Double blow to the dollar: gas for rubles, oil for yuan

On Wednesday, March 23, during a meeting between Russian President Vladimir Putin and the government, the freezing of Russian assets by a number of foreign countries and measures that can be taken to resolve the situation were discussed. According to the president, the countries that froze Russia's assets actually defaulted to Moscow, thereby "drawing a line" under the reliability of their currencies.

Everyone in the world now knows that "obligations in dollars and euros may not be fulfilled," the head of state continued. So, Vladimir Putin stressed, it does not make sense to supply Russian goods to other countries and receive payment in dollars and euros. Including natural gas.

Nevertheless, Russia will continue to supply it in accordance with the volumes fixed in the contracts at the contract price, but will change the payment currency. Now Russia will use only rubles in gas trade with "unfriendly" countries. The President separately instructed to ensure the possibility of ruble settlements with foreign counterparties.

Existing since May 2021, the list of unfriendly countries was expanded on March 7, 2022, now it is headed by the United States, Canada and the European Union, as well as Britain with its territories: Jersey, Anguilla, the British Virgin Islands, Gibraltar. Two days earlier, on March 5, 2022, Vladimir Putin signed a decree allowing Russian companies to repay debts to companies from unfriendly countries in rubles.

Those buyers of Russian gas who did not support Western sanctions - for example, Belarus, Hungary, China, Serbia and Turkey - will continue to receive Russian gas in the currency specified in the contracts.

The main addressee of Vladimir Putin's statement, of course, is the European Union, which is unable to completely abandon or at least qualitatively reduce its dependence on Russian hydrocarbon supplies in the coming years.

For the first time, Gazprom delivered gas to the EU in rubles in March 2019. Back then the buyer was Germany. However, the full transition to settlements in rubles is a phenomenon of a completely different scale and quality. The head of the German industry association Zukunft Gas, Timm Kehler, told the DPA news agency about the "great confusion" of the industry in connection with the position of Moscow. According to him, it is not yet clear what specific consequences this will have for gas trade.

Clarity on the issue should come within a week - it is during this time that the Russian Central Bank, on behalf of the president, should develop a new payment procedure.

We can name at least two consequences of Vladimir Putin's decision. Firstly, this will lead to a serious increase in the authority of the ruble as a means of payment and strengthen the position of the Russian national currency within Russia itself. Secondly, and more importantly, this decision looks like another step in the global process of moving away from the dollar as a systemically important world currency.

Collateral strengthening of the ruble

The main question remains whether the president's order will affect Gazprom's existing gas contracts. At the very least, this is possible, as Vladimir Putin asked the government to instruct Gazprom to make changes to existing contracts.

European partners are invited to either recognise the situation generated by European sanctions as force majeure and "renegotiate" in rubles, or break off deliveries altogether. The possibility, or rather the impossibility, of the EU's complete withdrawal from Russian gas in the coming years has already been considered in RUSSTRAT's materials.

A few hours before Vladimir Putin's statement, German Chancellor Olaf Scholz told the Bundestag that there is no substitute for Russian gas in the world right now, and abandoning it would mean plunging into recession, massive job losses and hitting entire sectors of the economy.

The logic of the circumstances is such that European consumers will have to reach an agreement - either switch to rubles, or cancel the freezing of Russian assets, or make other concessions. So far, there is no unity.

Thus, Bulgarian Energy Minister Alexander Nikolov has already announced his readiness to pay for gas supplies in rubles, since the country has a financial counterparty that can conduct ruble transactions. The head of the relevant energy committee of the German Bundestag added that payment in rubles is "technically possible", but this will require the EU to make a political balancing act - it may be necessary to circumvent its own sanctions and aggressive rhetoric.

On March 23, Russian Foreign Minister Sergey Lavrov said that no one predicted the West's seizure of $300 billion in assets of the Central Bank of the Russian Federation, calling the situation "theft". Apparently, Russia does not intend to forget about this theft.

Nothing prevents Russia from creating another task for "European partners" and appointing authorised banks for ruble payments those that the Europeans themselves cut off from SWIFT, setting up other banks as correspondents - to maximise the remaining commissions in Russia. It is not surprising that a number of sources reported that it is quite likely that gas payments in rubles will be discussed at the EU summit on March 24-25.

