Europe braces for Putin to turn off the gas: Deadline expires for EU to start paying for Russian energy in roubles or face supplies being stopped after Kremlin issued ‘blackmail’ decree – but will Moscow blink first?

  • Russia’s Putin last night threatened to close down European gas from today if states refuse to pay in roubles
  • He said foreign buyers will have to ‘open rouble accounts in Russian banks’ which can be used to pay for gas
  • According to Gazprom, 58 percent of its sales of natural gas to Europe as of January 27 were settled in euros
  • German Economy Minister Robert Habeck today rejected the demand, saying that it amounted to ‘blackmail’
  • The deadline to accept demands passed at midnight – but it remains to be seen if Putin to follow through with his threat
  • A spokesperson for Prime Minister Boris Johnson said companies are not planning to buy Russian gas in roubles
  • Putin announced on March 23 that ‘unfriendly’ states would have to pay in roubles in retaliation for sanctions

The energy crisis dramatically intensified last night as Vladimir Putin threatened to turn off Europe’s gas supplies as soon as today if countries refuse to pay in roubles. The Russian President, announcing a decree in televised remarks yesterday, said foreign buyers would have to ‘open rouble accounts in Russian banks’ which can be used to pay for ‘gas delivered starting from tomorrow’.

‘If such payments are not made, we will consider this a default on the part of buyers, with all the ensuing consequences. Nobody sells us anything for free, and we are not going to do charity either – that is, existing contracts will be stopped,’ he said. The move has been seen as a bid to bolster the Russian currency, which fell to historic lows when the West applied sanctions after he sent his army into Ukraine on February 24.

Although Britain gets only 4 percent of its gas from Russia, the extraordinary threat comes as millions of families face a record hike in energy bills of nearly £700 today. Western companies and governments have rejected the demands as a breach of existing contracts, which are set in euros or dollars. As the deadline for the EU to meet the demand passed at midnight, it remains to be seen how or if President Putin will implement his threat.

However, the president’s bullish comments on state television stating ‘unfriendly countries’ must pay for gas in roubles from midnight or face supplies being suspended seemed to be watered down by the Kremlin’s decree, which allows customers to pay dollars and euros to intermediary Gazprombank, which would then buy roubles on currency markets.

Russia has been hit by sweeping sanctions on its economy and trade since the start of Putin’s war in Ukraine but measures by EU governments have not targeted oil and gas contracts with Moscow because many member states are heavily reliant on the Kremlin’s supplies.

The European Union gets 30 percent of its oil usage from Moscow and relies on Russia for 40 percent of its gas consumption, costing the bloc £340million (€400million) a day.

However, Moscow cannot easily carry out threats of shutting off deliveries to Europe because the Kremlin has no alternative pipelines to redirect the oil and gas to other markets and does not have sufficient storage facilities to hold oil and gas reserves until alternative buyers can be found.

Putin said the switch was meant to strengthen Russia’s sovereignty and insisted Moscow would stick to its obligations on all contracts if foreign buyers agreed to pay in roubles. German Economy Minister Robert Habeck yesterday rejected Putin’s demands of payment in roubles as an unacceptable breach of contract, adding that the maneuver amounted to ‘blackmail’.

Separately, Chancellor Olaf Scholz said German companies would continue to pay for Russian gas using euros as stipulated in contracts. ‘By all means, it remains the case that companies want, can, and will pay in euros,’ he told a joint news conference with his Austrian counterpart Karl Nehammer.

A spokesperson for British Prime Minister Boris Johnson said that companies do not plan to pay for Russian gas in roubles, adding that the government was monitoring the implications for the European market of President Putin’s demand.

Asked if there were any circumstances in which Britain would pay in roubles for Russian gas, the spokesman said ‘that is not something we will be looking to do,’ adding that Putin’s latest decrees show ‘the impact that our sanctions are having on the Russian economy.

‘There are no gas pipes directly linking the UK with Russia, our imports from Russia made up less than four percent of total UK gas supply in 2021 so we are obviously less reliant on it than many of our European partners,’ the spokesperson added.

Putin said last week that Moscow would only accept roubles as payment from ‘unfriendly’ countries in retaliation for sanctions imposed over his invasion of Ukraine. According to Gazprom, 58 percent of its sales of natural gas to Europe and other countries as of January 27 were settled in euros. US dollars accounted for about 39 percent of gross sales and sterling around three percent.

A Kremlin decree published today sets out that contracts will be stopped if buyers do not sign up to the new conditions, including opening rouble accounts in Russian banks. The buyers can still pay in foreign currency and authorize the bank to sell that for roubles, which are placed in the second account, where the gas is formally purchased.

