Since Moscow deployed troops to Ukraine on February 24, European nations and the United States have imposed heavy sanctions on Russia. But Europe depends heavily on Russian gas for heat and power, and the European Union is divided on whether to sanction Russia’s energy sector.
Putin’s message was clear: if you want our gas, buy our currency. It remained unclear whether Russia has the power to unilaterally change existing contracts that were concluded in euros.
The ruble briefly jumped to a three-week high above 95 against the dollar after the shock announcement. It trimmed gains but remained well below 100, closing at 97.7 against the dollar, down more than 22% since February 24th.
Some European wholesale gas prices were up as much as 30% higher on Wednesday. Wholesale prices for UK and Dutch gas skyrocketed.
Russian gas accounts for about 40% of total consumption in Europe. EU gas imports from Russia have fluctuated between 200 and 800 million euros ($880 million) a day this year.
“Russia will, of course, continue to supply natural gas according to the quantities and prices stipulated in previously concluded contracts,” Putin told a televised meeting with government ministers.
“The changes concern only the payment currency, which will be changed to Russian rubles,” he said.
Federal Economics Minister Robert Habeck described Putin’s demand as a breach of contract, and other buyers of Russian gas agreed.
“This would be in violation of the payment rules contained in the current contracts,” a senior Polish government source said, adding that Poland has no intention of signing new contracts with Gazprom after their existing contract expires at the end of this year.
Big banks are reluctant to trade Russian assets, further complicating Putin’s demand.
A spokesman for Dutch gas supplier Eneco, which buys 15% of its gas from Russian gas giant Gazprom’s German subsidiary Wingas GmbH, said it had a long-term contract in euros.
“I can’t imagine that we will agree to change the terms of this.”
According to Gazprom, as of January 27, 58% of its natural gas sales to Europe and other countries were in euros. US dollars accounted for approximately 39% of gross sales and sterling for approximately 3%. Globally traded commodities are mostly traded in US dollars or euros, which account for around 80% of the world’s foreign exchange reserves.
“There is no risk for the (gas) supply, we checked, there is a financial counterparty in Bulgaria that can also settle the transaction in rubles,” Energy Minister Alexander Nikolov told reporters in Sofia. “We anticipate all possible action on the verge of the unusual, but this scenario has been discussed, therefore there is no risk to the payments under the existing contract.”
Several companies, including oil and gas groups Eni, Shell and BP, RWE and Uniper – Germany’s largest importer of Russian gas – declined to comment.
“It’s unclear how easy it would be for European customers to switch their payments to rubles given the size of these purchases,” said Leon Izbicki, an associate at consulting firm Energy Aspects. However, he said the Russian central bank could provide additional liquidity to the foreign exchange markets, which would allow European customers and banks to raise the rubles they need.
Moscow calls its actions in Ukraine a “special military operation”. Ukraine and Western allies call this a baseless pretext.
One week deadline
Putin said the government and central bank have a week to find a solution to shifting deals to the Russian currency and that Gazprom will be instructed to make the relevant contract changes.
In gas markets, eastbound gas flows via the Yamal-Europe pipeline from Germany to Poland fell sharply on Wednesday, data from the Gascade pipeline operator showed.
“The actions taken by Russia can also be interpreted as provocative, increasing the likelihood that Western nations will tighten sanctions on Russian energy,” said Liam Peach, emerging Europe economist at Capital Economics.
The European Commission has announced that it will reduce the EU’s dependence on Russian gas by two-thirds this year and end its dependence on Russian supplies “well before 2030”.
But unlike the United States and Britain, EU countries have not sanctioned Russia’s energy sector. The Commission, the executive branch of the 27 EU countries, did not respond to a request for comment.
Habeck said he would talk to European partners about a possible response to Moscow’s announcement. Read the full article Dutch Prime Minister Mark Rutte said more time was needed to resolve Russia’s claim.
“Their contracts usually state the currency in which payment must be made, so you can’t just change that,” Rutte said at a parliamentary debate.
Russia has compiled a list of “unfriendly” countries that correspond to those that have imposed sanctions. Business dealings with companies and individuals from these countries must be approved by a government commission. Read the full story
Countries include United States, European Union member states, United Kingdom, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine. Some, including the United States and Norway, do not buy Russian gas.
The United States is consulting with allies on the issue and each country will make its own decision, a White House official told Reuters. The United States has already banned the import of Russian energy.