G-7 Reject Paying for Russian Natural Gas in Rubles

G-7 Reject Paying for Russian Natural Gas in Rubles
German Economy and Climate Minister Robert Habeck speaks during an extraordinary session, after Russia launched a massive military operation against Ukraine, at the lower house of parliament Bundestag in Berlin, Germany, on Feb. 27, 2022. Michele Tantussi/Reuters
Nicholas Dolinger
Updated:

The German energy minister has announced that the Group of Seven major economies (G-7) had agreed to reject categorically Russian President Vladimir Putin’s demand that payments for Russian natural gas be made in rubles.

On Monday, when asked about Putin’s ultimatum demanding that “unfriendly countries” must make payments for natural gas in Russian fiat currency, German politician Robert Habeck told reporters “all G-7 ministers agreed completely that this (would be) a one-sided and clear breach of the existing contracts.”

Habeck continued, “payment in ruble is not acceptable and we will urge the companies affected not to follow Putin’s demand.”

The remarks follow after a demand issued by President Putin on Wednesday, requiring that all payments for exports of Russian natural gas must be made in the country’s fiat currency, the ruble, which has lost more than 50 percent of its value relative to the U.S. dollar since the beginning of the year—particularly after Russia’s invasion of Ukraine and the subsequent sanctions from the United States and its allies.

Many see this as an illegal violation of the country’s existing trade agreements, which make no such stipulation about payments for natural gas exports. However, the Russian head of state has remained steadfast in his commitment to the new policy, which is effective March 31st.

According to President Putin, the new policy is an attempt to protect Russian economic sovereignty from the freezing of assets by Western nations.

“[A] number of Western countries made illegitimate decisions on the so-called freezing of the Russian assets, effectively drawing a line over reliability of their currencies, undermining the trust for those currencies,” Putin said during a meeting last week, as he announced the new trade policy.

Since Putin issued this ultimatum, E.U. politicians have attempted to downplay its strategic significance, arguing that the move arises out of desperation.

“Putin’s demand to convert the contracts to ruble (means) he is standing with his back to the wall in that regard, otherwise he wouldn’t have made that demand,” Habeck stated.

However, other analysts consider Putin’s strategy a “masterstroke” of diplomacy, which could potentially salvage the value of the ruble by using Russia’s most powerful leverage in its negotiations with the western bloc: the flow of Russian fossil fuel exports to Western Europe.

Russia supplies about 40 percent of the E.U.’s natural gas supply, which has become especially relevant in Germany (the de facto locus of power in the E.U.) since the country’s decision to dismantle its nuclear program in the past decade.

Given the sensitive nature of natural gas imports and the waning European winter, existing trade sanctions have exempted natural gas. With the demand that energy payments be made in the currency of the Russian Federation, Putin is attempting to force the hand of the Western bloc by threatening the European energy supply.

Since the onset of the invasion, the ruble has collapsed relative to the U.S. dollar and all major fiat currencies, jeopardizing the entire Russian economy. Notwithstanding perhaps its large and powerful military and nuclear arsenal, Russia’s greatest leverage may lie in its fossil fuel exports to Europe.

However, compliance with Russia’s demand would likely weaken the position of the Western bloc, which accounts for the G-7’s refusal to comply. With the European winter receding as April approaches, the timing of Putin’s demand is perhaps less threatening than it may have been three or four months ago. However, in the medium and long term, European policymakers will find themselves in a difficult position as they attempt to shore up E.U. energy independence in time for the next and subsequent winters.