A worker passes on Tuesday, April 6th.
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Russia appears to have backed down demands that European companies pay for gas supplies in rubles from Thursday in a bid to temporarily mitigate the risk of supply disruptions.
It comes after Russia’s President Vladimir Putin has repeatedly called for so-called “unfriendly” countries to pay for gas in rubles rather than euros or dollars, targeting those behind the heavy economic sanctions aimed at blaming Russia for its unprovoked Isolate attack in Ukraine.
Putin had instructed the state-controlled gas giant Gazprom, the central bank and the government to outline proposals on how to implement the policy by Thursday. The currency conversion for gas supplies had been opposed by major G-7 economies.
In a conversation with Chancellor Olaf Scholz on Wednesday, however, Putin said European companies could continue to pay for gas supplies in euros or dollars.
The money will be deposited at the Gazprom Bank and transferred to Russia in rubles, the German broadcaster Deutsche Well reported.
According to the report, Scholz did not agree to this procedure in the talks, but asked for written information in order to be able to better understand the proposal.
Chancellor Olaf Scholz (SPD, r) and Russian President Vladimir Putin look up at a joint press conference after several hours of individual talks. Scholz met the Russian President to discuss the situation on the Ukrainian-Russian border.
Kay Nietfeld | Image Alliance | Getty Images
The Kremlin said the currency switch was necessary because the Bank of Russia’s foreign exchange reserves were frozen by EU member states. It was agreed that experts from Russia and Germany would continue to negotiate the matter, the Russian statement said.
Separately, Kremlin spokesman Dmitry Peskov confirmed on Wednesday that Russia will not immediately seek gas payments in rubles, saying the switch is likely to be a “gradual process”.
Germany has signaled alongside the G-7 that gas supply contracts cannot be changed unilaterally, and European buyers of Russian gas say the Kremlin does not have the authority to re-sign long-term contracts.
Most countries currently pay for Russian gas in euros or dollars.
What now?
The gas-for-ruble threat had raised the prospect of a supply disruption for European countries, with Germany and Austria taking precautionary gas rationing steps to avoid a potential supply halt during the dispute.
However, analysts at political risk consultancy Eurasia Group believe it is unlikely that Gazprom will breach its existing contracts by refusing to supply gas in the short term to customers who refuse to pay in rubles.
“More likely, Gazprom will instead attempt to renegotiate existing contracts — a time-consuming process at best — as part of regular reviews that allow for most long-term contracts. In the longer term, Gazprom is likely to insist that new contracts be signed, and contracts will reflect the new policy as they come up for renewal,” analysts at Eurasia Group said in a research note.
“There is a risk that Russia will act more aggressively, which would lead to a greater likelihood of gas supply disruption in the short term,” they added. “More likely is a lengthy negotiation process.”
European countries’ dependence on Russian energy exports has come under the spotlight since the Kremlin began invading Ukraine on February 24, especially as energy-importing countries continue to pour oil and gas revenues into Putin’s war chest on a daily basis.
In fact, between 2011 and 2020, revenues from Russian oil and gas accounted for about 43% of the Kremlin’s federal budget, underscoring the importance of fossil fuels to the Russian government.
The European Union gets about 40% of its gas through Russian pipelines, several of which pass through Ukraine.
Risk of “lengthy arbitration”.
Anne-Sophie Corbeau, a research scholar at Columbia University’s Center on Global Energy Policy, told CNBC that failure to resolve the ruble payments standoff could result in a lengthy arbitration process.
Companies have long-term contracts with Gazprom. If there is a clause in those contracts that allows companies to switch currencies to pay in rubles, that could be a possible outcome, Corbeau said. However, if there is no clause, the terms of the contract will apply, most likely in either euros or dollars – and this cannot be changed.
In that latter scenario, Corbeau said, Gazprom “would have to ask for a formal renegotiation of the terms of the contract, but I wouldn’t expect the buyers to agree and you’d end up with a lengthy arbitration.”
Front-month gas prices on the Dutch TTF hub, a European benchmark for natural gas trading, fell more than 7% to 111 euros ($123.9) per megawatt-hour on Thursday, according to New York’s Intercontinental Exchange.
The TTF Month-Ahead Index has been trading at elevated levels for the past few weeks, in part due to ongoing geopolitical concerns.
“Should renegotiations begin at Russia’s urging, it is likely that value will be offered to importers in their deals with Russia in exchange for switching to ruble payments elsewhere,” said Vinicius Romano, senior analyst at Rystad Energy, in a research note .
“The challenge in putting this into practice is that each buyer may have different terms, while some may not even be willing to change contract terms. This suggests that the negotiations could take some time, which means that there is still no abrupt deadline for the payment to switch to rubles.”