Russian gas for rubles: the response of "unfriendly countries". What's next?

On March 23, Russian President Vladimir Putin, in response to the West's default ("freezing" of Russian foreign exchange reserves, etc.), said that Russia would sell gas to unfriendly countries for rubles. The official reason: Russia can no longer make payments and settlements in "toxic" currencies, which can be seized at any time, and transactions in such currencies are blocked.

According to the president's instructions, by March 31, 2022, the government of the Russian Federation must approve a directive to representatives of the Russian Federation on the Gazprom Board of Directors to transfer payment for deliveries to rubles, while maintaining the supply volumes, prices and pricing principles established by contracts. Also, the government and the Central Bank were instructed to ensure the possibility of making payments for gas in rubles by the same date.

In total, at the moment, the list of unfriendly countries covered by the presidential directive includes 48 states and jurisdictions. Europe uses imports from Russia to cover 40% of its natural gas needs. A total of 175 billion cubic meters of gas were imported from Russia Germany is the largest importer of natural gas from Russia. In 2021, it purchased 48.2 billion cubic meters, 23.7% of total Russian gas exports.

In addition to Germany, Gazprom supplies natural gas to Austria, Bulgaria, Bosnia and Herzegovina, the United Kingdom, Hungary, Greece, Denmark, Italy, the Netherlands, Poland, Romania, Serbia, Slovakia, Slovenia, Turkey, Finland, France, the Czech Republic, and Switzerland. There are 20 countries in total, and almost all of them (with the exception of Turkey and Serbia) are on the list of unfriendly countries.

For the collective West, this was a real shock. The organisers of sanctions against Russia in this situation had a choice between bad and very bad. One option is to reject Putin's currency ultimatum, but at the same time save themselves (first of all, we are talking about Europe) from the cold and from an economic recession (Russian gas is necessary for the normal functioning of enterprises in many industries).

Another option is to agree to Putin's proposal. But then show your weakness, lose face. And not only this. You can also unwittingly support the Russian ruble as an international currency and, consequently, weaken the US dollar, euro, British pound sterling and other reserve currencies issued by the collective West.

The confusion continued for several days. And on March 28, the West finally announced its response to Moscow's currency ultimatum. It was announced on behalf of the G7 countries by German Economy Minister Robert Habeck. He said that the "Big Seven" (USA, Canada, Britain, Germany, France, Italy and Japan) will not agree to pay for gas in Russian rubles.

"All the G7 ministers were united that this is a unilateral violation of contracts. They stressed that the concluded agreements are valid, and the enterprises involved in them will remain loyal to them. This means that payment in rubles is unacceptable, and the affected enterprises are urged not to follow the demands (of the President of Russia)," the minister said.

"Putin's attempt to drive a wedge between us is obvious, but you can see that we will not allow ourselves to be divided, and the answer of the G7 is clear: contracts will be fulfilled," he added.

The last phrase ("contracts will be implemented") sounds very strange. Do the G7 think that Russia will continue to supply natural gas for free? Commenting on the statement of the German minister, deputy chairman of the Federation Council Committee on Economic Policy Ivan Abramov noted that the refusal to pay in rubles "will definitely lead to the termination of gas supplies”. Kremlin spokesman Dmitry Peskov commented on the statement of the Group of Seven as follows: "The fact that we will not supply gas for free is unequivocal”.

Some commentators believe that such a response of the Group of Seven is dictated by the desire of member countries to save face and the intention to bring the sanctions war with Russia to a complete victory. Others believe that the West has developed a fear of the Russian ruble.

The West is afraid to let the genie out of the bottle: to start creating demand for the Russian currency, which can suddenly become a competitor to the dollar, euro, British pound, Canadian dollar and Japanese yen. The West, of course, does not speak out loud about this currency phobia, but it affects the collective decision-making of the West in the sanctions war with Russia.

