As Russia demands rubles for gas: What options for the West?

The Russian President, Vladimir Putin, Thursday, issued a decree demanding payment for the natural gas in rubles, a demand apparently intended to help bolster his country’s currency.  However, European leaders say they will not comply with the demand because it violates the terms of contracts and sanctions, insisting payment remains in euros and dollars not […]

The Russian President, Vladimir Putin, Thursday, issued a decree demanding payment for the natural gas in rubles, a demand apparently intended to help bolster his country’s currency. 

However, European leaders say they will not comply with the demand because it violates the terms of contracts and sanctions, insisting payment remains in euros and dollars not rubles. 

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Putin’s announcement came a day after the leaders of Italy and Germany said they received assurances from Putin about gas supplies. 

According to Putin, Russia gas supplies will be cut off if buyers don’t agree to the new conditions. He fixed last Friday as the first day to start accepting the rubles payment. 

“If these payments are not made, we will consider it a failure of the buyer to fulfill its obligations, with all the ensuing consequences,” he said. 

The Kremlin decree published by state media indicates that countries deemed “unfriendly” for imposing sanctions on Russia over its war in Ukraine can continue to pay in foreign currency through a Russian bank that will then convert the money into rubles. 

The “unfriendly” countries are made of those that have rolled out sanctions, which include the United States, European Union member states, Canada, Japan, Norway, Singapore, South Korea, Switzerland, Ukraine and the United Kingdom.

Also, it’s a known fact that Europe is heavily dependent on Russian natural gas and, if Putin holds these countries hostage, they would struggle with a sudden cut-off. But, what alternative do they have?  

Many analysts believe that the answer to this question will be determined by how much Europe will pay for the gas, if the global energy market is held hostage by the Kremlin. 

Russia is the world’s largest exporter of gas in terms of volume, accounting for nearly 50 percent of the EU’s imports in 2021, and more than 40 percent of the energy needs of Europe’s largest economy, Germany. 

Meanwhile, Russia itself depends on oil and gas sales for much of its government revenue at a time its economy is under severe stress from Western sanctions.  

Putin’s demand, which includes opening ruble accounts in Russian banks, has caused natural gas prices to gyrate and raised fears it could be a prelude to an interruption of supplies to Europe. 

How much money does Russia make from the sale? 

Russia makes about $700 million on natural gas daily, and 70 per cent of its exports go to Europe. 

In total, the West pays upward of $1 billion daily to Russia for oil and gas.  

Going by estimate, Russia has already made more than $100 billion in revenue from oil and gas within the first quarter of this year. 

That is more than 50 per cent of what the Russian finance minister projected. Moscow has now weaponised the very same supply and the message is quite clear: “Stay out of Ukraine or run out of gas” and it’s a top choice for Europe. 

Can the West still go ahead  to sanction Russian oil and gas? Report says Germany, Netherland, and the United Kingdom are having second thoughts. But the US had banned its import of Russian oil. 

Announcing the ban, President Joe Biden said the US will target “the main artery of Russia’s economy” by banning the import of Russian energy products. 

He, however, ordered a major release of up to 180 million barrels of oil over six months from America’s reserves in an effort to bring down high fuel costs. 

Yet, analysts said the US ban on Russian oil will not make any impact because the US dependency on Russian oil is very low, at only eight percent.

So, if Europe does not join the US in banning the Russian’s oil and gas, the ban will be largely symbolic, thus the European countries are protecting their economies, bankrolling Russian war at the same time.

As it is now, there is no disruption of Russian supplies but the fear of a ban has pushed the price of oil and gas up world over. 

As the end of the Russian/Ukraine war is nowhere in sight, the effort of President Biden to pump more oil and stabilise the world energy market may not achieve the desired goal. 

His effort to get his allies to join him in pumping more oil into the market may not also yield much as he is at odds with many of them, including US closest ally, Saudi Arabia. 

Some analysts accuse Biden him of being more interested in lecture than partnership. Report says  he is considering a trip to Saudi Arabia on two issues – in the short run, to get Riyadh to produce more oil and in the long run to repair the bilateral ties.

Analysts say expensive oil is not only good for Russia but also for Saudi Arabia. What this means is that Riyadh will demand more in return to make this huge sacrifice. Perhaps more defence exports, less lectures on freedom and more support on the Yemen war. 

Last week, the Saudi Arabian crown prince seemed to tow this line when he said, “I don’t care if Biden misunderstood me” and that has set a tune for any meeting between the two leaders. 

Next on the Biden checklist is Venezuela. This will even be more difficult because the US did not support President Nicholas Maduro during the county’s last election. 

Washington has also slammed heavy sanctions on Venezuela. But, penultimate Monday, Biden sent a delegation to Caracas and Nicholas said the talks were cordial. 

Due to the US sanctions, Venezuela could not sell oil. If the sanction is lifted and the oil gets into the market, the price may gradually stabilise. But Venezuela is a key Russian ally, possibly Putin’s best bait in Latin America at the moment. 

So, if Biden can force President Nicholas Magudo to take side, it means he will further isolate Moscow. That sounds great, but there are two major problems.  

One, Venezuela’s oil industries are in the dumps. In the 1990s, they produced 2.2 million barrels per day. Today, they produce around 800,000 per barrel a day. So Venezuela does not have the capacity to fill the gap, and President Maduro does not want to lose a strategic ally

What next? 

German economy minister, Robert Habeck, has said his country will not achieve full independence from Russian energy supplies before mid-2024. 

So, if the German government does not secure enough gas, its industries which use a quarter of the country’s gas imports will be hit hard. 

“This means industrial production gets lost, that supply chains get lost,” Leonhard Birnbaum, chief executive of German energy group E.ON, told public broadcaster ARD. 

“We are certainly talking about very heavy damages.” 

Last week, Deputy Prime Minister, Alexander Novak, issued a threat: “If you ban Russian oil, there will be no gas for Europe”.

For now, the scenario looks dicey for both sides as they need each other to survive. The only hope is that a truce may be reached between Russia and Ukraine which may halt the likely economic catastrophe that is starring the world.