Since the invasion of Ukraine began, a possible flow to Europe has been a growing risk on both sides. Both Moscow and Brussels can use the purchase or sale of gas as a throwing weapon. However, what few or no one would have bet is that the trigger for this cut in supply would be the lack of agreement on the form of payment for gas, and even less so that the ruble was the main protagonist in that agreement. Under normal conditions, countries that export raw materials want to receive dollars or other hard currencies (much more stable and in demand globally) in exchange for their gas, oil… But this time the opposite is happening. and their demand makes economic sense.
If Russia manages to get European countries to pay in rubles for the gas they import, Moscow will ensure that the ruble exchange rate enjoys a natural support (the announcement of this demand has already given a notable boost to the Russian currency), the economy will start to receive an influx of rubles that will allow the Government’s policies to be financed without the need to create a new currency (which generates inflation and impoverishes the local currency) and, above all, will manage to circumvent or reduce the impact of some of the sanctions already imposed or of those to come.
Why is payment in rubles now an obsession for Russia? As has been seen, Russian reals outside of Russia (homes, yachts…) and financial assets denominated in dollars, euros… that need a western bank account or intermediary, but cannot do anything with assets denominated in rubles that are in Russian entities. For this reason, Moscow wants to avoid any possibility or risk in this regard, reducing the income and foreign exchange reserves of ‘hostile’ countries (dollars, euros, pounds…).
At the start of the war, Western countries froze virtually all Russian assets that came to hand. Overnight, the Bank of Russia lost about two-thirds of its assets (foreign exchange reserves in dollars, euros, pounds, yen, gold outside Russia…). Now Moscow intends to reduce this risk as much as possible (despite the costs involved, since and imports) by forcing ‘hostile’ countries to buy rubles on the market in order to acquire the gas.
Reduce risks and support the ruble
Russia and Gazprom are reportedly studying how to minimize the risks. One way would be (Gazprombank) that they be immediately converted into rubles. From Natixis they explain in a note that “this would be the least harmful Russian requirement for European importers, since companies that import Russian gas could make purchases by paying in euros or dollars to a bank account at Gazprombank, which will then convert it into rubles. This agreement should not change the scenario much for European companies.”
This payment method may be a way for Russia to circumvent banking sanctions, since it allows payments to be made directly to a bank favorable to the Russian government, without fear of the assets received being frozen.
Analysts at the French investment bank point out that “given the freezing of assets in euros and dollars, there is no incentive for Russia to use the currencies of ‘hostile’ countries and bet everything on supporting the ruble. The President of the Duma , the lower house of parliament, Vyacheslav Volodin, has declared himself in favor of extending the payment in rubles to other types of products such as fertilizers, wood, metals, oil, cereals… In other words, Russia is seeking to speed up the de-dollarization of And if Russia manages to export in rubles and not in dollars or euros, there is a risk that other countries will do the same, as is the case with China, India or Saudi Arabia, which is negotiating with China to sell part of its oil in yuan”, assure the Natixis economists.
Alexander Mihailov, Director of the Group for Economic Analysis at the University of Reading, explained in a column published on Voxeu.org that the payment in rubles would mean “a transfer of the exchange rate risk from Gazprom as an exporter to its importing counterparts in the countries ‘hostile’, which could result in higher energy costs if the ruble gains value in the medium to long term.”
This expert highlights that “the measure could boost the demand for rubles in international currency markets, in particular by forcing the West to buy rubles from oil and gas buyers under the current sanctions regime.” These expectations and what for now would be preventing Russia from entering an inflationary spiral.
On the other hand, this economist believes that thinking about the long term, the idea of requiring payments in rubles could have a significant impact on the global order of the foreign exchange market, which is currently completely controlled by the dollar: “Putin’s economic advisers they may have foreseen that such a move, if implemented, will likely pave the way for the Russian ruble to eventually gain a more important position as a reserve currency or international currency…the advantages of the dollar (and the US) such as the world’s main reserve and payment currency.
Panic in some European countries
The fate of the ruble will largely depend on the upcoming European sanctions. For now it is not very clear if European companies will end up giving in to the Kremlin’s requests. The countries most dependent on Russian gas show some nervousness. After cutting off the gas supply to Poland and Bulgaria, nerves are beginning to take over the countries most dependent on Russian gas within the European Union. From the Financial Times it was leaked that some German, Italian and other countries companies could continue to import this raw material.
This week, the Italian Prime Minister, Mario Draghi, urged the European Commission (EC) to express as soon as possible whether the payment in rubles for Russian gas is a violation of European sanctions against Moscow, for its invasion of Ukraine on 24 December. february. “It is very important that the Commission expresses a clear legal opinion on whether the payment in rubles violates the sanctions or not, it is the only way to keep us all united. If there is no line, each company or country will do what it sees fit”, Draghi maintained, in a press conference, at the end of the Council of Ministers on Monday.
Italy has been one of the countries that are under suspicion after the FT publications. However, the energy giant ENI, largely controlled by the Italian state itself, assured last week that it has not yet opened ruble accounts in the Russian bank Gazprombank, despite the information that has been published.
For now, capital controls, the expectation of payment in rubles for some raw materials and Russia’s powerful current account surplus (it exports much more than it imports) have allowed the ruble to recover all the ground lost during the early stages of the the war and hit highs not seen since February 2020 (long before the war started). Today and without trying to predict what will happen in the future, the ruble has been strengthened by the set of measures approved by Moscow and other consequences of the war. The question is for how long. If Europe puts, first, and gas, then, Russians, the demand for rubles and the current account surplus could have their days numbered.
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