Ukraine war: What is Putin's aim with the ruble compulsion?

Kremlin chief confuses West

Created: 03/25/2022, 08:58

By: Matthew Schneider

Putin only wants to accept rubles for his natural gas.

His project is confusing the West.

© Patrick Pleul/dpa-Zentralbild/dpa

Vladimir Putin only wants to accept rubles for his natural gas - and creates confusion in the West.

What the Kremlin boss's new move means and what scenarios arise for Germany.

Moscow/Munich – When Russia's President Vladimir Putin announced on Wednesday (March 23, 2022) that in six days he would only accept rubles for Russian natural gas from "enemy states", there were confused faces in "enemy" Germany.

So far, freezing Russia's dollar, euro and Swiss franc reserves has been one of the West's most powerful sanctions in the Ukraine war.

As a result, the Russian national currency was in free fall and Putin's foreign purchasing power had shrunk enormously.

It was largely maintained by the gas trade, which reliably brought the Kremlin vital foreign exchange from the West.

Ukraine war: What does Putin want to achieve with compulsory rubles?

So why does Putin suddenly want to be paid in his crashed national currency?

"With regard to Western currencies, it shouldn't matter to Putin whether Europe pays for gas in euros or rubles," explains Jürgen Michels, chief economist at BayernLB.

“In the first case, the payment is made in euros or dollars, and the recipients in Russia can then exchange it for rubles.

In the second case, the customer in Europe has to exchange their euros for rubles in advance in order to pay the bill.” This currency exchange would have to be largely processed through the Russian central bank.

"In both cases, foreign exchange comes to Russia, which Putin needs to buy abroad and to service the interest on government bonds," says Michels.

But while buying gas in euros, for example, does not involve the Russian currency,

Putin is confusing the West with his ruble demand

According to the economist, it now depends on which contracts the Russian gas suppliers present to Europe: "It would make economic sense for Russia to fix the prices if the ruble is bad against the euro, which is the case at the moment".

Because: “If the external value of the Russian currency then increases – which could be triggered by the forced exchange for gas purchases from the West – the purchasing power per cubic meter of gas increases.”

Ukraine war: Putin needs money - ruble compulsion as a solution?

Michels explains it with an example: 5,000 rubles are agreed for a cubic meter of gas.

At the current exchange rates, this would correspond to a value of around 50 euros.

If the ruble rises by 50 percent, Europe would have to pay 75 euros per cubic meter of gas without the contract being changed.” Putin could then exchange these more valuable rubles for more foreign currency at his central bank.

“He needs this to pay interest and repayments of government bonds.

Around two billion euros are due in April alone.

He has to pay this because otherwise he is considered internationally unworthy of credit,” explains Michels.

Because: "After the war, Putin will urgently need money to restructure his budget."

Putin's plan with his national currency crashed

The appreciation of the ruble would also have a psychological effect: “It would show the population that their currency is in demand.

Because of the drop in the exchange rate, many Russians had fled the ruble to other values, which is also damaging confidence in the state.” However, due to the many sanctions, Russia would benefit little from a stronger currency when it comes to imports, and it would only have a minor impact on the Russian domestic economy .

Russia's New Treaties: Will the West Go For It?

The question now for politicians and energy traders is whether they want to get involved with Putin's new contracts.

For the suppliers, however, it is initially irrelevant whether Russian gas is becoming more expensive or is missing on the European market, explains Detlef Fischer, head of the Association of Bavarian Energy and Water Suppliers: "For gas customers, everything depends on how the suppliers were in the past have shopped.

Anyone who buys years in advance, like most established energy suppliers, is immune to short-term price spikes.”

There are then problems for suppliers who had gambled on getting cheap prices on the short-term spot markets.

“The high prices have to be passed on to the customers.

If this is not possible because of contractual obligations, the utility may go bankrupt.

We experienced that with some discount providers at the end of 2021,” warns Fischer.

Ukraine war: Energy prices hit historic high

If Putin breaks the contract and, in the worst case, stops deliveries, there could be problems elsewhere: "The upstream suppliers, i.e. those who buy the gas at the border and sell it on to the suppliers, then find themselves in a quandary.

They would have to stick to the old, low tariffs that they have concluded with German public utilities, for example.” If import prices rise too much, the upstream suppliers could go bankrupt.

"As a result, all acceptance contracts would no longer be able to be fulfilled," explains Fischer.

The result would be a cascade of problems: "The suppliers would then have to buy new supplies in free trade at historically high prices, which would pose enormous problems for consumers - privately and commercially." Fischer warns: