EU Warns Putin’s Rubles-for-Gas Demand Would Break Sanctions

Apr 14, 2022

(Bloomberg) The European Union has warned member states that President Vladimir Putin’s demand that “unfriendly countries” effectively pay for Russian gas in rubles would violate sanctions imposed on Moscow following its invasion of Ukraine.The European Commission, the EU’s executive arm, has presented its analysis of Putin’s decree, according to a person familiar with the matter. The assessment raises the stakes for Europe’s energy security since Putin threatened to halt gas supplies to buyers that don’t comply with the edict.Putin’s March 31 demand stipulates that European gas buyers open two accounts, one in a foreign currency and one in rubles, with Gazprombank responsible for converting the foreign currency into rubles and transferring the ruble payment to Gazprom.According to the commission’s preliminary legal analysis, Putin’s decree substantially alters the procedure and creates a new legal situation, said the person, who asked not to be identified because the assessment is private.

European governments — and companies — are still grappling with what the decree means in operational terms. The person said the EU would work with national authorities to inform European companies that hold contracts of the assessment and provide guidance. The Dutch government has backed the EU analysis and said it won’t allow its companies to follow through with the Russian payment demand.

Share of natural gas imports coming from Russia, 2020

Putin will hold an energy meeting on Thursday, which may provide more clarity on payments for the country’s fuel in rubles. Logistics issues and payments for Russian oil and gas exports will be discussed at the gathering, according to Russian news agency Interfax.

Benchmark Dutch front-month gas futures fell as much as 5.6% to 99.48 euros per megawatt-hour and were down 4.3% by 11:01 a.m. in Amsterdam. With the Easter break coming, trading and demand typically slide ahead of holidays. The equivalent U.K. contract slid 7.6%.

The new process would hand over total control to the Russian state through its central bank in terms of when the transaction is completed and at what point the buyer is released from the obligation, the person said of the analysis. It would also give Russia control over the applicable exchange rate, which Moscow could manipulate to its benefit.

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The analysis warned that this new method could introduce new costs to the buyer since the transaction would be completely controlled by Russia, the person said.

Crucially, the mechanism would be in breach of restrictive measures the EU adopted in response to Moscow’s invasion of Ukraine and has applied to the Russian government, its central bank and their proxies. The process may also have an impact on other bans on various money-market instruments that could be issued by Gazprombank.

Most member states have said they will not pay for gas in rubles. Germany reiterated on Wednesday that it was opposed to Russia’s demands.

Sanctions Compliance

The commission has repeatedly said that agreed contracts must be respected and that nearly all of those explicitly stipulate payment in euros or dollars, and the bloc will respond to any attempt by Russia to circumvent sanctions.

But the decision on how to pay for the supplies will ultimately rest on the companies buying gas from Russia and they will be in a tricky position as European firms need to comply with all the restrictive measures that are in force.