Why Putin’s demand for rubles is confusing Europe

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Russian President Vladimir Putin’s decree imposing a new payment system for gas supplies has placed the European Union and Russia at loggerheads, with Moscow demanding European companies open ruble accounts. The problem, triggered by Russia’s war in Ukraine and the Western response to it, escalated on April 27 after Russia halted gas sales to Poland and Bulgaria, which refused to pay in rubles. What is at stake is European unity, with some countries, including Germany, being more dependent on Russian gas than others. So far, EU legal directives have puzzled some companies and governments.

1. What does the decree say?

Putin said on March 31 that he wanted his country’s gas to be purchased in local currency, starting April 1. The deposit of euros or dollars in the account of the supplier would no longer be considered as the execution of contractual obligations. Businesses should first pay for gas using a euro account; then the funds should be converted into rubles and sent to a second account at the state-controlled Gazprombank JSC. Only after the funds have reached the ruble account is the payment considered complete. Putin said that if payments are not made in rubles, gas exports will be cut off. Europe relies heavily on Russian gas to heat homes and power industry.

2. Why does Putin demand to be paid in rubles?

When he announced his decision, Putin said it was to protect vital Russian gas revenues from possible EU sanctions or seizures, as some member states had proposed. By giving Gazprombank a central role in the payment mechanism, the Kremlin could also ensure that the bank is protected from further sanctions. The ruble requirement has forced the EU to face deep divisions among its member states over how to deal with their reliance on Russian gas. Along with soaring fuel prices, the uncertainty has also boosted Russian revenues, while stoking political pressure on European leaders. In the long term, however, the gamble could be risky for the Kremlin if it forces the EU to accelerate its moves to diversify away from Russian supplies.

3. What is the problem for companies and governments?

Clarity. European companies, from Italy to Hungary, have quietly taken steps to prepare to comply with Putin’s decree. German utility Uniper SE, a big buyer of Russian gas, said it believed it could keep buying without breaching sanctions. And in Italy, another major customer, Eni SpA is preparing to open accounts in rubles at Gazprombank as a precautionary measure. The Hungarian government pays Euros to Gazprombank, which it then authorizes to convert into rubles. It is not clear whether he opened a ruble account or not. Governments and businesses see guidelines from the European Commission, the EU’s executive arm, as ambiguous, with ambassadors from several countries, led by Poland, pushing for clearer guidance.

4. According to the EU, what is allowed?

In a document dated April 21, the EU said payments can be authorized in euros and dollars as long as any legal obligation ends once the initial payment in euros or dollars is made to Gazprombank. The guidelines also advised companies to seek confirmation from Moscow that this was possible. EU officials said April 28 that companies can buy gas without violating sanctions if they only open a euro account to make their gas payment and report their full obligation.

5. According to the EU, what is not allowed?

Ursula von der Leyen, president of the European Commission, the EU’s executive arm, said on April 27 that “the Russian side’s request to pay in rubles is a unilateral decision and not in accordance with contracts.” EU officials say firms in the bloc that open a ruble account to pay for Russian gas would violate its sanctions. Indeed, the mechanism involves the Russian central bank, which was itself sanctioned, and they said that Putin’s payment agreement would constitute a loan to the central bank.

6. What’s next?

German Chancellor Olaf Scholz indicated on April 27 that the ball was now in Russia’s court. Its economy minister, Robert Habeck, said he told the committee that it was possible, under the sanctions regime, to transfer the money in euros. It remains unclear whether Moscow would agree to the transactions being completed once the initial payment is made in euros or dollars, even if the funds are then converted into rubles. Payment terms for European businesses are staggered, with many falling due in the second half of May. As they approach, companies and governments must decide whether to accept Russian demands and risk violating sanctions, or risk the prospect of gas rationing at home.

7. Who applies EU sanctions?

National governments, rather than the EU, are responsible for applying penalties, identifying breaches and punishing offenders. That means countries could end up finding different ways to interpret EU guidance, even though the bloc has said it aims to remain unified. If the European Commission concludes that a specific EU member state is flouting the sanctions, it could launch a legal process known as an infringement procedure, but that would take months or even years to unfold.

8. Could Europe refine its response?

The commission is in constant talks with member states to ensure they have what one official called maximum clarity on how to proceed. He told EU ambassadors he would consider refining the wording of his guidelines, and that the subject was likely to be considered by energy ministers.

More stories like this are available at bloomberg.com