Why is Russia demanding its gas be paid for in roubles?

Last week, President Vladimir Putin demanded payment for Russian gas sold to “unfriendly” countries to be in roubles and not euros, a move aimed at sidestepping Western sanctions imposed on Moscow over its attack on Ukraine.

The Russian central bank, the Kremlin and Gazprom – which accounts for 40 percent of European gas imports – are expected to present their proposals for rouble payments to Putin today.

“We are not going to supply gas for free, this is clear,” Kremlin spokesman Dmitry Peskov said in a press conference on Tuesday. “In our situation, this is hardly possible and appropriate to engage in charity [with European customers].”

Referring to the new rouble payment mechanism, Peskov said “all modalities are being developed so that this system is simple, understandable and feasible for respected European and international buyers”.

“Putin sought to send a clear message – if you want our gas, then buy our currency,” says Mikhail Sebastian, a London-based political risk consultant. “US dollars and euros are less useful to Moscow as sanctions tighten,” he tells TRT World.

However, in a call to German Chancellor Olaf Scholz yesterday, Putin appeared to backtrack on his rouble demand, lending weight to what observers have described as a “game of chicken” between Moscow and the EU.

But Russia’s demand had already enhanced security supply concerns, with companies and EU nations scrambling to plan for potential consequences.

Germany, which is particularly reliant on Russian natural gas, yesterday declared an “early emergency” for gas supplies and is moving closer to gas rationing. German economy minister Robert Habeck called on consumers and businesses to reduce consumption, saying that “every kilowatt-hour counts.”

Who will blink first?

Leaders from some EU member states said last week that Russia’s demand could breach supply contracts. It is unclear whether Russia plans to tear up existing contracts that set the price in euros or dollars.

According to Gazprom, 58 percent of its natural gas sales to Europe and other countries were settled in euros, while US dollars accounted for around 39 percent of gross sales. British pounds rounded out the remaining 3 percent.

Andrei Belyi, the founder of Estonian energy consultancy Balesene OU, said that Russia’s bid can engender a contractual dispute because the demand covers existing agreements.

“I guess Russia will counterargue saying that sanctions are a force majeure. Let’s see if arbitrators would agree with that, I would doubt it,” Belyi tells TRT World. “Ironically, the EU also wants to breach the contracts by declaring a reduction of Russian supplies by the end of this year.”

“Contracts have a take or pay clause, so it won’t be easy in legal terms. It looks like a game of ‘who will breach the contract first’”.

And Moscow appears willing to extend this demand to include exports of other key commodities.

Yesterday top Russian lawmaker, Vyacheslav Volodin, said that rouble payments should be extended to oil, grains, metals, fertiliser, coal and timber on global markets where it is profitable to do so.

An example where Moscow exercises a near-monopoly in the global manufacturing process is nickel, the metal which car companies use to make catalytic converters. Around 40 percent of the world’s nickel supply comes from Russia, and 90 percent of Russia’s output goes to the automotive industry.

“If carmakers have to choose between buying nickel in roubles or looking elsewhere for supplies, then lawmakers wanting to isolate Russia will force them to choose the latter option,” Sebastian argues, adding that car factory closures and rationing could subsequently follow.

‘Political motivations’

Sebastian believes Russia’s switch to rouble payments appears to be “politically motivated”, although it could also help prop up the Russian currency, which has slumped to record lows following the imposition of sanctions.

Desperate for roubles, is Moscow willing to play hardball and cut off gas supplies to Europe out of short-term political expediency that might play well at home, but jeopardise its long-term economic interests?

Belyi says it’s hard to put a finger on the calculus of the Kremlin’s gambit. He notes that over the last week, the issue of gas payments got a lot of mainstream attention on Russian TV. “Moscow has been preparing public opinion for a serious gas war with Europe,” he said.

However, yesterday the Kremlin seemed to soften its stance, saying that changes are unlikely to be made by the March 31 deadline and that it would be a lengthy process.

“From purely a business perspective, some Gazprom experts said that cutting off supplies is not advantageous. Also, it will be costly – with up to $400 per day of operational costs,” Belyi says.

“However, as we have already seen, political logic often prevails over the economic one.”