Putin wants “unfriendly” countries to pay for Russian gas in rubles

LONDON (Reuters) – Russian President Vladimir Putin said on Wednesday that Russia would seek to pay in rubles for gas sold to “unfriendly” countries and that European gas prices had risen sharply on fears the move would exacerbate the region’s energy crisis.

European countries and the United States have imposed severe sanctions on Russia since Moscow sent troops to Ukraine on February 24. But Europe relies heavily on Russian gas for heating and power generation, and the European Union is divided over sanctions on Russia’s energy sector.

Putin’s message was clear: If you want our gas, buy our currency. It remained unclear whether Russia had the ability to unilaterally change the existing contracts agreed in the euro.

The ruble jumped briefly after the surprise announcement to a three-week high after 95 against the dollar. It pared its gains but remained well below 100 to close at 97.7 against the dollar, down more than 22% since Feb. 24.

Prices of some wholesale gas prices in Europe rose by 30% on Wednesday. Wholesale gas prices jumped in Britain and the Netherlands.

Russian gas accounts for about 40% of Europe’s total consumption. EU gas imports from Russia this year fluctuated between 200 million and 800 million euros ($880 million) per day.

Putin said in a televised meeting with government ministers, “Russia will, of course, continue to supply natural gas in accordance with the quantities and prices … specified in the contracts concluded previously.”

“The changes will only affect the payment currency, which will change to Russian rubles,” he said.

German Economy Minister Robert Habeck described Putin’s request to breach the contract, and other buyers of Russian gas echoed this point.

“This would constitute a breach of the payment rules included in existing contracts,” a senior Polish government source said, adding that Poland does not intend to sign new contracts with Gazprom after its current agreement expires at the end of this year.

Big banks are reluctant to trade Russian assets, further complicating Putin’s demand.

A spokesman for Dutch gas company Eniko, which buys 15 percent of gas from Russia’s gas giant Gazprom’s subsidiary, Wengas GmbH, said it has a long-term contract in euros.

“I can’t imagine we would agree to change the terms of that.”

According to Gazprom (GAZP.MM), 58% of its natural gas sales to Europe and other countries as of January 27 are settled in euros. The US dollar made up about 39% of the total sales and the British pound about 3%. Commodities traded around the world are largely denominated in US dollars or euros, which make up nearly 80% of global currency reserves.

“There is no danger to the (gas) supply, we have checked, there is a financial counterparty in Bulgaria who can carry out the deal in rubles as well,” Energy Minister Alexander Nikolov told reporters in Sofia. “We expect all kinds of actions on the verge of the unusual but this scenario has been discussed, so there is no risk to payments under the current contract.”

Several companies, including major oil and gas companies Eni, Shell, BP, RWE and Uniper – Germany’s largest importer of Russian gas – declined to comment.

“It is unclear how easy it is for European customers to convert their payments into rubles given the scale of these purchases,” said Leon Isbeki, coordinator at consultancy Energy Aspects. However, he said that the Russian Central Bank could provide additional liquidity to the foreign exchange markets that would enable European customers and banks to obtain the necessary rubles.

Moscow describes its actions in Ukraine as a “special military operation.” Ukraine and its Western allies describe this as a baseless excuse.

One week deadline

Putin said the government and central bank had one week to come up with a solution on transferring operations into the Russian currency and that he would ask Gazprom to make corresponding changes to contracts.

Data from the Gascad pipeline operator, on the gas markets on Wednesday, showed that eastward flows of gas through the Yamal-Europe pipeline from Germany to Poland have sharply reduced.

“The measures taken by Russia may also be interpreted as provocative and may increase the likelihood of Western countries tightening sanctions on Russian energy,” said Liam Beach, emerging European economist at Capital Economics.

The European Commission said it plans to reduce the EU’s dependence on Russian gas by two-thirds this year and end its dependence on Russian supplies “well before 2030”.

But unlike the US and Britain, EU countries have not imposed sanctions on the Russian energy sector. The European Commission, which includes 27 countries, did not respond to a request for comment.

Habeck said he would discuss with European partners a possible response to the Moscow declaration. Dutch Prime Minister Mark Rutte said more time was needed to clarify Russia’s demand.

“In their contracts, the currency that has to be paid is specified, so you can’t change it that way,” Rutte said during a discussion with Parliament.

Russia has drawn up a list of “unfriendly” countries such as those that have imposed sanctions. Dealings with companies and individuals from those countries must be approved by a government commission.

The countries include the United States, European Union member states, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine. And some, including the United States and Norway, are not buying Russian gas.

A White House official told Reuters that the United States is consulting with allies on the issue and that each country will make its own decision. The United States has already banned Russian energy imports.

(1 dollar = 0.9097 euros)

Reporting by Reuters reporters. Writing by Nina Chestney; Editing by Catherine Evans, Carmel Kremens, Jonathan Otis and David Gregorio

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