Vladimir Putin is insisting that 48 “hostile nations“—the US, the UK, and the EU’s members among them—pay for Russian gas in rubles. The demand is more than provocation; it’s a strategy to force the West to dilute the effects of its own sanctions on Moscow.
In 2021, these hostile nations paid roughly $69 billion for gas from Gasprom, the Russian state-owned company. To make a similar scale of payments this year, countries will have to procure around 6-7 trillion rubles. In a meeting with officials on Mar. 23, Putin told the Central Bank of Russia to figure out how these ruble payments can be made.
In so doing, Putin dug into the other front of the Ukraine conflict—the financial front with the West. But his move also fits into a larger mosaic of efforts by several countries to challenge the hegemony of major Western currencies like the dollar and the euro—the kind of hegemony that is making the pain of sanctions on Russia possible in the first place.
How will the West acquire rubles to pay for Russian gas?
As yet, most of these “hostile nations” buying Russian energy have few options but to continue their purchases. To make payments in rubles, these gas purchasers will have to buy the currency first, either from the Central Bank of Russia or on the foreign exchange market. If the demand for rubles steadily increases as a result, the drastic fall in the currency’s value will halt and even reverse. After Putin made his announcement, the ruble gained 7% against the dollar.
Dealing directly with the sanctioned Central Bank of Russia will be a fraught process, even though countries like the US have, for now, left energy transactions out of the list of sanctions. And buying rubles on the market will involve finding non-sanctioned Russian banks with which to conduct these transactions. If Western governments pursue these avenues, the Central Bank of Russia doesn’t have to spend its own dollars and euro reserves to prop up the ruble—which is just as well, since more than half of Russia’s foreign reserves have been frozen by sanctions.
A further complication may arise if Russia’s central bank, fearing that its new acquisitions of dollars or euros may be frozen as well, refused to accept these currencies. The US and the EU may then have to run these payments through a third, intermediary currency such as the Chinese yuan.
Another way for Western nations to acquire rubles would be to sell goods and services to Russia in return for ruble payments. But at the moment, though, sanctions make the financial transactions behind most such sales unlawful.
Russia will have to rewrite its gas contracts
Russia’s gas contracts with most countries are denominated either in dollars or euros. For Putin to now demand payments in rubles would be a breach of contract, Robert Habeck, Germany’s economy minister, told the German news agency dpa. To change the currency of payment would require a renegotiation that could work against Russia’s favor, Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects, told Bloomberg. “It reopens the contracts, and buyers could ask for shorter-terms for instance.”