December 2, 2023


Vladimir Putin just upped the ante in the economic war between Russia and the West.

By announcing on Wednesday that so-called unfriendly countries — a list including EU countries and the United States — will have to pay for Russian gas imports in rubles, the Russian president is challenging Western efforts to punish Moscow for invading Ukraine while carving out crucial Russian energy imports from sanctions.

“I made the decision to implement within the shortest possible time the package of measures to transfer payments — we will start with that — for our natural gas supplied to the so-called ‘unfriendly’ states to Russian rubles,” Putin said.

It’s a high-stakes gamble: Either the West caves and complies with Putin’s demands, or it balks and risks seeing how far Putin will go in withholding gas supplies and potentially cutting off the cash needed by his flailing domestic economy.

“It’s a game, it’s trying to bully the West to moderate sanctions. He wants to force the West — if they want to continue with energy imports from Russia — to transact with Russian entities,” said Timothy Ash, emerging market sovereign strategist at BlueBay Asset Management. “This is an attempt to break sanctions, to weaken the resolve of the West.”

The U.S. has blocked Russian energy purchases, but it’s much tougher for the EU, which gets about 40 percent of its gas from Russia — earning Moscow $30 billion to $40 billion a year. The bloc wants to end its dependency on Russia, but it’s going to take time.

Putin instructed the government and the Bank of Russia to facilitate the purchase of rubles by gas buyers within a week.

“Unlike some colleagues, we value our business reputation as a reliable partner and supplier. The changes will affect only the payment currency, which will be changed to Russian rubles,” Putin said.

It’s unclear how Western countries will be able to access sufficient rubles to fund gas imports, or even whether they’d be willing to pay in Russian currency.

“It’s definitely a risk factor as this would create complications for European buyers of Russian gas,” said S&P Global Commodity Insights analyst James Huckstepp. “The market is concerned about this as its new territory, although the plans are relatively vague at this stage.”

The ruble jumped by about 5 percent against the dollar; it had shed around 40 percent of its value against the U.S. currency since the invasion began in late February.

“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 rubles, with the added benefit of supporting the value of the currency,” said Liam Peach, emerging Europe economist with Capital Economics.

Russia’s biggest gas customers were aghast at the new demands from the Kremlin.

Germany’s Economy and Climate Minister Robert Habeck accused Putin of breaking contracts, adding that Russia is not a stable partner and that European governments will consult on what to do. Germany relies on Russia for more than half its gas imports.

The measure is a way for Russia to try to escape sanctions, Francesco Giavazzi, an adviser to Italian Prime Minister Mario Draghi, told an audience in Milan on Wednesday, according to Bloomberg. Italy gets about a third of its gas from Russia. A spokesperson for Draghi declined to comment. 

It’s not clear what happens if gas buyers balk.

“If Putin says you need to pay rubles and Italy says we’re not going to do that, we’re going to pay as we are, then what does Putin do next?” asked Ash.

Putin said state-owned Gazprom would need to amend its existing gas supply contracts denominated in dollars or euros, but Russia’s long-term gas deals are complex and usually confidential, so any changes are likely to set off a legal battle.

“A contract is a contract, and if a contract is in euros, not in rubles, and in dollars, not in rubles, I can imagine you’re very quickly in an area where you don’t want to be,” said a senior EU diplomat.

One lawyer familiar with Gazprom contracts said changing any aspect of long-term gas supply deals was often arduous and time-consuming. 

The deals often have provisions — such as a significant market price change — that trigger renegotiations. Each side can also have a contractual right to request a revision to be used at their discretion — a joker, so to speak. 

Otherwise, standard take-or-pay gas contracts — in which buyers must take the gas, or pay as if they had taken it — require each side to fulfill their obligations unless events outside their control prevent them from doing so. The bar for what qualifies as such an event is high.

That means, without energy sanctions or other uncontrollable interruptions, Gazprom would be required to keep sending gas to Europe, and buyers would be required to keep paying what they promised.

Gazprom did not respond to requests for comment.

Jakob Hanke contributed reporting.


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