Putin's demand for ruble payments? No way! say EU nations

Economists said the move appeared designed to try to support the ruble, which has collapsed against other currencies since Russia invaded Ukraine on February 24.

Published: 25th March 2022 09:07 AM  |   Last Updated: 25th March 2022 09:07 AM   |  A+A-

People walk past a currency exchange office screen displaying the exchange rates of U.S. Dollar and Euro to Russian Rubles in Moscow's downtown. (Photo | AP)


BRUSSELS: President Vladimir Putin's threat to have "unfriendly" countries pay for Russian natural gas exports only in rubles from now on got the not-so-friendly treatment from European Union nations on Thursday.

"I don't think anybody in Europe really know how rubles look like," said Slovene Prime Minister Janez Jansa.

"Nobody will pay in rubles."

If others put it less bluntly, it came down to the same, from German Chancellor Olaf Scholz to Italian Prime Minister Mario Draghi, who as former chief of the European Central Bank, knows something about currencies.

Early this week, Putin launched the idea that because of Western sanctions targeting the Kremlin and freezing Russian assets, they were "effectively drawing a line over reliability of their currencies, undermining the trust for those currencies."

So instead of euros and dollars, Putin wants Russian rubles for Russian gas.

Economists said the move appeared designed to try to support the ruble, which has collapsed against other currencies since Russia invaded Ukraine on February 24 and Western countries responded with far-reaching sanctions against Moscow.

Making such demands though, would fundamentally change contracts and render them null and void, several European leaders said during the first day of their EU summit.

"What we have learned so far boils down to the fact that there are fixed contracts everywhere, where the currency in which payment is made is also part of the contract," said Scholz.

"Those are the starting points that we have to work from."

Draghi simply said that if Putin pushed through the plan, "we consider it a violation of existing contracts."

And considering the skyrocketing prices for gas, Belgian Prime Minister Alexander De Croo even saw possibilities in the proposal, though not the kind Moscow intended.

"In any case, if one element of a contract is changed, than we can talk about a whole range of issues, including the price," De Croo said.

The Russian threat is potent since the EU imports 90 per cent of the natural gas used to generate electricity, heat homes and supply industry, with Russia supplying almost 40 per cent of the bloc's gas.

With the ruble in trouble because of the stringent economic sanctions, Putin would use any financial lift he can find.

He instructed the country's central bank to work out a procedure for natural gas buyers to acquire rubles in Russia.

But some analysts expressed doubt that it would work.

The European Union preserved a sense of rarely seen unity through four rounds of unprecedented sanctions against Russia over its invasion of Ukraine.

But at a summit Thursday, the 27 leaders faced division on the biggest issue of all: energy.

During the first month of war, EU nations imposed tough measures targeting Russia's economy and financial system as well as President Vladimir Putin and Russian oligarchs.

Unlike the US, they have so far spared Russian fossil fuels, highlighting the EU's reliance on the country's oil, natural gas and coal to keep homes warm and the wheels of industry turning.

"We are not at war with ourselves," Belgian Prime Minister Alexander De Croo said at the summit in Brussels, where sanctions and energy were key topics.

"Sanctions must always have a much bigger impact on the Russian side than on ours."

He reflected the position of EU nations like Germany, Austria and the Netherlands.

They are running up against other member states situated closer to Russia that want tougher action now.

"As long as we are purchasing energy from Russia, we are financing the war, and this is the big problem that we have," Finland Prime Minister Sanna Marin said.

She was joined by Baltic leaders in demanding swift action.

"We have to continue to isolate Putin's economy, Russia's economy, to stop the money flowing into the war machine," Latvian Prime Minister Krisjanis Karins told reporters.

"The most logical place to move forward is in oil and coal."

The EU imports 90% of the natural gas used to generate electricity, heat homes and supply industry, with Russia supplying almost 40% of EU gas and a quarter of its oil.

Instead of an embargo, the European Commission, the EU's executive arm, has proposed slashing the bloc's dependency on Russian gas by two-thirds this year.

The EU is in talks with the US to ensure extra deliveries of liquefied natural gas and have also started discussions with other suppliers.

Maria Zakharova, spokeswoman for the Russian Foreign Ministry, said Thursday that European nations that don't want to work with Russia on energy should "just tell their citizens who is destroying their prosperity and how. We will cooperate with those who are interested in ensuring their own energy security."

High energy prices triggered by a supply crunch in Europe have for months triggered rising energy bills and prices at the pump, worsening as the war has jolted energy markets.

Last year, the EU's imports of Russian goods were worth 158.5 billion euros, with mineral fuels accounting for 62%, or 98.9 billion euros, according to the European Commission.

Karins said the Ukraine war was a prime example where morals should trump money.

Despite Latvia's "high dependency on Russian oil and gas," businesses support a halt to trade in these goods, he said.

