Whether or not to pay in rubles for Russian gas? This is how Putin’s goat path works

Hungary is willing to pay for Russian gas in rubles in a roundabout way, as Russian President Vladimir Putin demands. German, Austrian and Slovakian energy companies are also kneeling before the Russian demand. But the European Commission says it is not allowed. However, the companies use a small detour.

Russian President Putin recently announced that EU companies will in future have to pay for their gas in rubles instead of euros or dollars. With this, Russia hopes to increase the demand for its own currency, making the ruble worth more.

Two bills

That is not exactly the intention of the European sanctions. Moreover, all the sanctions make it virtually impossible for Western companies (and their banks) to get the necessary rubles. All transactions with the Russian central bank are prohibited and many other Russian banks are also on the sanction list.

The ruse made up by Russia: European companies must open a second special account with Gazprombank, the home bank of the Russian state gas company Gazprom. In the first account they deposit the money in euros or dollars.

Gazprombank then converts that money into rubles at the Russian central bank and puts it in the second ‘rouble account’. The state gas company is then paid from this. The effect of this is in fact the same as paying directly in rubles.

According to Dutch energy minister Rob Jetten, this detour is in conflict with European sanctions rules, he recently announced in a letter to parliament. Not everyone seems to agree on that.

Hungarians: we have to

Hungarian Foreign Minister Péter Szijjártó confirmed to CNN on Thursday that his country will use the mechanism. Hungary is 85 percent dependent on Russian gas, and cannot afford not to buy gas from Russia. “This is not for fun. We did not choose this situation ourselves,” said Szijjártó.

And a number of large energy companies also think they can get away with payments via the Russian construction. Germany’s Uniper said on Monday that payment via the two-account detour is not a violation of the sanctions laws. An Austrian and a Slovenian company are also planning to do business with Gazprom in this way.

Europe: it seems possible

The companies felt empowered by a memo from the European Commission. It states that Putin’s decree does indeed pose the risk of violating sanctions laws, but leaves a lot of room to go along with it.

“It seems possible” to pay for gas even after Putin’s decree comes into effect, the Commission concluded on Friday. The condition is that the money owed is paid in dollars or euros. “EU companies can make a clear statement that they want to fulfill their contractual obligation and that they consider their contractual obligation fulfilled by paying in euros or dollars.”

In other words, if you say that your payment in euros or dollars is the real payment as far as you’re concerned, you can get away with it.

Also Europe: it is not possible

On Friday, however, the tone was completely different in Brussels. “Complying with the decree violates the sanctions,” the European Commission’s chief spokesman said this afternoon.

“We cannot accept that companies are required to open a second account in rubles and that the payment is not made until it has been converted into rubles,” another official added. That would be a violation of sanctions, he said.

But why actually? It is not a matter of having an account with Gazprombank, because that bank is not subject to European sanctions, says sanctions lawyer Yvo Amar. That exception was made precisely to make gas payments possible.

And even paying in rubles is not prohibited in itself. But if you’ve only paid when the rubles flow into Gazprom, you’re actually doing business indirectly with the Russian central bank, Amar thinks. And that is not allowed.

When paid?

The big question now seems to be: when did you pay for gas? When the euros have been transferred to Gazprombank? Or when the rubles are in Gazprom?

According to the Russian reading, the latter is the case. And then payment via this mechanism is therefore prohibited for European companies, says the Commission. A difficult situation, because the Russians have shown that they are willing to bite the bullet with countries that do not accept it.

Poland and Bulgaria, two countries that refused to comply with the Russian decree, were cut off from the gas from Russia on Thursday. Other countries should also fear the same treatment.

Surprisingly…

Energy expert Jilles van den Beukel, of the Hague Center for Strategic Studies, finds this step surprising. “Putin is breaking a long-term contract with this.” Something that never happened until now because, despite everything, Russia wanted to be seen as a reliable supplier.

For the European market as a whole, this means that the market will become even tighter, and gas prices have risen again, says Van den Beukel. This makes it potentially lucrative for Russia to close off the countries, because the gas can be sold to others for more.

…a verdict

But it is not smart, thinks the energy expert. “Tactically it is a useful move in the short term, but it strengthens European countries in their determination to move away from Russian energy.”

That would happen very quickly if Russia decides to cut off gas to Germany or Italy, for example. In the short term, gas would then become incredibly expensive, but after that, Europe quickly moves away from Russian gas, completely drying up revenues for the Kremlin.

Does Putin want to go that far? “Rationally you would say: he better not do that, he shoots himself in the foot. But I don’t pretend that I can predict what he will do…”, concludes Van den Beukel.

(kg)

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