Gas deliveries: This is how Putin's ruble trick works

"Western gas buyers now have to pay for supplies from Russia in rubles. The corporations are examining, politicians are confused. The procedure is very simple.

Rubles, euros or at least a disguised exchange: For days there was great confusion as to how western buyers could pay for Russian gas in the future. Now the Kremlin has clarified the mechanism in a decree. In the end, western buyers have to pay in Russian national currency, only when rubles have arrived in the gas supplier's accounts is the delivery considered paid.

The new mechanism caused a great deal of confusion at corporate headquarters and in political Berlin, but is clearly stated in the Kremlin's decree: Western customers must first open a foreign currency account with Gazprombank and deposit euros or dollars there, for example. Then they open a second account in Gazprombank, denominated in rubles. In a third step, the Western customer must actively initiate the currency exchange. "This requires the customer's express order," says Russia professor Alexander Libman from Freie Universität Berlin.

With the decree, the previously discussed variant is off the table, that Western customers only transfer dollars or euros to Russia - and a possible currency exchange takes place later without the knowledge of the customer.

Chancellor Olaf Scholz was rather vague in his initial reaction on Twitter: "The payment for Russian gas deliveries will be made in euros or dollars in accordance with the current contracts." Even if one can read only conditionally a clear approval of the procedure of the Kremlin, a clear rejection sounds different.

Technically, little will initially change for Gazprom's major German customers: Instead of instructing their own German house bank to pay the money directly to Gazprom, the two Russian accounts would now be interposed. However, it is unclear whether the corporations are willing to go this route. The Düsseldorf energy giant Uniper did not want to comment on the new decree on Friday, nor did the Leipzig gas company VNG.

The economic logic behind the decree is disputed among experts: some had speculated that Putin wanted to use it to support the exchange rate of the national currency, the ruble. However, Russian companies already have to convert 80 percent of their foreign currency earnings into rubles within three days. With the new decree, 100 percent would then be exchanged for rubles. "That doesn't really matter for the ruble rate," says currency expert Ulrich Leuchtmann from Commerzbank.

For the Kremlin, the new approach has a completely different advantage: Russia can better ensure that the money gets to the country at all. If Western gas buyers had had to convert their dollar or euro sums into rubles in the West before making a transfer, the money in the financial system might have been more easily the target of sanctions. "Putin was obviously afraid that the money could then be frozen," says Russia professor Libman.

Russian gas is still flowing westwards unhindered. Gazprom pumped around 108 million cubic meters of gas through the pipeline system on Friday, a company spokesman said. The Federal Network Agency's situation report also reported "no special incidents". Experts expect that the new mechanism will only really take effect after a transition period of around two weeks."

 

The new order means that the West will not even theoretically be able to get Russian gas for free anymore. When a huge amount of money from the Russian central bank’s reserves was blocked, it meant that the West received equal value of  gas and oil from Russia for free.