EXPLAINER: What's next for Europe's natural gas during war?

EXPLAINER: What's next for Europe's natural gas during war?

Russian President Vladimir Putin is demanding payment in rubles for natural gas — or else

By The Associated Press

2 April 2022, 08:40

• 7 min read

Russian President Vladimir Putin chairs a Security Council meeting via videoconference at the Novo-Ogaryovo residence outside Moscow, Russia, Friday, April 1, 2022. (Mikhail Klimentyev, Sputnik, Kremlin Pool Photo via AP)

Russian President Vladimir Putin is demanding payment in rubles for natural gas — or else. Germany is talking about gas rationing in case of a cutoff. Prices for the fuel used to heat homes, generate electricity and power industry are through the roof.

There's a lot of discussion around natural gas in Europe against the background of Russia's invasion of Ukraine, to say the least.

Here are key things to know:

WHAT IS PUTIN PROPOSING?

Putin has said importers of Russian gas must now pay in rubles. European leaders said no dice — the contracts say euros or dollars and one side can't abruptly change that.

Changing currency would normally follow extended negotiations, analysts say, with customers demanding something in return for being exposed to fluctuations that would come with paying in the less-stable ruble.

The open questions about what the change could mean have sent shudders through energy markets, raising uncertainty about whether Europe's natural gas could be cut off and cause a major hit to the economy. But Russia also relies on oil and sales to fund its government as sanctions have squeezed its financial system.

The Kremlin offered what could be seen as a loophole. Importers would simply have to establish an account in dollars or euros at a designated bank, then a second account in rubles. The importer would pay the gas bill in euros or dollars and direct the bank to exchange the money for rubles.

In any case, Kremlin spokesman Dmitry Peskov said Friday that the change won't happen immediately: “Payments on shipments in progress right now must be made not this very day, but somewhere in late April, or even early May.”

European leaders have rejected the proposal as “blackmail” and say payments will continue in dollars and euros.

German officials wouldn't discuss the impact of Putin's decree other than to say they were examining it. Economy Ministry spokeswoman Beate Baron noted that Russia’s Gazprombank has been given 10 days to explain the procedure, “and of course we will in turn look carefully at that.”

A top European Commission energy official tweeted that the European Union was coordinating “to establish a common approach.”

WHAT IS PUTIN AFTER?

The Kremlin says the change is necessary because Western sanctions have frozen its reserves of foreign currency. Because the measure targets importers in “unfriendly countries,” it can be seen as retaliation for the sanctions that have cut many Russian banks off from international financial transactions and led some Western companies to abandon their businesses in Russia.

The economic advantages for Russia aren't clear. In theory, payment in rubles would increase demand for the currency and help the Kremlin prop up its exchange rate, which has regained ground from its initial plunge after the invasion. But gas exporter Gazprom already has to sell 80% of its foreign earnings for rubles, so the boost to the currency could be minimal.

The Kremlin indicates it also wants to extend ruble payments to other commodities, such as metals.

One motive may be political, said Stefan Meister, head of the program on international order and democracy at the German Council on Foreign Relations.

“Russia is not interested in stopping gas, but it wants a kind of political victory,” Meister said. “It wants to show that Putin dictates the conditions under which it exports gas."

The move is partly aimed at Russia's domestic audience, Meister said, with Putin telling his people: “Look, these are enemy states and now they have to pay under a different scheme."

“So I think that this is also about getting support inside the country, defining who are the enemies,” Meister said.