Thu. Jul 7th, 2022

One of Europe’s biggest economic fears since Russia invaded Ukraine has been a cut-off in Russian natural gas supplies. This week such a threat seemed more real. G7 ministers rebuffed Vladimir Putin’s demand to switch to paying in rubles, not euros, for gas; Moscow warned it would not continue deliveries “for free”. Germany, Austria and others began preparations for rationing. Despite further verbal threats from Russia’s president, and European warnings that they were preparing for all contingencies, a face-saving solution appears in prospect. After much smoke and mirrors from the Kremlin, what the episode may highlight is Russia’s difficulty in imposing “counter-sanctions” that do not inflict still greater harm on its own economy.

Last week’s presidential order that payments for gas exports must be made in rubles by “unfriendly countries” – those that have placed sanctions on Russia – was heavily political. Putin said it was a response to an EU freeze on the Russian central bank’s foreign reserves. In part, it appeared an attempt to force European gas buyers to transact in the beleaguered ruble, and interact with Russia’s financial sector or central bank to exchange the euros or dollars they use to settle bills into the Russian currency.

The demand may have helped to fuel the ruble’s recent rebound to close to prewar levels. Yet its impact is largely cosmetic. The Russian central bank had already ordered Russian exporters, including Gazprom, to convert 80 per cent of their foreign-currency receipts into rubles; the Kremlin decree only increases the proportion to 100 per cent and shifts responsibility for buying rubles to energy buyers.

G7 countries called Putin’s bluff. They argued that the requirement violated gas contracts denominated in international currencies – something Russia has always avoided doing since it began exporting gas to Europe in the cold war. That left the Kremlin, slightly absurdly, threatening to cut off gas to customers simply because they insisted on paying in hard currency – which Russia desperately needs. A decree signed by the president on Thursday required foreign gas buyers to open both ruble and foreign currency accounts with Gazprombank, which is not subject to EU sanctions, in order to buy rubles to use for payment. That may be something buyers will reluctantly live with.

Germany, in particular, has fretted since the war began that Moscow might turn off the taps even for just a few days – enough to create severe disruptions for a country that relies on Moscow for half its gas imports. In reality, however, Russia would do immense damage to its economy if it cut off gas to Europe for any length of time. It could continue pumping gas into storage for a while but, with no other destination for gas from its western Siberian fields – China is supplied from east Siberia – it would have to cap them. Analysts say gasfields would start to deteriorate, making them tricky and costly to restart.

Just such a calculation that Russia can not afford to suspend deliveries has underpinned a push by some Ukraine supporters for further energy sanctions on Russia, similar to those on Iran. Buyers would have to pay into escrow accounts from which Moscow could withdraw funds only to pay for certain essentials. Putin’s decree may have been, in part, an attempt to insulate Russia from such a move.

Russia’s president may feel he has hit back at the west by forcing it to pay in rubles. But by in effect rewriting contracts he will have further damaged trust in Moscow as a supplier. Even if some sanctions are lifted as part of a peace deal in Ukraine, Europe’s new determination to end its reliance on Moscow’s gas will be here to stay.

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