Russia asks rubles for payment of gas

Russia will soon only accept rubles for gas supply. Russian President Vladimir Putin made that announcement earlier this week well-known. This measure only applies to countries that have imposed sanctions on Russia due to Russia's invasion of Ukraine. This means that European countries will soon need rubles to continue importing gas.

This measure is in retaliation for the decision of Western countries to freeze Russia's foreign exchange reserves. As a result of these sanctions, the country can no longer access its assets listed in dollars, euros and British pounds. These currencies together account for more than half of Russia's total reserves of $630 billion. The central bank will still have access to its gold reserves and its foreign exchange reserves in Chinese yuan.

How are Russia's reserves structured? (Source: Central Bank of Russia)

Gas in rubles

The Russian president has ordered Gazprom to review all gas contracts with "unfriendly" countries. This mainly concerns European countries that have imposed economic sanctions and that are still importing Russian gas. In response to this announcement, the value of the ruble skyrocketed to 106 rubles per euro. At its lowest point in early March, one euro was equivalent to 160 rubles. This does not mean that the ruble has yet returned to its pre-war level, when you got about 80 to 90 rubles for a euro.

Exchange rate of the ruble against the US dollar (Source: Bloomberg)

By paying for a strategically important commodity such as natural gas exclusively in rubles, Russia creates more international demand for its currency. European economies that depend on Russian gas have to get their hands on rubles on the foreign exchange market to import gas. Now, European countries only use euros (58%), US dollars (39%) and British pounds (3%) to pay Gazprom.

Putin's decision to no longer accept this currency is therefore also a hard blow to the international role of the euro. Until recently, Russia was still very positive versus the use of euros for trade with both Europe and China. The Russian central bank has also exchanged many dollar reserves for euros, yuan and gold in recent years.

Multipolar world order

In recent decades, the U.S. dollar has been by far the most important currency for settling accounts for oil and other commodities. Due to network effects, countries worldwide have started using dollars for international trade and have also started hoarding this currency as a reserve. The guarantee that dollars can be used worldwide to import oil gives the currency a lot of value. Moreover, because countries collect dollars and invest them in US Treasuries, the US can borrow very cheaply.

For a long time, this privilege was reserved for the United States. But in recent years, we have seen those relationships slowly but surely change. The euro has become increasingly important as an international trading currency, but now China and Russia also want to join in. China is trying to persuade Saudi Arabia to oil in yuan to be settled And Russia is now demanding rubles for its natural gas. These developments undermine the dominant position of the US dollar and thus the advantage that the United States derives from it.

Russia is now pressuring European countries to pay in rubles, but that will not be without a struggle. Gazprom has to review all current contracts, but European customers are unlikely to agree to that. It is a form of breach of contract. Germany, Italy and Poland have already made it known that they will not simply agree to this and that they will consult first. To strengthen their bargaining position consider European countries are now jointly purchasing gas. We will continue to monitor this development closely.

Viewing tip: Paul Buitink interviews Brent Johnson

Paul Buitink spoke with Santiago Capital's Brent Johnson this week about Russia's decision to settle for gas in roubles. One Interesting conversation in which Johnson explains that it is not so easy to switch to an alternative to the dollar. He explains that countries around the world have not only built up a lot of dollar reserves. They have also accumulated a lot of debt in dollars. Countries need dollars to repay these debts. So they can't always switch to another currency.

Johnson says that countries with the greatest economic and military power have always set the rules of the game. At present, that role is reserved for the United States, but in the future another country could take over that role. A change of power can lead to major economic changes, but that does not mean that the world will be a better place. According to Johnson, we should look at Russia and China just as critically as we do at the United States. 

This contribution comes from Geotrendlines

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.