Separately, it is worth noting the economic effect for the EU - in addition to the consequences that Olaf Scholz spoke about. Back in early March, the EU Statistics Office reported a record inflation rate – in February it was 5.8% in annual terms.

The dynamics are quite typical: in January, inflation was 5.1% and, according to Trading Economics with The Wall Street Journal, was mainly due to the continued rise in energy prices - by 31.7% compared to 28.8% in January. By forcing the EU to buy rubles, Russia is repeating the American practice of "transferring" national inflation outside the country - in this case, to the EU.

International markets reacted immediately to the Russian leader's announcement of the new settlement procedure. The price of April natural gas futures at the TTF hub in the Netherlands soared by 20%, reaching a peak of €118.75 per 1 MWh, or more than $1,370 per thousand cubic meters based on the current exchange rate.

According to the Moscow Exchange, the ruble has sharply strengthened, passing the psychologically important level of 100 rubles per dollar, and is now trading in the region of 95-96 rubles per USD. The euro exchange rate at the moment fell to ₽110, the yuan lost up to 3% of its value.

We should expect further strengthening of the Russian currency. From a monetary and financial point of view, the transition to trading in rubles with foreign counterparties is commensurate with the sale of Gazprom's entire foreign exchange earnings on the domestic market. According to data for January, the Russian concern received about $9.5 billion a month.

Speaking about ruble payments for gas, Vladimir Putin made an important reservation, from which it clearly follows that the matter may not be limited to gas: "In the shortest possible time, we will implement a set of measures to transfer payments - let's start with this, with our natural gas."

The second obvious Russian commodity that may be a logical consequence of "gas rubles" is oil. According to Newsweek, since the beginning of the special operation in Ukraine, the EU has paid Russia about $16 billion - $9.5 billion for gas, $5 billion for oil, and more than $385 million for coal imports. Perhaps, in the near future, the transition to the ruble in the supply of Russian oil will take place. And this will not be an individual decision of Russia, but a coordinated policy of a number of countries.

"How Biden lost Saudi Arabia"

This was the headline of an article in The Wall Street Journal, the authors of which were frightened by Saudi Arabia's plans to accept yuan as payment for oil supplies to China.

About 80% of global oil sales are priced in US dollars, and Saudi Arabia's own currency, the rial, is pegged to the dollar. This has been the case since 1974, when Saudi Arabia pledged to trade oil only in dollars in exchange for security guarantees from Washington.

"The Biden administration has undermined this relationship at every turn, and the Saudis seem to have had enough of it," the WSJ editorial notes.

One of the administration's first foreign policy actions was to end US support for Saudi Arabia's war against the Iranian-backed Houthis in Yemen. He also removed from the Houthis the status “terrorist”. Then the White House postponed the planned arms sale to Riyadh under Trump.

The Houthis responded to Mr. Biden's gift by sending drones and missiles to attack the oil fields and cities of Saudi Arabia and its ally, the United Arab Emirates. Meanwhile, the Saudis are watching in horror as Biden seeks a new nuclear deal that will give Iran the resources to finance proxy wars against Saudi Arabia – until Tehran gets its own nuclear bomb," wrote the American financial publication, listing the threats.

Washington's claims to Riyadh over the murder of journalist Jamal Khashoggi in 2018 did not add to friendly relations. "The noble internationalists who make up the Biden administration mistakenly believe that a power like America can afford the luxury of cooperating only with morally pure people," the WSJ comments on what is happening.

As a result, during Washington's campaign to increase oil production to minimise the effect of sanctions against Russia, the Crown Prince refused to respond to Biden's requests to produce more oil, and he reportedly even refused to answer the US president's phone call.

"In this new era of great-power rivalry, the United States cannot afford to alienate allies who can help deter authoritarian aggressors who seek to harm US interests and values. The US is paying the price of the Ukrainian crisis for the loss of the Saudis," complains the WSJ.

In 2021, Saudi Arabia retained the first place in terms of oil supplies to China, increasing them by 3.1% compared to 2020. In absolute terms, exports totalled 87.58 million tons. Saudi Arabia accounts for up to 25% of Chinese oil imports.

