Russian President Putin demands trade in rubles; What it means and how it could work?- Explained

Russian President Putin has raised a demand that the European countries must pay for all-natural gas imports in rubles and not euros or US dollars. The latest demand by Putin has shocked the countries in Europe as, notably, the European Union imports 40% of the natural gas requirements.

Created On: Mar 30, 2022 17:06 IST
Russia demands trade in rubles
Russia demands trade in rubles

The President of Russia Vladimir Putin on March 23, 2022, raised a demand that the European countries must pay for all-natural gas imports in rubles and not euros or US dollars. The latest demand by Putin has shocked the countries in Europe as notably the European Union imports 40% of the natural gas requirements.

Already high gas prices in Europe have now spiraled ever since the Russian President announced the plans to have the importers pay for the Russian Natural gas in Rubles. The latest development can be seen in the light of the Russia-Ukraine conflict and the support of the European Union and the US to war-torn Ukraine.

Know what Putin is proposing and how the demand of doing trade in rubles can work.

What is President of Russia Vladimir Putin proposing?

Large amounts of Russian natural gas are imported to Europe that it uses to heat homes, generate electricity, and fuel industry. Notably, the imports of natural gas from Russia to Europe have continued despite the ongoing war in Ukraine.

Around 60% of the natural gas imports are paid in euros while the rest is in dollars. However, Vladimir Putin demands to change that by requiring foreign gas importers to purchase rubles and further use them to pay Russia-owned supplier Gazprom.

The President has also told the Russian central bank to come up with a workable system that can facilitate trading in rubles.

Russia demands trade in rubles: How it can work and what will be the impact?

Due to the demand, the importers of Russian natural gas will have to find a bank that will exchange euros and dollars for rubles. However, it could be tricky as some of the Russian banks have either been blocked or cut off from the SWIFT messaging system. It facilitates international payments.

Notably, there are some banks that haven’t been cut off and the sanctions that are imposed by the US Treasury forbidding bank transactions to contain the exceptions for energy payments. The concession is for the European allies who are much more reliant on Russian natural gas.

Getting paid in rubles for gas would at best help Russia marginally get around the financial sanctions or protect the Russian economy. However, Russia’s move can further roil global energy markets by facilitating current supply disruptions and adding to the uncertainty about future supplies.

How is Europe reacting to Putin’s demand?

The Governments in Europe as well as the energy companies have been rejecting the idea of trade in rubles. As per them, the gas import contracts specify the currencies and that one side cannot change it overnight. European countries are firm to keep paying in euros and dollars.

Importantly, the group of 7 major economies which includes the US, Japan Italy, France, Britain, Germany, Canada has also rejected Moscow’s demand.

What is Russia’s objective?

Requiring ruble payments can support the demand for the currency as well as its exchange rate, however, not by much. Notably, dollars and euros are already being used to purchase the rubles when Gazprom exchanges its foreign earnings.

But according to the Center for Eastern Studies in Warsaw, by moving the flow of foreign currency from Gazprom to the largely state-controlled banking system, Russia can gain added control over a foreign currency that has become scarcer. However, the move could leave Gazprom without any hard currency to make the foreign debt payments.

The ruble dispute between Russia and Europe has now raised concerns that it could lead to an interruption in natural gas supply. When asked if Russia can cut gas supplies to European countries, the spokesperson of the Kremlin said that Russia is clearly not going to supply gas for free.

Why energy is significant in the war?

Europe remains heavily dependent on Russia for 40 percent of its gas imports and 25 percent of its oil.

While the UK and US have made it clear that they will stop buying Russian oil, the European leaders have avoided the talks of a total boycott of Russian gas and oil. They have in return focused on reducing their imports through conservation and switching to wind and solar as fast as they can.

Even though estimates vary on the impact of total gas shutoff in Europe, it still involves a substantial loss of economic output.

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