In a statement Russian President Vladimir Putin said, unfriendly countries will have to pay for gas in rubles. Following the announcement European gas prices soared since the move will exacerbate the region’s energy crunch.
Western nations led by the United States and the Europe have imposed tough economic sanctions on Russia. But with Europe heavily dependent on Russian gas for heating and power generation, the EU is split on whether to sanction Russia’s energy sector.
It is not clear whether Russia has the power to change existing contracts which are based in euros.
Following the announcement, the Rubles briefly leapt to a three-week high past 95 against the dollar but pared gains and closed at 97.7 against the dollar, down by more than 22% since February 24.
Russian gas accounts for around 40% of Europe’s total consumption. EU gas imports from Russia this year have fluctuated between 200 million to 800 million euros ($880 million) a day.
“Russia will continue, of course, to supply natural gas in accordance with volumes and prices … fixed in previously concluded contracts,” said Putin at a televised meeting with government ministers. “The changes will only affect the currency of payment, which will be changed to Russian roubles”.
Germany’s Economy Minister Robert Habeck termed the demand a breach of contract and with other buyers of Russian gas also mirroring the point.
“This would constitute a breach to payment rules included in the current contracts,” said a senior Polish government source while adding Poland has no intention of signing new contracts with Gazprom after their existing deal expires at the end of this year.
Since major banks are reluctant to trade in Russian assets, it complicates the situations.
According to a spokesperson for Eneco, a Dutch gas supplier which buys 15% of its gas from Russia’s Gazprom’s German subsidiary Wingas GmbH, the company had a long-term contract denominated in euros.
“I can’t imagine we will agree to change the terms of that.”
According to Gazprom, 58% of its sales of natural gas to Europe and other countries as of January 27 were settled in euros.
U.S. dollars accounted for about 39% of gross sales and sterling around 3%. Commodities traded worldwide are largely transacted in the U.S. dollar or the euro, which make up roughly 80% of worldwide currency reserves.
“There is no danger for the (gas) supply, we have checked, there is a financial counterparty in Bulgaria that can realize the transaction also in roubles,” said Russian Energy Minister Alexander Nikolov. “We expect all kinds of actions on the verge of the unusual but this scenario has been discussed, so there is no risk for the payments under the existing contract.”
Several firms, including oil and gas majors Shell, Eni, BP, RWE and Uniper declined to comment.
“It is unclear how easy it would be for European clients to switch their payments to roubles given the scale of these purchases,” said Leon Izbicki, an associate at consultancy Energy Aspects. He went on to add, Russia’s central bank could provide additional liquidity to foreign exchange markets that would enable European clients and banks to source needed roubles.
Putin has given the central bank and the government 1 week to come up with a Rubles denominated LNG gas pricing strategy, which would be reflected in Gazprom’s contracts.
Following the announcement, eastbound gas flows via the Yamal-Europe pipeline from Germany to Poland declined sharply, according to data from the Gascade pipeline operator.
“The measures taken by Russia may also be interpreted as provocative and may increase the possibility that Western nations tighten sanctions on Russian energy,” said Liam Peach, emerging Europe economist at Capital Economics.
“In their contracts it’s usually specified in what currency it has to be paid, so it’s not something you can change just like that,” opined Dutch Prime Minister Mark Rutte saying more time was needed to clarify Russia’s demand.
($1 = 0.9097 euro)
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