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The EU-Russia Energy Standoff is Further Complicated by Russia's Demand for Rouble Payments for Gas

Charlie Brooks

Jun 22, 2022 11:42

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Russia's demand that so-called "unfriendly nations" pay for natural gas in ruble would likely only provide short-term support for the sanctions-affected Russian ruble by using the country's energy clout over Europe.


Putin has requested that the government tell the state-controlled gas monopoly Gazprom to alter current contracts so that "unfriendly nations," including EU member states, begin paying in roubles for natural gas imports. The Bank of Russia (CBR) will build a payment processing method.


The short-term support for the rouble will come at the expense of Russia's ability to persuade the European Union to lessen its dependence on Russian energy imports as quickly as possible, a process that will take time due to infrastructural constraints in the natural gas industry in particular.


The outlook for Russia's financial benefit is modest.


Since sanctions froze about half of Russia's international assets, Russia has mandated that exporters sell 80% of foreign currency earnings to bolster the rouble. By requiring purchasers of Russian natural gas to convert foreign money for roubles, this rate of rouble conversion for gas exports grows to one hundred percent.


Nonetheless, Gazprom's foreign-currency sales threshold might have been extended to 100 percent anyway. The attempt to demand payments in roubles is a strategic response against the EU based on Russia's clout as the most significant supplier of natural gas to Europe, with Russian shipments accounting for more than 75 percent of the total gas demand of several nations in central and eastern Europe.


The Russian government is also attempting to increase the CBR's capacity to manage the currency by requiring natural gas trades to be conducted in domestic currency and major foreign-currency flows to be routed through the CBR, a sign that financial sanctions have diminished the central bank's ability to steer the Russian economy.


Rouble payments for gas might strengthen the CBR's ability to operate under the existing sanctions system, given the CBR's present inability to trade with European Union central banks.


The EU confronts increased energy trade complexities and a danger of gas supply interruptions.


If EU nations claim that the conversion would constitute a violation of contract, Russia's most recent demand might lead to renegotiation of gas contracts and changes in the term of gas contracts, in addition to legal challenges. Approximately 58 percent of Gazprom's gas sales to Europe and other regions are paid in euros, while 39 percent are handled in dollars. Any legal impasse heightens the possibility of interruptions in Russian exports to Europe, which might have a negative impact on some nations in the near term.


Long-term, Russia's new policies are expected to hasten the European Union's diversification away from Russian oil and gas. Before 2030, the European Commission has devised a strategy to make Europe independent on Russian fossil fuels. This proposal might reduce the need for Russian gas by two-thirds by the end of the year. In the near future, as a result of Russia's action, the EU might decide to buy less Russian gas.


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