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23rd Feb 2024

Putin's rouble shift: mistake or masterstroke?

  • "I have decided to implement to switch payments for our natural gas supplies into Russian rubles," Russian president Vladimir Putin said in a televised government meeting (Photo: kremlin.ru)
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Russia's plans to demand rouble payments for oil- and natural gas purchases from "unfriendly nations," unveiled on Wednesday, further escalated the battle of sanctions with Europe ahead of the two-day EU summit on Thursday (24 March).

EU leaders have sounded unimpressed by the move. "I don't think anyone in Europe knows what roubles look like," Slovenian prime minister Janez Janša said arriving at the summit. "Nobody will pay in roubles."

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Likewise, Belgian prime minister Alexander de Croo warned that changing the currency means prices can be changed as well. "If we change one element of existing contracts, everything will become negotiable, including the prices," he said.

At the start of the summit, it was still unclear whether Russia could legally unilaterally change existing gas contracts, but Russian president Vladimir Putin has ordered the Russian central bank to develop a mechanism to make rouble payments for natural gas possible within a week.

But some experts hailed the move as a masterstroke.

German economist Richard A. Werner predicted in a tweet on Thursday that the West would be forced to "scramble for roubles" due to its dependency on Russian gas.

The EU imports 40 percent of its gas from Russia, with no easy alternatives at hand, while gas exports represent 15 percent of the total value of Russian fossil fuel exports.

"This is Putin's way of saying Russia is fine with cutting natural gas exports to the West," a financial analyst specialised in the Russian economy, who asked not to be named, said. "Financially, it will be less painful for Russia than for Europe."

It weakens the dollar hegemony on the oil- and gas markets and may force EU banks to circumvent their own sanctions, which resulted in Russian central bank assets being frozen, he noted.

"If Putin's move works out and the EU will need to get roubles, Russia is less at risk that their proceeds would be frozen," Steffen Murau, a research fellow at the Global Development Policy Center of Boston University, also said.

Immediately after Putin's announcement, the rouble — which has plummeted since the start of the Russian invasion of Ukraine — strengthened against the dollar and euro, while gas prices rose.

But the anonymous financial analyst said speculators may overestimate the boon rouble-denominated gas sales will have on the strength of the rouble because it will only increase demand for the currency by a small degree. "It's far from game-changing," he said.

At the same time, Murau cautioned that limiting access to gas and denominating gas contracts in roubles may not improve Russia's position.

Gas trade represents a daily income for Russia of between €200m and €800m. And the move is likely to speed up European efforts to reduce its dependence on Russian gas.

"[Putin] wants to take everybody down. He doesn't win anything if the West declines and stops gas imports," Murau said.

Dutch prime minister Mark Rutte told the press on Thursday that the Russian economy had already taken a hit "the size of the Belgian national income", indicating the EU is winning the sanctions battle.

"If the conditions of new rouble-denominated gas contracts are attractive, maybe EU countries will fold," the financial analyst said, indicating that the effectiveness of Putin's chess game depends on EU decisions this week.

"But right now, nobody seems to be willing to negotiate," he added.

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