The Prince

European leaders say natural gas contracts spell out payment in euros or dollars and that can’t be suddenly changed by one side. Poland has taken long-term steps to insulate itself from a cutoff, such as building an import terminal for liquefied gas that comes by ship, and had planned to cancel its import deal with Gazprom at year’s end anyway. Bulgaria says it has enough gas for now.

Still, the open questions about what the change could mean have sent shudders through energy markets, raising uncertainty about whether natural gas could be cut off to other European countries and cause a major hit to the economy.

“President Putin’s decree that gas payments made by ‘unfriendly’ countries must be denominated in rubles raises the risk that supply could be cut off to other European countries when payments are due in the next few weeks,” Edward Gardner of Capital Economics said in a report.

The Kremlin warned of that possibility if countries don’t pay for energy supplies in rubles. But Russia also relies on oil and gas sales to fund its government as sanctions have squeezed its financial system.

Under the new payment system, the Kremlin has said importers would have to establish an account in dollars or euros at Russia’s third-largest bank, Gazprombank, then a second account in rubles. The importer would pay the gas bill in euros or dollars and direct the bank to exchange the money for rubles.

null

European Commission President Ursula von der Leyen said Wednesday that paying in rubles violates European Union sanctions and that companies with contracts “should not accede to the Russian demands.”

What is Putin after?

Because Putin’s order for ruble payments targets “unfriendly countries,” it can be seen as retaliation for the sanctions that have cut off many Russian banks from international financial transactions and led some Western companies to abandon their businesses in Russia.

“Gazprom’s decision to suspend deliveries to Poland and Bulgaria from today over their refusal to pay for Russian gas in rubles marks an escalation in Russia’s use of gas as political leverage,” Gardner wrote. 

The economic motives for demanding rubles aren’t clear because Gazprom already has to sell 80% of its foreign earnings for rubles, so the boost to Russia’s currency could be minimal. One motive could be political, to show the public at home that Putin can dictate the terms of gas exports. And by requiring payments through Gazprombank, the move could discourage further sanctions against that bank.

If Putin was looking for a pretext to cut off countries that have supported Ukraine, this could serve that function. Russia is still sending gas to Hungary — whose populist Prime Minister Viktor Orban has agreed to Putin’s payment arrangement — on the same pipeline system.