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Europe Gas Supply: Russia Insist On Gas For Rubles Payment Deal

Russia’s insistence that its “unfriendly” nations pay in rubles for Russian natural gas risks disrupting European supplies as soon as this week as the deadline set by Putin for moving to ruble payments is drawing closer.

Europe, which depends on Russian natural gas for more than one-third of its demand—with some countries, including the biggest economy Germany, depending on Russia for half of its consumption—has rejected the gas-for-rubles idea, saying it would be a breach of contracts to switch the currency in payments.  

Russia, for its part, says it demands only rubles for its gas and will not ship gas for free. 

Europe’s gas prices continued rising on Tuesday, two days ahead of the March 31 deadline Vladimir Putin has set for the government, Gazprom, and the central bank of Russia to make the arrangements for payments in rubles from the so-called “hostile” countries.

The Russian President—whose list of “hostile” states includes the United States, all EU member states, Switzerland, Canada, Norway, South Korea, Japan, and many others—ordered last week the central bank to develop a system for payments in rubles within a week.

“The Russian government together with the Bank of Russia and Gazprom PJSC should implement a set of measures on changing the currency of payment for natural gas supplies to the countries of the European Union and other states that imposed restrictive measures against the citizens of the Russian Federation and Russian legal entities, to the Russian ruble,” Putin said this week per a Kremlin document cited by Russian news agency TASS.

Putin has also ordered the Russian government to approve a move on changing Gazprom’s current contracts to reflect the change in the currency to the Russian ruble. This should be done “with supply volumes, prices, and price formation principles stipulated by contracts maintained” by March 31.

Commenting on Putin’s rubles-for-Russian-gas plan, the EU and leaders of the biggest economies in Europe said that changing the currency of the payments would be a breach of contract and that Europe would not be blackmailed into buying gas with rubles.

 “There are fixed contracts everywhere, with the currency in which the deliveries are to be paid being part of these contracts… in most cases, it says euros or dollars,” German Chancellor Olaf Scholz said last week. Italy’s Prime Minister Mario Draghi noted that “This is basically a breach of contract, this is important to understand.”

European Commission President Ursula von der Leyen said that “We will not allow our sanctions to be circumvented. The time when energy could be used to blackmail us is over.”

From the Kremlin, spokesperson Dmitry Peskov said on Tuesday, as carried by Reuters:

“No one will supply gas for free, it is simply impossible, and you can pay for it only in rubles.”  

As a result of the Russia-Europe standoff regarding the ruble payments, Europe’s benchmark natural gas prices rose on Tuesday, as did the British day-ahead and front-month prices.

“It will then be interesting to see whether Russia follows through on its threat. So far, both sides have appeared keen to avoid being the first to halt the flow of gas,” analysts at Commerzbank said on Tuesday, as quoted by Reuters.

Europe and the United States struck a deal last week for increased LNG imports into the European market. Yet, supply will not be enough in the short term to fully replace the Russian gas.

“The extra 50 bcm / a year offered by the US would only cover about a third of the 155 bcm / year of imports from Russia that EU leaders want to replace. But in the context of a larger European strategy to find alternative supplies of gas, both pipeline and LNG, and to curb demand, US exports could make a significant contribution,” Ed Crooks, Vice-Chair, Americas, at Wood Mackenzie, wrote earlier this week.

Germany, for example, will need three years to become independent of Russian gas, Leonhard Birnbaum, the CEO at utility E.ON, said earlier this week. 

Russia claims it could redirect its energy supply to Asia if Europe refuses to buy. But it remains to be seen whether Moscow would follow up with the gas-for-ruble threat, considering that it cannot redirect anywhere the pipeline gas supply going to Europe, which brings it substantial revenues.

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