Putin also decreed today that foreign buyers of Russian gas will have to use special accounts at Gazprombank to pay for the import of Russian gas.

A foreign buyer is now obliged to transfer foreign currency to one special, so-called ‘K’, account. Gazprombank would then buy roubles on behalf of the gas buyer to transfer roubles to another special ‘K’ account, the order said.

Gazprombank would then transfer rouble funds from a ‘K’ type account of the foreign gas buyer to Gazprom’s rouble accounts, the order said. Gazprombank can open such accounts without the presence of a foreign buyer’s representative.

German Economy Minister Robert Habeck, speaking during a joint news conference with his French counterpart, said: ‘With regard to the threat, demand or consideration – one doesn’t know what to call it anymore – to be made to pay in roubles, it is crucial for us that the contracts are respected… It is important for us not to give a signal that we will be blackmailed by Putin.’

Germany on Wednesday triggered an emergency procedure to monitor gas imports and storage capacity and urged consumers and manufacturers to reduce consumption in preparation for any Russian delivery stoppage.

The network regulator said on Thursday the situation was stable and that storage had risen slightly. Habeck said he and French Finance and Economy Minister Bruno Le Maire discussed possible new punitive measures on Russia, declining to go into details.

‘The last sanctions package must not and should not be the last. We spoke about what additional sanctions can prevent Putin from continuing the war in Ukraine,’ Habeck said.

Scholz also raised the possibility of new sanctions on Russia over its invasion of Ukraine, adding that Germany was prepared for all scenarios, including a stoppage of Russian gas flows to Europe.

Scholz reiterated that Germany hoped to become independent of Russian oil and coal imports this year, but it would take longer to reduce its dependence on Russian gas. French Economy Minister Bruno Le Maire said ‘contracts are contracts, but declined to elaborate on the next steps.

Dutch companies Gasterra and Eneco said they would stick to the contracts, which meant they could pay for Russian gas in Euros. Gasterra said: ‘International agreements contain clauses about payments and currency. Sticking to the agreement remains our position.’ It comes after Putin on March 23 announced ‘unfriendly’ countries would have to pay for gas in Russian currency in retaliation for Western sanctions over his war on Ukraine.

‘Russia will continue, of course, to supply natural gas in accordance with volumes and prices… fixed in previously concluded contracts,’ he said, adding that sanctions had ‘destroyed Moscow’s trust’. ‘The changes will only affect the currency of payment, which will be changed to Russian roubles’ for a list of countries, corresponding to those that have imposed sanctions.

Putin said at the time that the government and central bank had one week to come up with a solution on how to move these operations to the Russian currency and that gas giant Gazprom would be ordered to make the corresponding changes to gas contracts. Contractual changes would have meant European customers had to renegotiate their agreements, which are mostly in euros.

The list of ‘unfriendly’ countries includes the United States, European Union member states, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland, and Ukraine. Among other things, deals with companies and individuals from those countries have to be approved by a government commission.

The move forced Germany, Europe’s biggest economy, to declare on Wednesday an ‘early warning’ that it could be heading for a supply emergency. Germany imported 55 percent of its gas from Russia last year.

It is thought the move was intended to boost the Russian currency which fell to a record low of 120 to the dollar this month following the invasion of Ukraine, despite usually trading around 80 to the dollar.

After the announcement on March 23, the rouble was 3.4 percent stronger against the dollar at 100.02, its strongest since March 2. A higher rate means exports give a better return and more money can be pumped into the state coffers to pay for the war in Ukraine.

Dollars, euros, and pounds are also less valuable to Russia because, with restricted access to international markets, the currencies are harder to use. Moscow had hoped to sell foreign currency investments for roubles to push up the price, but the plan was scrapped when the West agreed to cut Russian banks out of the Swift global payments system in February.

Instead, the Kremlin forced exporters to change 80 percent of the foreign currency they receive into roubles. Putin is now reportedly considering pricing all energy and commodity exports in roubles, toughening the Kremlin’s attempt to make the West feel the pain of the sanctions it imposed for the invasion of Ukraine.

‘If you want gas, find roubles,’ parliament speaker Vyacheslav Volodin said in a post on Telegram. ‘Moreover, it would be right – where it is beneficial for our country – to widen the list of export products priced in roubles to include:

fertilizer, grain, food oil, oil, coal, metals, timber, etc.’ Meanwhile, the head of Britain’s armed forces Admiral Sir Tony Radakin declared today that Putin has already lost the war in Ukraine and is weaker than a month ago after it emerged demoralized Russian troops are refusing orders and are sabotaging their own equipment.

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