German media tried to soften the ultimatum nature of the German minister's statement. Like, the situation is hopeless. Germany and other Western countries simply do not have these rubles to pay for energy resources. But this is not the case. First of all, there are some rubles there. According to the Bank of Russia, at the end of 2020, the share of rubles in payment for Russian imports from the European Union was 27.5%. In the same year 2020, the EU used Russian rubles to cover 11.0% of its imports from Russia.

According to the results of the three quarters of 2021, these indicators were 27.4% and 8.6%, respectively. It can be assumed that Europe has formed some masses of ruble deposits, which could be immediately put into use.

Secondly, the missing rubles can be bought on the Russian currency exchange. It is still functioning. However, the West went along with the principle: it is better to freeze and go bankrupt than to support Moscow and the Russian ruble. In the current situation, the West expects to do some "energy manoeuvre". Partially reduce their exorbitant energy needs. And partially replace supplies from Russia with supplies from other countries.

Of course, there is no need to talk about the complete emancipation of the EU from Russian gas. In November last year, the EU prepared the report "Union-wide simulation of gas supply and infrastructure disruption scenarios (SoS simulation) 2021", which played 19 scenarios of interruptions in natural gas supply. But none of them completely excluded supplies from Russia.

In addition, if the Group of Seven managed to demonstrate the unity of the collective West, then in the EU, which consists of 27 states, such unity is almost impossible.

Back on March 8, it became known about the statement of Hungarian Prime Minister Viktor Orban, who said that under any circumstances his country will continue to receive natural gas and oil from Russia. This statement was made after a meeting with British Prime Minister Boris Johnson in London.

Orban noted that sanctions against the Russian energy sector will be a heavy burden for Hungary. The country buys most of its oil and gas from Russia, and 90% of families use gas to heat their homes. The Hungarian Prime Minister added that he cannot allow the suffering of his country's citizens.

I note that at the end of September 2021, Hungary signed a 15-year contract with Gazprom to supply gas bypassing Ukraine via the Turkish Stream. And Budapest considered this a great success for itself. In fact, Hungary is ready to pay for the remaining 14.5 years of the contract in rubles.

On March 27, Prime Minister Viktor Orban again rejected the idea of banning the purchase of Russian oil and gas. He said that after the introduction of a ban on the purchase of oil and gas from Russia in Hungary, the economy will stop. At the same time, the prime Minister added that the same position is taken by neighbouring Austria.

Apparently, the main stake in the emancipation of Europe from Russian energy carriers in Brussels is made on the supply of liquefied natural gas from the United States. On March 25, US President Joe Biden promised to provide the EU countries with such volumes of gas that would allow them to abandon Russian gas "long before 2030”.

According to him, the United States, together with international partners, is working to ensure the supply of an additional 15 billion cubic meters of liquefied natural gas to Europe this year. In the long term, the United States will supply at least 50 billion cubic meters of gas per year to EU countries.

But this is clearly not enough to compensate for the refusal of Russian supplies, which amount to about 175 billion cubic meters. Negotiations are underway with other suppliers. Qatar, Turkmenistan, Iran and the Eastern Mediterranean countries may become potential "alternatives" to Russia for the European gas market.

If the contradictions with Iran and the differences in the Eastern Mediterranean are resolved, Turkey can play an important role in the transit of natural gas from both regions to Europe. In any case, the development of alternatives requires a lot of effort and time. But it's not a year or two.

According to the official representative of the European Commission (EC) Tim McPhie, the European Union will be able to get rid of the need for Russian energy resources by 2027, the corresponding RePower EU program has been approved by the leaders of the EU countries.

This means that within five years, Russia has the opportunity, firstly, to strengthen its ruble and turn it into a popular currency in the world. Secondly, it is necessary to reorient the flow of blue fuel to other directions (primarily Chinese) – by 2030, Beijing plans to increase gas consumption by 1.4 times.

Thirdly, it is necessary to carry out a radical restructuring of the Russian economy in order to transform it from a "pipe economy” into a highly developed economy with a predominance of manufacturing over mining. The latter is especially important, as it will make Russia invulnerable to the most "infernal" sanctions of the West.