Why Putin’s demand for rubles has Europe scrambling

Russian President Vladimir Putin’s decree imposing a new payments system for gas supplies has placed the European Union (EU) and Russia at loggerheads, with Moscow demanding that EU companies open accounts in rubles.

The issue, sparked by Russia’s war in Ukraine and the Western response to it, escalated on Apr 27 after Russia cut off gas sales to Poland and Bulgaria, which refused to pay in rubles.

At stake is European unity, with some countries including Germany more reliant on Russian gas than others. The EU’s legal guidelines so far have left some companies and governments confused.

WHAT DOES THE DECREE SAY? 

Putin said on Mar 31 that he wanted his country’s gas bought in local currency, from Apr 1. The deposit of euros or dollars on the supplier’s account would no longer be considered fulfillment of contractual obligations.

Companies would first have to pay for gas using a euro account; then funds would have to be converted into rubles and sent into a second account at state-controlled Gazprombank JSC. It is only after the funds reach the ruble account that the payment would be considered complete.

Putin said that if payments aren’t made in rubles, then gas exports would be halted. Europe depends heavily on Russian gas to heat homes and power industry.

WHY IS PUTIN DEMANDING TO BE PAID IN RUBLES

When he announced his move, Putin said it was to protect Russia’s vital gas revenues from possible EU sanctions or seizure, as some member states had been proposing. By giving Gazprombank a central role in the payment mechanism, the Kremlin also could ensure the bank was protected from further sanctions.

The ruble requirement forced the EU to confront deep divisions among its member states on how to address their dependence on gas from Russia. With prices for the fuel surging, the uncertainty has also boosted Russian income, while stoking political pressure on European leaders.

Over the long haul, however, the gambit could be risky for the Kremlin if it causes the EU to speed up moves to diversify away from Russian supplies.

WHAT IS THE PROBLEM FOR COMPANIES AND GOVERNMENTS? 

Clarity. European companies from Italy to Hungary have been quietly taking steps to prepare to comply with Putin’s decree.

German utility Uniper SE, a big buyer of Russian gas, has said it believes it can keep up purchases without breaching sanctions. And in Italy, another major client, Eni SpA is preparing to open ruble accounts at Gazprombank as a precautionary measure.

Hungary’s government is paying euros to Gazprombank, which it is then allowing to be converted into rubles. It is not clear whether it has opened a ruble account or not.

Governments and companies see guidelines from the European Commission, the EU’s executive arm, as ambiguous, with ambassadors for several nations, led by Poland, pushing for clearer guidance.

WHAT DOES THE EU SAY IS ALLOWED?

In a document dated Apr 21, the EU said that payments may be allowed in euros and dollars as long as any legal obligations end once the initial euro or dollar payment is made to Gazprombank.

The guidance also advised companies to seek confirmation from Moscow that this was possible.

EU officials said on Apr 28 that companies can buy gas without violating sanctions if they only open an account in euros to make their payment for gas and declare their obligation complete. 

WHAT DOES THE EU SAY IS NOT ALLOWED

Ursula von der Leyen, president of the European Commission, the EU’s executive arm, said on Apr 27 that "the request from the Russian side to pay in rubles is a unilateral decision and not according to the contracts".

According to EU officials, companies in the bloc that open an account in rubles to pay for Russian gas would violate its sanctions. This is because the mechanism involves the Russian central bank, which has itself been sanctioned, and they said Putin’s payments arrangement would constitute a loan to the central bank.

WHAT IS THE NEXT STEP? 

German Chancellor Olaf Scholz indicated on Apr 27 that the ball is now in Russia’s court. His economy minister, Robert Habeck, said he has clarified with the commission that it is possible, within the sanctions regime, to transfer the money in euros.

It remains unclear whether Moscow would accept that transactions are complete after the initial payment is made in euros or dollars, even if the funds are then converted to rubles.

Payment deadlines for European companies are staggered, with many falling due in the second half of May. As they approach, companies and governments need to decide whether to accept Russian demands and potentially violate sanctions, or risk the prospect of rationing gas at home. 

WHO ENFORCES EU SANCTIONS? 

National governments, rather than the EU, are responsible for applying sanctions, identifying breaches and punishing violators. That means countries could end up finding different ways to interpret the EU’s 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 years, to play out.

COULD EUROPE REFINE ITS RESPONSE?

The commission is in continual talks with member states to make sure they have what one official called maximum clarity on how to proceed. It told EU ambassadors that it would consider fine-tuning the wording of its guidelines, and the topic was likely to be reviewed by energy ministers.