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What happens when Russia demands to pay for gas in rubles?

Russian President Vladimir Putin has announced that Russia will soon require countries “unfriendly” to Russia to pay for their gas purchases in rubles.

What happens when Russia demands to pay for gas in rubles?  - first

Russia will ask countries “unfriendly” to Russia to pay for gas in rubles (Image: Reuters).

This requirement poses new barriers for most European buyers when purchasing Russian gas. Europe imports about 40% of its gas from Russia, with bills ranging from 200 million euros to 800 million euros per day, paid in euros and dollars.

Putin ordered the central bank and government institutions within a week to figure out how to convert payments into the Russian currency. State gas company Gazprom was also ordered to amend the contract to accommodate the move.

What is behind this change?

The European Union is considering a Russian oil embargo after the US, UK and Canada imposed sanctions on Russia’s central bank and banned energy imports from Russia.

If Russia accepts payments for gas contracts in rubles, it could avoid some sanctions finance there. Nearly all Russian gas purchases are denominated in euros or dollars, according to consulting firm Rystad Energy.

Since the outbreak of hostilities, the ruble has fallen about 85% against the dollar. After the above statement, the ruble recovered against the dollar and spiked again after a short time.

Why is there a problem?

Europe relies heavily on Russian gas for heating and electricity production. As a result, members of the European Union are divided over whether they can embargo Russia’s energy sector.

In response to Putin’s shocking statement, the price of TTF gas futures delivery across Europe quickly skyrocketed to $44 per million British thermal units.

Data from pipeline operator Gascade shows that the eastward flow of gas through the Yamal-Europe pipeline from Germany to Poland has decreased sharply.

How is the conversion?

Legal experts say that Russia does not have the right to unilaterally change the terms of the signed contract.

“The contract is signed between two parties and it is usually paid in dollars or euros. So if one party unilaterally says ‘no, you will have to pay this way’, the contract is void,” he said. Tim Harcourt, chief economist at the Institute of Public Policy and Governance at the University of Technology Sydney.

Susan Sakmar, a visiting professor of law at the University of Houston and a consultant business “It’s not clear how serious the requirement is,” said liquefied natural gas.

According to her, the increase in the exchange rate between the ruble and the dollar yesterday (March 23) along with the jump in gas prices across Europe could be the key points. “It’s going to take a long time for that request to happen. But that means Mr. Putin will keep prices up and that’s in his favor.”

Is there a mechanism for this problem?

Bulgarian Energy Minister Alexander Nikolov said a financial partner in Sofia can handle transactions in rubles.

“We are looking forward to any impending irregularities but this scenario has been discussed so there is no risk to existing contractual payments,” he said.

Claudio Galimberti, Senior Vice President of Rystad, thinks that Russia can create new contracts that require payments in rubles, but will require governments to keep rubles in their central banks or buy them on the open market.

What is the effect in the long run?

Russia, China, Iran and others have worked to reduce the dollar’s dominance in global trade and the frequency of financial sanctions imposed by Washington.

According to Liam Peach, for Russia, this move will put pressure on the ability to pay foreign debts and cut imports, further freezing the economy.

As for the US, a successful transition could contribute to a reduction in the role of the US dollar in global trade as the role of the ruble, renminbi, renminbi and other currencies increases. in commercial activities. This will have lasting effects on America’s borrowing capacity and financing costs.

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