comment from them. Also, the Polish Climate Ministry had not yet commented. Gazprom has agreed to supply Polish citizens 10.2 billion cubic meters of gas per year. The contract is in dollars.

Eni, an Italian energy company, was also a major European buyer for Russian gas. Eni bought approximately 22.5 bcm Russian gas in 2020. Gazprom’s contract with it expires in 2035.

Germany gas buyers, Uniper (RWE), EnBW’s and EnNG’s – didn’t immediately reply to inquiries for comment.