What the Kremlin’s rubles-for-gas threat is about

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EU companies are scrambling to understand how to keep paying for Russian gas without falling foul of EU sanctions or getting their gas supply cut off by Moscow.

Their angst is the result of Russian President Vladimir Putin’s demand that so-called unfriendly countries pay for their gas in rubles. Moscow sent a signal it’s not bluffing last week when it stopped supplying Poland and Bulgaria, after both countries refused to comply with Russia’s request. Further gas payments are coming due in the second half of May, raising the prospect of more shut-offs unless a solution is found.

Europe is in the process of decoupling itself from Moscow’s energy exports, with an embargo on Russian oil under discussion this week by EU ambassadors, but ditching gas, largely delivered by pipelines, is likely to take longer. In the meantime, companies need a way to pay.

The European Commission has tried to explain what companies should do, but the guidance is confusing and countries want more clarity for their companies. POLITICO explains what we know of the rubles-for-gas saga so far:

What exactly does Russia want?

In a presidential decree signed on March 31, the Kremlin demanded that companies from so-called unfriendly countries, a list including EU members, pay for their gas in rubles. It set out a payment system where a company would need to open two accounts with Gazprombank, Russia’s third-largest lender and a subsidiary of state-controlled gas export monopoly Gazprom. The company would have to transfer payments into the first account in the currency prescribed by its contract with Gazprom and authorize Gazprombank to convert those funds into rubles on the Moscow Exchange, moving the proceeds into the second bank account and paying out Gazprom. Only then is the payment considered completed.

How does that change from what companies were doing until now?

Gas supply contracts are confidential, but industry standards usually have companies pay in one specified currency. In 97 percent of EU companies’ contracts with Gazprom, payment is in euros or dollars, according to the European Commission. The bank account receiving the deposits would be chosen by Gazprom and specified in the contract. Payments are considered cleared as soon as the full amount arrives in that account.

In cases where there’s a dispute over the amount due, gas contracts usually require buyers to pay the full amount listed on the seller’s invoice (in this case, issued by Gazprom), with a later adjustment made once the dispute is ironed out.

Failure to pay can result in a series of penalties on the buyer, ranging from interest applied on any outstanding amount to a suspension of gas deliveries or outright contract termination.

Why is Russia’s proposed payment system in breach of EU sanctions?

According to the Commission, Moscow’s demands contravene the EU’s sanctions regime, and in particular the prohibition to “directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments” issued by the Russian state or its central bank. That’s because the new gas payment system “is more or less equivalent to a loan that will be given by the companies to the Russian Central Bank before the payment is complete,” an EU official said last week. “This is for us … a clear breach of the sanctions.”

So what are EU companies allowed to do?

Companies can try different things, according to the Commission’s guidance issued last month. They may seek a derogation to keep paying as before. But “the procedure for derogations from the requirements of the Decree is not clear yet,” it added.

Alternatively, companies can open a bank account in euros with Gazprombank, deposit their dues in euros or dollars as per their contract and issue a declaration that their payment obligations are fulfilled. “After that, what the Russians do with the money, it’s up to them,” the EU official said. However, they should “seek confirmation from the Russian side that this procedure is possible,” the Commission wrote in its guidance.

Will that work?

Bulgaria and Poland tried to pay in the usual form, but their payment was rejected, the gas supply halted and the money returned.

As for the other Commission suggestion of paying euros to Gazprombank, there are no indications that Russia would accept such a workaround. According to Bulgarian officials, this is “not really an option.”

What are companies not allowed to do?

They can’t open a second bank account in rubles and accede to Russia’s other demands, according to the Commission. “What we cannot accept is that companies are obliged to open a second account,” the EU official said. “And that between the first and second account, the amount in euro is in full hands of the Russian authorities in the Russian Central Bank, and that the payment is only complete when it is converted in rubles.”

“This is absolutely a clear circumvention of the sanctions,” the official added.

What are they actually doing?

A number of companies have reportedly opened accounts with Gazprombank, but it’s not clear whether those accounts are in euros or rubles. A spokesperson for Germany’s Uniper said: “We continue to believe that compliant future payment processing is feasible.” Italy’s Eni declined to comment.

If companies contravene the European Commission’s guidance, it will fall on national governments to prosecute potential breaches, as they’re the enforcers of the EU sanctions regime.

What do European governments say?

EU governments have said that they intend to keep paying for gas in euros or dollars, as per their companies’ contracts. However divisions are starting to show: Hungary has said that it sees no issue in paying in rubles, and Italy said companies should be provisionally allowed to pay in rubles to avoid having their gas cut off. Energy ministers are meeting in Brussels on Monday to discuss a way forward.

Will the Commission change its stance?

This is where the matter gets even more confusing. The Commission initially indicated to EU countries in its preliminary assessment that acceding to Putin’s demands would be a breach of sanctions. A week later, it issued a guidance with the proposed workaround. A number of EU countries demanded that the Commission clarify its guidance, unhappy about the confusion. A Commission spokesperson countered that its guidance “still stands.”

EU Energy Commissioner Kadri Simson on Monday confirmed that the Commission will “issue more detailed guidance on what companies can and cannot do within our sanctions framework.”

But there’s little chance of Brussels agreeing to Moscow’s demands.

“We need to give [companies] the clarity that paying in rubles through the conversion mechanism managed by the Russian public authorities and a second dedicated account in Gazprombank is a violation of the sanctions and cannot be accepted,” Simson said.

What does Putin gain from this?

The immediate impact is a strengthening of the ruble by forcing Gazprom to convert gas sale proceeds into the Russian currency, which boosts demand for it and props up its value. But the move comes after Moscow in February required that Russian businesses convert 80 percent of their foreign-earned revenues in rubles for that very purpose — raising the question of whether Putin has another motive.

Cracking the bloc’s unity by forcing countries to choose between sanctions and continued gas supplies might be his end goal. Judging from the fluster that ensued, he has at least partially succeeded.

This article has been updated with comments from Energy Commissioner Kadri Simson.