In March 2019, the company disclosed its financial performance for the first time. Saudi Aramco's net profit for fiscal year 2018 was $111 billion, with total revenue of $355.9 billion. SA produced 10.3 million barrels a day, with just over half of that volume going to Asia, primarily China. The company supplied an average of 1 million barrels per day to North America, and slightly less to Europe.

At the conclusion of the Saudi Aramco deal with China, the largest seller and the largest buyer will fall out of the "petrodollar" turnover – at least $150 billion a year. Russia's transition to ruble payments for gas will add at least the same amount to this amount – based on the estimated portfolio of contracts for 173 billion cubic meters per year.

Just how many billions of dollars will fall out of the global hydrocarbon trade depends on the price environment and how many more countries will join the de-dollarisation process.

Step by step

Another problem is planned for Washington in the Indian direction: India and Russia can switch to trading under the rupee-ruble scheme, the starting point for which will be the yuan, sources tell the Mint newspaper.

India, the world's third-largest oil importer, is considering buying oil from Russia at a reduced rate to ease inflationary pressures. To increase oil purchases from Russia, India is working to address key issues, including ship availability, import insurance coverage, and the composition of the oil mix, taking into account the configuration of Indian refineries.

This is particularly important given the Western sanctions against Russia and Rosneft, which is attracting interest from Indian companies that want to take stakes in Russian projects and buy Russian crude oil. The cost of a unit of production of Rosneft is considered one of the lowest in the world, the newspaper notes, emphasising the advantages of Indian partners.

Known details of the future agreement include opening an account with an Indian bank by a Russian bank – and vice versa. Indian media remind that the rupee-rouble payment mechanism with Russia has already been tested on a small scale for some goods, such as tea.

The local currency trading mechanism is key to resuming trade with Moscow, as India buys a lot of defence products and nuclear energy technologies from Russia, exporting pharmaceuticals, machinery and agricultural products.

It is important to emphasise that the measures announced by the president primarily solve the problem of rapid strengthening of the ruble and the creation of a new network of settlements with counterparties, simultaneously removing a huge part of world trade in strategically important hydrocarbons from dollar circulation.

The next step could be the practice of sovereign pricing – at the moment, oil quotes are formed mainly in the West. European platforms also use the dollar to determine the price, which in one way or another remains as a measure of trade.

Proof of the conceptual de-dollarisation will be the exchange quotations of gas and oil not in dollars, but in rubles, yuan, rials and other national currencies. To achieve this goal, it is necessary to continue the policy of persuading the transition to national currencies in mutual settlements.

In this sense, the sanctions again turned out to be a good gift for Russia and the process of its sovereignty. The transition to national currencies in the trade of China, Russia, Saudi Arabia and India may well be a cause for reflection for other countries doing business with any of the four countries mentioned.

Selling Russian gas (and eventually oil) in rubles will definitely strengthen the ruble's exchange rate – which, when a certain limit is reached, will begin to hinder Russian exporters who do not trade in hydrocarbons. At some point, the ruble mass will have to be disposed of, and the Russian government will have to decide what to turn the “gas-ruble" into and where to direct it. But what's for sure – not in the money box.

Clearly, it is not worth investing them in foreign exchange reserves in the form of dollars and euros – the sanctions ban on trading in dollars is a very clear example, although the yuan may be a currency alternative. An asymmetric solution would be to create conditions under which the Russian ruble cannot be purchased at all, except to receive revenue in rubles for goods sold in Russia. Ideologically, this is nothing new; this is how the United States acts, simultaneously exporting national inflation to the world around it.

In other words, it is necessary to promote in every possible way the expansion of purchases of physical and tangible goods for rubles. Countries that buy hydrocarbons from Russia look like natural partners in the scheme described.

Vladimir Putin's statement, combined with the bilateral processes between China and Saudi Arabia, suggests a possible official start to the redistribution of world trade in hydrocarbons, which has existed in its current form since 1974. If successful, Russia will see a stronger national currency and easier international trade with key partners.

So far, it is impossible to declare the world's imminent rejection of the dollar. However, the alliance of the largest energy suppliers with the largest production, gradually displacing the US and EU to the second role in the global economy, will certainly be a factor that changes the entire global economy as we knew it before February 2022.