Putin Wants Europe to Pay for Gas in Rubles

“I have decided to implement a set of measures to transfer payment for our gas supplies to unfriendly countries into Russian rubles,” Mr. Putin told a government meeting.

Gas prices in Europe spiked after Mr. Putin’s remarks, with Europe’s regional gas benchmark, the TTF month-ahead contract, rising 19% before retreating and ending the day lower. Brent crude oil prices also rose around 5% to above $120 a barrel. 

Russia supplies around 40% of the EU’s natural gas, a dependency that has cast a shadow over Europe’s response to the war. European leaders have scrambled since the war broke out to reduce the region’s reliance on Russian energy. Officials announced fresh legislation Wednesday to require gas storage facilities be filled to minimum levels and proposed the creation of a task force to coordinate gas purchases.

Mr. Putin said that Moscow would continue to supply gas in accordance with existing contracts. Russia’s list of unfriendly countries includes EU members, the U.K., the U.S. and others.

German Economy Minister Robert Habeck said Wednesday that Mr. Putin’s demand constituted a breach of contract. Mr. Habeck said that Berlin will discuss a response with its European partners.

Most global commodity deals are conducted in dollars—and to a lesser extent euros—and it is unclear how Russia could force its biggest customers to change. Sourcing rubles for Western utilities could be difficult if not impossible. Trading in the Russian currency has been severely hampered by Western sanctions as well as Russia’s capital controls, which seek to prevent capital flight from the country. 

The move could backfire for Russia. “Insisting on ruble payments may give buyers cause to reopen other aspects of their contracts—such as the duration—and simply speed up their exit from Russian gas altogether,” said Vinicius Romano, senior analyst at Rystad Energy consulting firm.

Payments for energy supplies were granted specific carve-outs in U.S. and EU sanctions to ensure the flow of energy and dollars could continue. Western nations designed sanctions to create maximum pressure on Russia’s economy without boomeranging on themselves. 

Even if buyers of Russia’s energy switched payments to rubles, there might be limited effect. Russia has already asked its companies that take payment in dollars and euros to swap 80% of their revenue into rubles, a way to create demand for the currency. But it has the practical impact of putting the onus of supporting the ruble on Russia’s customers, rather than the central bank or domestic companies.

The Russian ruble gained 7% to trade at around 98 rubles to the dollar after Mr. Putin’s remarks.

Russia’s government takes hold of dollars generated through energy sales. Sanctions on Russia’s central bank, however, have limited the country’s ability to use them. 

Russia Foreign Minister Sergei Lavrov said Moscow was surprised by the sweep of Western sanctions. 

“When the central bank’s reserves [were frozen], no one would think, out of those who made predictions, what sanctions the West might apply,“ he said on Wednesday.

Mr. Putin directed the central bank and the government to determine the procedure for such transactions within a week.

Jason Tuvey, a senior emerging markets economist at Capital Economics, said that the move was likely aimed at boosting the ruble and reducing Russia’s reliance on Western financial infrastructure. However, the downside is that it would reduce Russia’s already diminished inflow of hard currencies needed to pay for imports.

“Ultimately, I guess this simply reinforces the idea that Russia will continue its drift toward autarky,” Mr. Tuvey said, referring to an inward-looking economic system that seeks to diminish ties with the outside world.

Europe, meanwhile, is under heavy pressure to address concerns about the security of its energy supplies and its reliance on Russia. 

The European Commission proposed legislation that would set a minimum natural-gas storage level of 80% by Nov. 1, a move that is meant to ensure enough energy supply to get through next winter’s heating season. The minimum storage level would increase to 90% in subsequent years, it said.

The commission also laid out options for possible emergency measures to deal with surging electricity prices. Those could include financial compensation, either at the retail or wholesale level, or a regulatory cap for the maximum price that could be charged for gas. 

Ben McWilliams, a research analyst with Brussels-based think tank Bruegel, said the EU should also be putting more emphasis on reducing its overall energy use.

“Demand has to be reduced,” Mr. McWilliams said. “If we live in this world of subsidizing prices and protecting consumers by artificially keeping prices low—which means demand stays high—we’re heading for a huge crunch.”

Write to Georgi Kantchev at [email protected], Caitlin Ostroff at [email protected] and Kim Mackrael at [email protected]