LONDON: Russia will seek payment in roubles for gas sold to “unfriendly” countries, President Vladimir Putin said yesterday, and European gas prices soared on concerns the move would exacerbate the region’s energy crunch.
European nations and the United States have imposed heavy sanctions on Russia since Moscow sent troops into Ukraine on Feb 24. But Europe depends heavily on Russian gas for heating and power generation, and the European Union is split on whether to sanction Russia's energy sector.
Putin's message was clear: if you want our gas, buy our currency. It remained unclear whether Russia has the power to unilaterally change existing contracts agreed upon in euros.
The rouble closed yesterday at its strongest this month against the dollar both in Moscow and offshore exchanges. It gained 6% to close at 97.7375 per dollar in Moscow after touching 94.9875, its strongest since March 2. It closed up 8.8% at 96.5 on the EBS platform. Both closing prices were the strongest since February.
Against the euro, the rouble rose 6% to 108.01 in Moscow .
European gas prices soared after Putin's shock announcement, on concerns the move would exacerbate the region's energy crunch.
“It seems to be an effort by the Russian authorities to apply pressure on Western countries by forcing foreign buyers of Russian gas to use roubles, with the added benefit of supporting the value of the currency,” said Liam Peach, Emerging Europe economist at Capital Economics in a client note.
Some European wholesale gas prices up to 30% higher yesterday. British and Dutch wholesale gas prices jumped.
Russian gas accounts for some 40% of Europe's total consumption. EU gas imports from Russia this year have fluctuated between €200 million and €800 million (RM930 million and RM3.7 billion) a day.
“Russia will continue, of course, to supply natural gas in accordance with volumes and prices ... fixed in previously concluded contracts,” Putin said at a televised meeting with government ministers. “The changes will only affect the currency of payment, which will be changed to Russian roubles.”
German Economy Minister Robert Habeck called Putin’s demand a breach of contract and other buyers of Russian gas echoed the point.
“This would constitute a breach to payment rules included in the current contracts,” said a senior Polish government source, adding Poland has no intention of signing new contracts with Gazprom after their existing deal expires at the end of this year.
“There is no danger for the (gas) supply, we have checked, there is a financial counterparty in Bulgaria that can realise the transaction also in roubles,” Energy Minister Alexander Nikolov told reporters in Sofia. “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.”
Major banks are reluctant to trade in Russian assets, further complicating Putin's demand.
A spokesperson for Dutch gas supplier Eneco, which buys 15% of its gas from Russian gas giant Gazprom's German subsidiary Wingas GmbH, said it 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 Jan 27 were settled in euros. US dollars accounted for about 39% of gross sales and sterling around 3%. Commodities traded worldwide are largely transacted in the US dollar or the euro, which make up roughly 80% of worldwide currency reserves and carry less political risk than other currencies.
Several firms, including oil and gas majors Eni, Shell and BP, RWE and Uniper – Germany’s biggest importer of Russian gas – declined to comment.
“At face value this appears to be an attempt to prop up the rouble by compelling gas buyers to buy the previously free-falling currency in order to pay,” said Vinicius Romano, senior analyst at consultancy Rystad Energy.
Moscow calls its actions in Ukraine a “special military operation”. Ukraine and Western allies call this a baseless pretext.
Putin said the government and central bank had one week to come up with a solution on moving operations into the Russian currency and that Gazprom would be ordered to make the corresponding changes to contracts.
In gas markets yesterday, eastbound gas flows via the Yamal-Europe pipeline from Germany to Poland declined sharply, data from the Gascade pipeline operator showed.
The European Commission has said it plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies “well before 2030”.
But unlike the US and Britain, EU states have not sanctioned Russia's energy sector. The Commission, the 27-country EU's executive, did not respond to a request for comment.
Habeck said he would discuss with European partners a possible answer to Moscow's announcement about the gas payments. Dutch Prime Minister Mark Rutte said more time was needed to clarify Russia's demand.
“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,” Rutte said during a debate with parliament.
Russia has drawn up a list of “unfriendly” countries corresponding to those that have imposed sanctions. Deals with companies and individuals from those countries must be approved by a government commission.
The list of countries includes the US, EU member states, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine. Some, including the US and Norway, do not purchase Russian gas.
The US is consulting with allies on the issue and each country will make its own decision, a White House official told Reuters. The US has banned imports of Russian energy, so Russia's demand does not apply, the official added. – Reuters
