Little more than hot air: What will change if natural gas is paid in rubles

Putin is demanding payment in rubles for its natural gas exports. However, the contracts are denominated in euros and dollars. One would think that Putin would benefit from a change towards the ruble (why else would he act that way). But that’s not the case at all.

Let’s compare the two payment methods. 

Method 1 is the payment method valid until yesterday:

euros/dollars -> Gazprom -> rubles

With this payment method, the demander (e.g. Europe) pays for Russian gas in their own currency (e.g. euros), and the supplier (e.g. Gazprom) exchanges that money into their currency (rubles).

Method 2 is the payment method that might apply from today:

euros/dollars -> rubles -> Gazprom 

As you can see, with the second payment method, only the order changes. Gas buyers have to exchange their domestic currency for foreign currency before paying.

What are the differences in practice? 

The most important difference is that gas consumers need foreign currency to pay for the commodity. Therefore, importers have to find a bank that exchanges euros and dollars for rubles. That could be cumbersome because some Russian banks have been either blocked or cut off from the SWIFT messaging system that facilitates international payments. But there were two notable absentees: Sberbank of Russia PJSC and Gazprombank. And it is precisely the latter bank that is needed in gas deals.

So a change to method two would not change anything given the current sanctions situation. Gas consumers could exchange their currency for rubles at Gazprombank and use it to pay for the gas.

Even if the sanctioning countries came up with the idea of extending the sanctions in the banking system to Gazprombank as well, nothing would necessarily have to change. Because as a Russian bank, Gazprombank would always have access to rubles since this currency is Russia’s state monopoly currency. So there can be no shortage of this money. So Gazprombank could always exchange foreign currency for rubles.

A second argument is put forward as to why Putin might have ordered the change: to strengthen Russia’s currency. The reasoning goes that gas consumers would have to ask for rubles to pay for their gas deliveries. This would cause the ruble to rise. 

What is forgotten: Even with the previous payment method, the Russian currency is in demand, just not from the gas demander, but the gas supplier. Gazprom regularly exchanges foreign currency for domestic ones – that is, buying rubles and selling euros and dollars. 

A third consideration. One might think that the new method is disadvantageous for Gazprom/Russia. They would no longer have the choice of keeping the foreign currency (to make foreign debt payments or purchase supplies abroad) or exchanging it into rubles (to pay wages and salaries or to transfer profits to the Russian state). But the assumption is wrong. The foreign currency is just somewhere else with method two – instead of at Gazprom at Gazprombank. Both have the same owner. – So there is practically no difference here either.

So I can only think of one real reason for Putin’s move: it is an internal Russian propaganda measure. We defend ourselves against the evil West! We force them to pay in our currency! That is the message to “his” people. 

In reality, nothing changes. At least not until Putin actually turns off the gas tap. Of course, I don’t know if Putin thinks about it. It would make sense to me. Europe is pulling out all the stops to become independent of Russian gas and oil. In two years, Putin will no longer be able to play off his resource power against Europe. Now would be one of the last chances.


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