"They're telling to me sanctions are a necessity because we have to stop Putin's regime," he said.

"It's just money. If you're alive, if your infrastructure is fine, you can re-earn the money. Greenpeace has accused the European Union of bankrolling Russia's war by continuing to purchase its energy supplies."

"Fossil fuels have a history of being connected with conflict and war, wherever they come from, governments must phase them out as quickly as possible, not look for new suppliers," Greenpeace EU director Jorgo Riss said.

But Dutch Premier Mark Rutte signaled that EU countries were still too divided over the question of energy sanctions against Russia to produce an agreement on the matter at the summit.

He stressed the four sets of sanctions that the EU has already imposed against Russia over the past month.

"We will discuss sanctions; I don't think we will decide on sanctions," Rutte told reporters.

"Don't forget that the sanctions package in place at the moment is by far the toughest package I've seen in my lifetime as a politician."

The Russian stock market opened Thursday for limited trading under heavy restrictions for the first time since Moscow invaded Ukraine, coming almost a month after prices plunged and the market was shut down as a way to insulate the economy.

Trading of a limited number of stocks, including energy giants Gazprom and Rosneft, took place under curbs meant to prevent a repeat of the massive selloff on Feb 24 that came in anticipation of Western economic sanctions.

The significant restrictions on trading Thursday underlined Russia's economic isolation and the pressure on the financial system despite central bank efforts to curb market plunges.

Foreigners could not sell stocks, and traders were barred from short selling, or betting prices will fall, while the government has said it will spend $10 billion on shares in coming months, a move that should support prices.

The benchmark MOEX index gained 4.4% as some companies partially recovered losses from the plunge on the day of the invasion.

Airline Aeroflot bucked the positive trend by losing 16.4%, not a surprise after the US, European Union and others banned Russian planes from their airspaces.

Russian stocks were only a small part of emerging market share indexes even before the war and only for those with a high risk tolerance, given extensive cronyism, nontransparent accounting and widespread state interference.

They lost any attraction for most foreign investors when the Moscow Exchange was dubbed "uninvestable" about a week into the war.

"The stock market is really almost a sideshow at this point," said Chris Weafer, CEO at Macro-Advisory Ltd, a consulting firm.

"It's more a sentiment indicator because obviously companies are not raising any money on the stock market, and they won't be able to."

He said, however, that state-owned banks or funds may have been buying to support prices: "It does look like state-supported buying rather than any genuine interest on the part of investors."

Government efforts to stabilise stocks and the ruble that has plunged in value are a way to show that some confidence was returning and "to try to get that message across to people not to panic, that this is a temporary situation that will improve," Weafer said.

Nonetheless, he added, the Russian financial system remained in a "fragile" state.

Tim Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, said reopened trading was "deeply managed" and suggested that "for those Russians with some spare cash, there is nothing much else to buy as hedge to inflation and currency collapse".

Restrictions like shutting down and restricting the stock market are among those that Russia has taken to shore up the financial system against utter collapse, but they also close off the economy to trade and investment that could fuel growth.

Some foreign hedge funds have expressed interest in shopping for distressed assets, viable companies trading at knocked-down prices, but they have no way to take part because of the trading restrictions, Weafer said.

A US official called the severely restricted trading a "charade".

"This is not a real market and not a sustainable model, which only underscores Russia's isolation from the global financial system," Daleep Singh, a deputy national security and economic adviser to President Joe Biden, said in a statement.

The economic turmoil in Russia from sanctions and the war has been severe.

Hundreds of US, European and Japanese companies have pulled out of Russia.

There have been bank runs and panic buying of sugar and other staples.

The exchange rate of Russia's ruble has tumbled.

Outside Russia, the reopening of stock trading on the Moscow Exchange has little impact, including on the vast majority of US investors' portfolios, said Leanna Devinney with Fidelity Investments.

The exchange's market capitalisation, about $773 billion at the end of last year, according to the World Federation of Exchanges, is a fraction of that of major Western or Asian markets.

In comparison, the total of all equities on the New York Stock Exchange is roughly $28 trillion.

Russia's central bank estimates that retail investors owned roughly 7.7 trillion rubles of stock, equal to $79 billion, as of late 2021.

Stocks last traded in Moscow on Feb 25, a day after the MOEX sank 33% after Russian forces invaded Ukraine.

Russia restarted trading in ruble-denominated government bonds earlier this week.

Roughly a week into the conflict, Russia was removed from emerging markets indexes compiled by MSCI, a division of Morgan Stanley, after it determined the market to be “uninvestable”.

The London Stock Exchange suspended trading in shares of 27 companies with links to Russia on March 3, including some of the biggest in energy and finance.

The shares lost most of their value before that: Rosneft dropped from $7.91 on Feb 16 to 60 cents on March 2.

Sberbank plunged from $14.90 to 5 cents.


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