The Cost of Energy Dependency

Russian President Vladimir Putin chairs a government meeting via a video link at the Novo-Ogaryovo state residence outside Moscow on Wednesday. Putin said Russia will only accept payments in rubles for gas deliveries to "unfriendly countries," which include all EU members and the U.S.   Mikhail Klimentyev/Sputnik/AFP via Getty Images

"I have decided to implement ... a series of measures to switch payments — we'll start with that — for our natural gas supplies to so-called unfriendly countries into Russian rubles." 

"Russia will continue, of course, to supply natural gas in accordance with volumes and prices ... fixed in previously concluded contracts."

"The changes will only affect the currency of payment, which will be changed to Russian rubles."

Russian President Vladimir Putin

"At face value this appears to be an attempt to prop up the ruble by compelling gas buyers to buy the previously freefalling currency in order to pay."

Vinicius Romano, senior analyst, consultancy Rystad Energy

"It is unclear how easy it would be for European clients to switch their payments to rubles given the scale of these purchases."

"However, there are no sanctions in place that would prohibit payments of Russian gas in rubles."

Leon Izbicki, associate, consultancy Energy Aspects

AFP/Getty Images

Punishment and its sister spite have aided Russia in drawing up a list of 'unfriendly' countries who just happen to correspond to any imposing sanctions on Russia for its sudden invasion of Ukraine. Agreements with companies and individuals from the marked countries must be approved by a government commission. Some of the listed countries like the United States and Norway make no purchases of Russian gas and some others purchase so little they have no need of it whatever.

 

The list Russia has compiled includes but is not exclusive to the United States, European Union member states, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and -- suppress that laugh -- Ukraine. Questions arise over whether this decision of Russia to impose this kind of 'penalty' would breach contract regulations agreed in euros.

"This would constitute a breach to payment rules included in the current contracts", a senior Polish government source complained, adding there is no intention on Poland's part to sign new contracts with Gazprom following the current long-term agreement's expiration in 2022. "I can't imagine we will agree to change the terms of that", he stressed.

Punishing Russia with sanctions and more sanctions for its misdeeds and now the incalculable horrors of a full-on conflict with Ukraine has given Vladimir Putin inspiration on pay-back. It's the steep price that comes with dependency. Without Russia's natural resources bonanza paying the freight for his technologically-updated war machinery inspiring him to the belief it'll be a quick in-and-out to achieve  his aspirations to help himself to Ukraine's territories, his level of confidence would be somewhat less.

 

In the full confidence of European dependence on Russia's gas and oil, Mr. Putin feels he's still holding aces.  His rubles demand from 'unfriendly' countries sent prices for European gas into the stratosphere on concerns the region's energy crunch would be exacerbated. Heating homes and powering up industries is of vital concern to any economy and so it is with Europe who in their fury over Russia's invasion of Ukraine exacted their own punishment on Russia.

 

To the EU's consideration of whether to sanction the Russian energy anchor, Putin took the initiative to snap back: Buy our currency or forget about acquiring our gas. Europe's need of Russian gas accounts for 40 percent of its total usage. Fluctuating between 200 million to 800 million euros daily so far in 2022. The demanded currency change has the potential to disrupt that trade, sending wholesale gas prices 30 percent steeper after the announcement.

 

Since February 24 when Russia began its invasion of Ukraine, the Russian currency has fallen about 20 percent. Major banks are wary of trading in Russian assets and some buyers of Russian gas in the European Union were unable to clarify how they would go about paying for gas under the new demand. 58 percent of Gazprom's sales of natural gas to Europe and other countries from January 27 were paid in euros, with U.S. dollars accounting for 39 percent of gross sales and sterling 3 percent. 

The European Commission plans to end reliance on Russian supplies of gas "well before 2030" and has started out with plans to cut its dependency by two-thirds this year. EU states, given their dependency on Russia's energy sector, however, have not agreed to sanction it. Germany's Economy Minister plans to discuss with his European partners a potential response to Moscow's gas payments announcement. Even while Germany's Habeck stated that the demand represented a breach of delivery contracts.

 

A Russian Gazprom vessel — a floating storage and regasification unit — is seen anchored offshore in the Baltic Sea near Kaliningrad, Russia, in early February. (Vitaly Nevar/Reuters)

"It's difficult, given the current economic situation, for Russian authorities to abandon sales of oil and gas to the Western countries."

"You can say, 'We do not trust euros or dollars,' but economically it's the same operation. Money is money."

Marcel Salikhov, president, Institute for Energy and Finance, Moscow