Buyers of Russian Gas Confused Over Putin’s Demand for Payment in Rubles

A model of a natural gas pipeline is placed on a Russian rouble banknote and a flag in this illustration photo on March 23, 2022. Dado Ruvic/Reuters

Asian and European importers of Russian gas remained puzzled on Thursday after Russian President Vladimir Putin said earlier that “unfriendly” countries must pay for Russian gas in roubles.

There are over 45 countries on Russia’s “unfriendly” list, including Austria, Germany, and Japan, where politicians and gas buyers on Thursday expressed confusion about how to handle Putin’s demand to pay for Russian energy in roubles.

Putin instructed the Russian central bank and the government to develop a mechanism to make the ruble payments within a week, while saying that Russian energy giant Gazprom would be ordered to make the needed changes to contracts.

Eswar Prasad, a trade policy professor at Cornell University, told Reuters that while “foreign importers would no doubt be happy to pay for their purchases of Russia’s exports in a currency that is collapsing in value,” getting access to roubles in a way that does not violate Western sanctions “could be tricky.”

Political leaders in Japan, which is the biggest importer of Russian liquefied natural gas (LNG) in Asia, had little idea how Russia would enforce the requirement to settle in roubles.

“Currently, we’re looking into the situation with relevant ministries as we don’t quite understand what [Russia’s] intention is and how they would do this,” Finance Minister Shunichi Suzuki said in parliament.

Spokespersons for three Japanese buyers of Russian gas—JERA, Tokyo Gas, and Osaka Gas—told Reuters that they were in the process of checking details on the rouble requirement.

German gas industry group Zukunft Gas told the DPA press agency on Wednesday that it was confused by the rouble requirement.

“We took the message that Russia wants [us] to pay for gas supplies only in rubles with great confusion,” Timm Kehler, the director general of Zukunft Gas, told the agency. “We can’t predict at this moment what specific implications this will have for the gas trade,” Kehler added.

Alfred Stern, chief executive of Austrian petrochemicals group OMV, told local media that it planned to continue paying for Russian gas in euros as they have no contractual basis to switch to roubles.

Analysts cited by the Financial Times said that changes to the payment currency were likely to create practical problems for European importers of Russian gas, who would likely need to renegotiate contracts that don’t have rouble settlement provisions.

Vinicius Romano, senior analyst at Rystad Energy, told Financial Times that Putin’s demand to settle energy transactions in roubles could give buyers a reason to “re-open other aspects of their contracts, such as the duration, and simply speed up their exit from Russian gas altogether,” which would be an unwanted side-effect of Putin’s move.

Some analysts say Putin’s demand for energy payments in roubles is likely a way of trying to shore up the Russian currency, which has dropped sharply in value since Russia was hit with sanctions over the invasion.

While the rouble has regained some of its value after an initial plunge from around 76 roubles to the dollar before the invasion to as high as 138 on March 8, experts say the currency will face more pressure in the face of ongoing sanctions.

“I believe what we are seeing now with the reappreciation of the ruble is just a correction,” Ipek Ozkardeskaya, a senior analyst at Swiss online bank Swissquote, told Fortune last week. “I don’t see the medium to long-term valuation being positive if the situation in Ukraine keeps escalating. Russia has already lost a lot in this conflict. They will be increasingly feeling the pinch of these sanctions.”

At the time of reporting, the rouble was trading at around 101.7 against the dollar.

Reuters contributed to this report.