Gas in rubles and not in euros, what is Putin up to?

When the Europeans imposed sanctions on Russian companies and authorities, they did not sanction Gazprombank.

There was no other choice, because, otherwise, European companies would not have been able to pay for the gas they continue to import.

So Europeans pay Gazprombank in euros.

Can the Russian state access them?

The Russian state has a legal right to receive those euros at Gazprombank.

But to access them there has to be a settlement in euros, which goes through the payment system of the Economic and Monetary Union called Target 2. All transactions in euros, anywhere in the world, have to be settled through the Target system two.

What this payment system does is finalize the transaction, so that the Russian state is the legal owner of the euros that the European importers have transferred and the European importers are the legal owners of the supplied gas.

This is how it would be in normal times.

However, as one of the two parties to this transaction, the Russian State, is sanctioned, Target 2 cannot settle the payment and is discontinued.

This means that the Russian state cannot access the euros paid (assuming, of course, that the sanctions are effective and enforceable, which is not always easy).

To what extent does it solve the problem for Russians that they are paid in rubles instead of euros?

The important thing is not only payment in rubles.

The way you organize it also helps to avoid sanctions.

In the March 31 decree, when Vladimir Putin ordered that gas exports to Europe be paid for in rubles, he also instructed European gas importers to open two accounts with Gazprombank: one in euros and one in rubles.

The European gas importer deposits (through its own bank) euros into the Gazprombank euro account.

He then asks Gazprombank to convert the euros to rubles.

Gazprombank can buy those rubles on the market (where it is unlikely to find the necessary amount) or go to the Russian central bank.

To do this, Gazprombank can borrow rubles from the Central Bank of Russia, thereby increasing its reserves (deposits) in the Bank of Russia and bypassing the European payment system.

Gazprombank then transfers those borrowed rubles to the gas importer's ruble account.

From there, any type of settlement can be made, because it is a transaction between two accounts that belong to European gas importers.

Gazprombank may then, on behalf of the European gas importer,

pay in rubles to the Russian state with money taken from its deposits in the Bank of Russia.

In this case, it is not necessary to carry out any settlement in Target 2, since it is done entirely in rubles.

The result is that the Russian state receives the rubles it desperately needs to pay its bills and finance the war.

Sanctions are very complicated legal instruments with unforeseen consequences.

Naturally, the Russian state could force its central bank to print money to finance its spending.

But the Bank of Russia is an independent institution, so it would be illegal for the government to ask for it.

This ruble gas trick completely avoids that problem.

When Gazprombank borrows from the central bank, there is an implicit euro-to-ruble exchange transaction that may require a commission.

Foreign exchange fees are normally very low, but since the ruble market is probably very illiquid, Gazprombank could ask for a hefty fee, which would effectively increase the price of gas.

So this operation ends up being a price instrument in the hands of the Russian state.

So there is no breach of sanctions, but perhaps a breach of contract?

Gas contracts between European buyers and the Russian state are agreed and signed in euros.

Therefore, as far as European gas importers are concerned, payments are finalized as soon as the transfer is made in euros.

However, Putin's decree specifying the requirement for payments in rubles means that, for the Russian exporter, payment is not finalized until it is made in rubles.

That is, the Russian State does not consider the payment official until that moment.

The period between payment in euros and its conversion into rubles is a delicate moment for Europeans, because they run the risk of not receiving the gas after paying for it.

Interpreting how serious this risk is may be important in determining whether Putin's decree amounts to a breach of sanctions or a breach of contract.

The European Commission must be very clear about what it is about.

Maria Demertzis

is Deputy Director at Bruegel and

is a Senior Researcher at Bruegel.

From Demertzis, M. and F. Papadia,

(Bruegel Blog, April 19, 2022).

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