By Alexander Miller, emerging market consultant – Eurasia Business News, March 23, 2022
The Russian President Vladimir Putin announced today during a meeting with the federal government that payment for Russian gas supplies to European countries will be translated into Russian rubles.
The Russian central bank and the government have been ordered to determine the procedure for the acquisition of rubles in the domestic market of the Russian Federation by foreign buyers of Russian gas within a week.
This is a way for the Russian state to sell rubles for euros and support the national currency agains the Western economic sanctions. But it is also a major step for Russia in its policy of freeing its economy from the dollars. Russia has been buying and stockpiling gold bars since 2014 and has not hidden its project with China to strenghten the ruble and the yuan in the Eurasian region.
Russia currently exports about $10 billion worth of gas per month.
President Putin noted that “over the past few weeks, a number of Western countries have made illegitimate decisions on the so-called freezing of Russian assets.“
The Russian President added that ” This “collective West” actually drew a line under the reliability of its currencies, crossed out confidence in these very currencies. Both the United States of America and the EU declared in principle a real default on their obligations to Russia, and now everyone in the world knows, and so suspected, and now they know that obligations in dollars and euros may not be fulfilled.”
“It is quite obvious that in this regard, supplying our goods to both the European Union and the United States and receiving payments in dollars, euros, and a number of other currencies no longer makes any sense for us. Therefore, I have decided to implement a set of measures to transfer payment for our natural gas in the shortest possible time, let’s start with this one supplied to unfriendly countries, for Russian rubles. That is, to abandon the use of all compromised currencies in such calculations“, stated the Russian President.
At the same time, Mr Putin separately noted that “Russia will continue to unconditionally supply natural gas in accordance with the volumes at prices, according to the pricing principles fixed in previously concluded contracts. […] Unlike some colleagues, we value our business reputation as a reliable partner and supplier. The changes will affect only the currency of payment, which will be changed to Russian rubles.“
The Kremlin ordered the federal government to give a corresponding directive to Gazprom on amending existing contracts. All foreign consumers will be given the opportunity to perform the necessary operations. Vladimir Putin announced that Russia will create for foreign buyers of Russian gas a clear and transparent procedure for making payments, including the purchase of Russian rubles in the domestic foreign exchange market.
The Bank of Russia and the government have been ordered to determine the procedure for such operations within a week.
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In late February, Russia, in response to sanctions and the seizure of its international reserves by the United States and the European Union, introduced currency control measures, in particular, mandating exporters to sell 80% of foreign exchange earnings.
The German Economy Minister Robert Habeck said today that he would discuss with partners the decision of the Russian leadership to transfer payment for Russian gas to European countries in rubles.
Armenia is already discussing with Russia the possibility of payments for the supplied natural gas in rubles, said Deputy Prime Minister of Armenia Mher Grigoryan.
Gazprom is the only supplier of gas to consumers in Armenia. The operator of the gas transmission network of Armenia is Gazprom Armenia CJSC, a 100% subsidiary of Gazprom.
Moldovagaz JSC will switch to rubles for payments of gas supplies with Gazprom from May 1, said the Chairman of the Moldovan energy corporation Vadim Ceban.
The Russian gas giant Gazprom in January 2022 (the latest operational data) exported 7.146 billion cubic meters of gas worth $ 5.99 billion to 20 European countries, according to the press agency Interfax.
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The total revenue from the export of Russian gas in January 2022 amounted to a record $ 9.75 billion.
After the statement of Vladimir Putin, the spot price of gas in Europe jumped up to $ 1510 per thousand cubic meters. A day earlier, gas trading on the spot market ended at $1,077.
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Gas prices in Europe are affected by the current drop in electricity generation due to low wind. Last week (March 14-20), wind farms provided an average of 17% of electricity generation in the EU, on Monday this figure fell to 13.8%, and on Tuesday – to 11.3%. Further in the week, a rather weak wind is expected, which will reduce the generation of electricity from renewable sources. The decline in this indicator is a catalyst for the growth of gas demand and prices.
Such high gas prices will boost inflation in Europe in coming months. The annual inflation in the Euro area in January 2022 was already 5.1%, never seen since 1992. Inflation should worsen in Europe in coming months, disrupting industries and markets. This situation may force the European central bank to tighten its monetary policy in the Euro area.
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© Copyright 2022 – Alexander Miller, emerging markets consultant.