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26 Mar, 2022 06:31

What buying gas in rubles means for Russia and the West

Importers are puzzled by the switch, while the ruble surges against the dollar and euro
What buying gas in rubles means for Russia and the West

Russian President Vladimir Putin on Wednesday gave the country’s central bank and government one week to come up with a way to switch payments for Russian gas exports to the national currency, the ruble. The prospect raised many eyebrows among Russia’s gas buyers, who started to speculate how exactly this could be done and whether Russia would go through with the measure. Here are some ideas.

  1. Why the switch to rubles?
    The US and its allies have imposed unprecedented sanctions against Russia, targeting the country’s financial system. President Putin explained that illegitimate decisions by a number of Western nations to freeze Russia’s assets destroyed all confidence in their currencies. Russia’s energy exports have not fallen victim to Western restrictions yet, but nearly all gas purchase contracts are denominated in euros or US dollars, which makes them a potential target. But if Russia is paid in rubles, it could evade sanctions.
  2. Which countries does this affect?
    The proposed move affects “unfriendly countries” which imposed economic restrictions against Russia. These include the US, Canada, Australia, Japan, South Korea, and most EU states.
  3. What will happen if buyers refuse to pay in rubles?
    In this case, they won’t be able to buy Russian gas, since any other currency would not be accepted. This would be a blow for Europe, which gets more than 40% of its gas imports from Russia.
  4. How can ruble payments be handled?
    Russia’s central bank can sell rubles to gas buyers or they can buy the currency on the open market. It may also be wise for governments to hold rubles in their central banks, analysts say.
  5. How will the change impact Russia’s buyers?
    Natural gas is used for a variety of purposes, from heating and cooking to providing energy for industrial enterprises. Buying less gas from Russia effectively means paying more for the commodity on the open market. This leads to higher costs for industries and households, rising prices for all consumer goods, and recession.
  6. What does it mean for the dollar and euro?
    The dollar’s dominance as a global reserve currency could be compromised. Its strength comes from being pegged to global trade in oil and other commodities. The euro faces a similar challenge to a lesser degree, but less demand for the currency means a weakened position in the global basket of reserve currencies.
  7. What does it mean for the ruble?
    Increasing the ruble’s role in international trade would strengthen the currency, as it would be backed by Russia’s vast natural resources. With this backing and due to increased demand, it could one day be a major global currency. The ruble switch announcement has propelled the currency to a three-week high.
  8. What are the wider implications?
    In his announcement, Putin hinted that natural gas is just the first Russian commodity to be sold in rubles. “I have decided to implement in the shortest possible time a set of measures to change the payments for – yes let’s start with this – for our natural gas supplied to the so-called unfriendly countries to Russian rubles,” the head of state said earlier this week. His choice of words raises the possibility that other Russian export commodities could follow, including oil, metals, and grain. This would further strengthen the ruble and weaken the dollar and euro.

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