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The Russian demand for Rouble payments for gas complicates the EU-Russia energy standoff

Aria Thomas

Mar 31, 2022 10:16

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Russian President Vladimir Putin has directed the government to advise state-owned gas monopolist Gazprom to change existing contracts so that "unfriendly countries," including EU member states, begin paying for Russian natural gas imports in roubles. The Bank of Russia (CBR) will develop a mechanism for processing such payments.


Short-term rouble assistance will come at the price of Russia pressing the European Union to reduce its reliance on Russian energy imports as soon as possible – albeit this will take time given the infrastructure restrictions in the natural gas sector in particular.


Russia seems to have a little financial edge.


Since sanctions froze about half of Russia's abroad reserves, Russia has already compelled exporters to sell 80 percent of their currency revenues in order to boost the rouble. In the case of gas exports, forcing buyers of Russian natural gas to exchange hard money for roubles elevates the rate of rouble conversion to 100 percent.


However, Gazprom's foreign-currency selling obligation may have been increased to 100% in any event. The transition to rouble demand payments is a strategic retaliation against the EU based on Russia's dominance as Europe's biggest supplier of natural gas, with Russian supplies accounting for more than 75 percent of aggregate gas demand in some countries in central and eastern Europe.


The Russian administration is also attempting to strengthen the CBR's capacity to manage the currency by requiring natural gas trades to be conducted in domestic currency and directing major foreign-currency flows through the CBR, a sign of how financial sanctions have harmed the central bank's role in steering the Russian economy.


Rouble payments for gas may increase the CBR's capacity to function under the existing sanctions regime, given the CBR's current limits on its ability to deal with European Union central banks.


The EU is confronting growing energy trade complexity as well as the possibility of gas supply disruption.

Russia's new demand may result in gas contract renegotiation and changes in contract terms, as well as legal challenges if EU countries think the conversion is a breach of contract. Around 58 percent of Gazprom's gas sales to Europe and other countries are paid in euros, with the remaining 39 percent paid in dollars. Any legal stalemate increases the risk of Russian exports to Europe being stopped, which might be unpleasant for certain countries in the short term.


Russia's recent limitations are anticipated to speed the EU's efforts to diversify away from Russian oil and gas in the long run. The European Commission has proposed a strategy to wean Europe from Russian fossil resources by 2030. This approach might cut demand for Russian gas by two-thirds by the end of the year. In the medium term, the Russian strategy may lead to the EU defining lower purchase volumes of Russian gas.

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