ArathySomasekhar

HOUSTON (Reuters), – Russian President Vladimir Putin stated Wednesday that Russia would soon be the biggest producer in the world and will require other countries to buy their oil using Russia’s currency, a rouble.

For the majority of European gas buyers that purchase Russian gas, this requirement has created additional hurdles. Europe receives about 40% of its natural gas from Russia. It pays approximately 200 to 800 million euros ($880 millions) daily in dollars and euros.

Putin granted the Russian central bank and officials a week to devise a method to transfer payment to Russian currency. Gazprom (MCX) was also given an order to amend its contracts in response to the change.

WHAT IS THE CAUSE OF THE CHANGE

While the European Union considers sanctions, the United States of America, Britain, and Canada placed sanctions on Russia’s central banks and imports of energy, causing a serious economic blow to Russia to punish Moscow’s invasion in Ukraine.

Russia could be exempted from financial sanctions if it gets gas paid in Russian roubles. Consulting Rystad Energie has found that nearly all Russian gas purchase agreements are in U.S. Dollars or Euros.

After Russia’s attack on Ukraine that the country called a “special operations”, the ruble has fallen as low as 85% against the U.S. dollars. The rouble has since recovered against the dollar, and briefly spiked after Wednesday’s announcement.

WHY IS IT MATTTERING?

Europe is heavily dependent on Russian gas to heat and generate power. Members of the European Union are divided on how they should sanction Russia’s energy sector.

In response to Putin’s request for payments in rubles, the European wholesale gas futures benchmark TTF briefly exceeded $44 per million British thermo units.

The Yamal Europe pipeline, which connects Germany and Poland to the east, saw a sharp decline in Eastbound gas flows from Germany to Poland. This was according data provided by the Gascade pipeline operator on Wednesday.

HOW ACTIVITIES ARE AVAILABLE FOR TRANSITION

Experts in legal matters believe it unlikely Russia would unilaterally modify existing contracts.

The contract is between two parties and usually takes the form of a dollar or euro. Therefore, if one side unilaterally states ‘no’, they’re going to have to pay in that’, then there is no contract,” stated Tim Harcourt of the Institute for Public Policy and Governance of the University of Technology Sydney.

Susan Sakmar is a University Houston visiting law professor who is also a consultant for liquefied gas businesses.

She suggested Wednesday’s increase in the Russian rouble-dollar currency exchange and the jump in European wholesale gasoline prices could be the key. This would require a lot of time. Putin has the ability to keep prices high in the interim. It’s in Putin’s best interest.

IS THERE A MECHANISM?

Alexander Nikolov from Bulgarian Energy Ministry said transactions could be done in roubles by a Sofia-based financial counterpart.

“We expect many actions that are unusual, but we have discussed this scenario so the risk of losing the current contract payments is not a concern,” he stated.

Claudio Galimberti is a Rystad senior vice president. He said that Russia could devise new contracts that required payment in rubles, however it would be necessary for governments to either hold the roubles at their central banks, or to buy them on open markets.

What are the long-term effects?

Russia, China, Iran, and other countries have taken aim at Washington’s dominance over global commerce and its frequent use of financial sanctions.

Russia’s move will put pressure on its ability to service its foreign debts and reduce imports. This would further squeeze its economy. Liam Peach is a Capital Economics Emerging Europe economist.

A successful US switch may result in a decrease in the role of the dollar in international trade, as trade increases in the rouble and yuan, or any other currencies. It would also have long-term consequences for U.S. financing and borrowing costs.

($1 = 0.9087 euros)