Pay for petrol in rubles? There are two reasons for Vladimir Putin’s move. Or rather, two possible interpretations. First, the decision serves to strengthen and revalue Moscow’s currency, with the West footing the bill. And exploiting a loophole in the sanctions system created by the US and Europe. Secondly, in this way the tsar can also create demand for the Russian currency on the foreign market. Because Gazprom’s customers have to convert their foreign currency. By feeding the liquidity of the exchange rate on the international markets. And “help” the Central Bank and Russian credit institutions. In doing so, however, Putin also risks preparing for a new escalation of the war: the hypothesis is looming that Russia or Europe will suddenly close the gas exchange.
This is how gas contracts work
With order. Putin’s move to pay for Russian gas in rubles is primarily aimed at Gazprom. Putin has ordered the state giant to review contracts with “enemy countries” and from now on only accept rubles as payment. And to show that this is not an easy path, the government and the monopolist were given a week to adapt. Because the contract change is intended to strengthen the Russian currency, which has collapsed in the meantime after the invasion of Ukraine and the sanctions of the European Union and the USA. In fact, yesterday after the announcement, the exchange rate between the euro and the ruble and the dollar immediately fell (from Moscow’s point of view). And the price of gas also jumped 34%.
A circumstance that immediately registered the reaction of the City Council of Palazzo Chigi Francesco Giavazzi: “Being paid in rubles would be a way to circumvent the sanctions, so I think we will continue to pay in euros.” But why is the change decisive in the system of sanctions? In order to understand this, it is necessary to look at the working mechanism of gas contracts. Currently, as Francesco Lenzi explains in Fatto Quotidiano today, exporters report the amount received in foreign currency to a Russian bank to pay for shipments. Within three days they have to convert 80% of it into rubles, and then sell the currency on the market. Importers buy it by debiting their account in rubles. And finally, they use the currency to buy the necessary goods abroad (if possible).
The currency of the transactions
This mechanism also works when paying interest on government debt. A few days ago, the Russian central bank redeemed a coupon, although all dollar accounts abroad were blocked because of the sanctions. How has he fared? By purchasing the necessary currency in the domestic market. But it can’t last forever unless it’s fed continuously. Forcing “enemy countries” to pay for gas in rubles also creates demand for foreign exchange on foreign markets. Because if the customer has to pay for the fuel in rubles, he has to get them first. And for this it needs to turn to Russian banks and institutions. This can then help to find the foreign currency needed to service the debt. Putin’s idea is similar to what Iran was asking a few years ago with its oil allegedly being paid for in euros instead of dollars, or the recent Chinese request for the Saudis to pay for oil in yuan.
Davide Tabarelli, president of Nomisma Energia and an expert on the sector, told Ansa news agency that Putin’s initiative has “the characteristics of Sovietera measures or autocracies with delusions of omnipotence”. A country like Italy should first find the rubles to pay for its 29 billion cubic meters of natural gas from Moscow: “We should export to Russia at the same value or pay in gold: I see that as difficult,” says Tabarelli. But there is a but. And that’s what Stefano Agnoli points out today in the Corriere della Sera. The payment currency is also included in the gas contracts. Which is set up first exactly to avoid blackmail like this. The currency of transactions cannot be determined or changed unilaterally by either party. And then the seller or Gazprom must ask the buyer for permission.
The danger for Europe
This applies to Eni, Total and all those who currently buy Russian gas by paying for it in currencies other than the ruble. Perhaps Putin is considering applying the rule only to future contracts. In this case there would be no legal problems. In fact, the move could represent an own goal as prices could also be renegotiated at this point. If this is not the case, however, there is a risk of conflict: the importers can terminate the contracts, but then they would no longer have the gas. Gazprom could turn off the faucets to the West, but it would not collect a euro or a dollar. A situation that typically mirrors that of the prisoner’s dilemma. And with dangerous effects on Russia’s financial stability. And on the fuel supply in Europe. Yes, because, as La Stampa recalls today, before the attack on Ukraine, 58% of Gazprom’s sales were settled in euros, 39% in dollars and 3% in pounds. So the problem is mainly European. And therefore Italian.
Also read: