Tuesday, May 24, 2022

Germany, Italy Say Putin Offers Compromise on Ruble Gas Payments

(Bloomberg) — Germany and Italy said Vladimir Putin told them that European buyers could continue making gas payments in euros, potentially averting a showdown over Russia’s demand that customers switch to rubles.

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“Putin said that current contracts will remain in place,” Italian Prime Minister Mario Draghi said at a press conference Thursday, recounting a phone conversation with the Russian president a day earlier. He said conversion from those payments into rubles would be done internally within Russia. “The feeling I had it is not absolutely easy to change the currency without violating contracts.”

German officials said Putin delivered a similar message to Chancellor Olaf Scholz in a call Wednesday.

But Kremlin said Thursday Dmitry Peskov and the buyers would still have to obtain rubles in exchange for the dollars or euros specified in the contracts. Prices and volumes wouldn’t be affected, he said. “De facto, there will be no changes for buyers of Russian gas,” he said, without elaborating on how the rubles would be acquired.

As traders struggled to make sense of the murky reports, European gas prices fluctuated between gains and losses on Thursday. Fear of a possible cutoff of Russian gas — worsened by the threats on ruble payments — had driven prices higher in recent days. Putin had set March 31 as a deadline for his government and central bank to come up with a mechanism to fulfill his demand announced last week. Peskov said Russia will details of that scheme soon.

When he announced the move against “unfriendly countries,” Putin portrayed it as retaliation for sweeping Western sanctions imposed over his invasion of Ukraine. The Kremlin, seeking to use its leverage as Europe’s largest gas supplier, hinted it might cut off countries that refused. But the Group of Seven leading industrial nations flatly rejected the demand, saying it violated contractual terms.

Authorities in Germany and Austria warned that the dispute could lead to an interruption in vital supplies.

According to Berlin, Putin offered to allow customers to continue paying in euros but to route them to Russia’s Gazprombank for conversion into rubles and transfer on to Gazprom, the state-controlled energy giant. Italian officials said European buyers would have to open a euro account with a Russian bank.

Peskov confirmed that a role for Gazprombank was under consideration but provided no details.

Draghi said gas supplies from Russia are not at risk.

“It is absolutely not easy to change the currency used to pay for key goods internationally,” Italy’s Draghi said. “For example, Europeans tried in recent years to change into euros payments for oil and this has not been easy. Technical difficulties are hard to overcome.”

According to a Russian source with direct knowledge of the situation, the offer isn’t a concession from Moscow as this is the approach that was planned from the start. It will require European buyers to have both foreign-currency and ruble accounts with Gazprombank, he siad, speaking on condition of anonymity to discuss matters that aren’t yet public.

‘Send A Message’

“I think ultimately Russia wanted to send a message that as long as its gas is being paid for in time and in full (irrespectively of which currency is used), the gas will continue to flow,” said Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies. “If Europe were to lose supplies of Russian gas it would be not because of Russia cutting them off but because of Europe not paying for them.”

Another motivation may have been to protect Gazprombank, one of the few major Russian banks that’s so far avoided the most severe western sanctions, from future restrictions, she said.

Europe gets about 40% of its gas from Russia and is already grappling with fallout from record prices this winter.

Economists said the impact on the ruble would likely be limited because Gazprom is already required to sell 80% of its foreign-exchange earnings for rubles under the capital controls imposed after the latest sanctions hit. The shift would effectively raise that to 100%, not a large enough change to have a major effect on the currency, according to economists.

“This talk to move to rubles was never going to be enforced tomorrow unilaterally as that would break existing contracts, something that Russia said it would never do,” said Chris Weafer, chief executive officer of Macro-Advisory Ltd. “Now it is clear when the contracts come up for renewals, they will then convert to ruble payments.”

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