The article below says that Poland refuses to pay for Russian gas using rubles. Poland notes the terms of the contract does not specify they pay in rubles.
Ok, but, presumably, Poland is still paying Russia in some fashion. Whether it is the zloty or the euro Russia is getting currency. Indeed, foreign currency might be more useful to Russia right now since the collapse of the ruble in price.
I assume Putin wants the money in rubles to prop-up the ruble in exchange markets. But, if Putin has euros instead of rubles is that really worse? If Putin gets (say) euros can’t he buy rubles on the market with those euros and achieve the same thing?
I’m missing something here. I just do not know what.
I think what’s happening is that Putin would like to use his foreign currency reserves or the foreign currency proceeds from gas sales to prop up the ruble, but it is difficult for him to do so because nobody will transact with Russian banks, and Russia’s substantial foreign exchange holdings are at least partially frozen. So he’s trying to force the buyers of Russian gas to carry out ruble purchases on his behalf.
The Fed’s holdings of euros and yen are in the Fed’s accounts at the Bundesbank, Banque De France, Bank of Japan and the Bank of International Settlements. If the U.S. invades Canada and all these banks freeze the Fed’s accounts, the Fed has no way to access this money. Financing a war of aggression in which you no longer have access to the international financial system is not the usual reason for central banks to hold foreign currency reserves, so this is not generally a concern. In Russia’s case - well, this was poor planning.
It is a game of chicken. Will russia turn off the tap if the western energy companies don’t pay? They can’t pay in roubles, that everyone knows. But they can pay in euros to a third party who then buys roubles. Just as the Russian energy company would have done if paid in euros directly. Putin’s effort doesn’t change any financial result. Except that now the western energy companies are responsible for finding a third party to handle the transaction. The Russian energy company used to have that job, now it has been shoved off to the western companies. How that will play out is going to generate a lot of western legal fees. So, as usual, the lawyers laugh all the way to the bank. In the meantime, russia doesn’t get paid for the gas, which they weren’t effectively being paid anyway. Since while it was OK to pay in Euros, Russia wasn’t allowed to do anything with those Euros. So the game of chicken continues as spring arrives and the need for Russian gas drops.
FWIW Poland has noted that their contract did not specify payment in rubles. I am unsure if any currency was specified but, from a previous thread (that I can’t find) it was noted that such international contracts almost always specify the currency to be paid for services (usually a stable currency is chosen so likely euros or dollars). Poland’s stance here seems to be they will continue per what the contract stipulates.
Of course, Russia still might stop service (but I suspect they could use the money).
I wonder, too, unless Russia can salvage a good win out of the current war, then all that money in Western banks is at risk of being diverted to Ukraine for rebuilding the country. Some building contractors are going to get very rich in a year or so; and I don’t see a large effort in the west to pay to rebuild Ukraine if half of it is going into Russian pockets (not Ukrainian ones) skimmed off the top of any work.
Whereas if Russia loses bigly, then I’m sure the settlement will attach those frozen funds and plenty of future payments toward compensating Ukraine. So - another good reason those frozen funds are at risk, as maybe would be anything owed to Russia by energy companies in Europe. IF Ukraine sued Russia in, let’s say, Germany or Poland, could they effectively claim some or all of the money owed to Russia?
(If I were Ukraine, I’d settle for something like 60% of proceeds to encourage Russia to keep selling their gas.)
But for the OP - very simple, if Poland had to pay in rubles, then it would have to buy rubles on the open market (China? India?) to make payments, making it harder for the western banking system to freeze that money and also creating a demand that raises the value of the ruble.
I was reading an article about this earlier. Rather than try to reprocess it…
Although the details of the new arrangement aren’t clear yet, Putin’s demand for payments in rubles essentially forces European companies to directly prop up the Russian currency after it was sent into free fall by sanctions. Earlier this month, the Bank of Russia was already forced to hike interest rates to 20% in order to halt the ruble’s depreciation.
Putin’s gas-for-rubles plan would also bring Russia’s central bank back into the global financial system after sanctions have virtually cut it off from financial markets. “Putin would reinstall the central bank as a key player in the market because it is essential for paying gas bills with rubles,” Südekum told DW.
Payments for Russian gas purchases are usually so large that the amount of rubles needed cannot currently be secured on foreign currencies’ markets. Western buyers will most likely need to go via the Bank of Russia to make their payments, essentially undercutting sanctions against the Russian central bank.
So you can’t just buy enough rubles elsewhere to make payments of this size; the only place to get them is from Russia’s central bank. Western European nations would be forced to deal with Russia’s central bank and send it large amounts of western currency to purchase the devalued rubles, thus making rubles more valuable and softening the impact of sanctions.
I still don’t understand. To buy oil from Russia, you have to send Russia money, whether that is Rubles, Dollars, Euros, etc. I get the idea that Russia is trying to prop up its currency because nobody is selling them anything (almost) and the value of Rubles keeps going down.
But what is the difference between Poland sending Russia X Euros to its Central Bank to buy Rubels to pay the bill that just sending X Euros and letting Russia do what it wants with them, including converting them to Rubels in its own central bank?
In fact, wouldn’t Russia rather have Euros? At least they could run them through intermediaries who could pretend they were not of Russian origin, and would hold their value as the Rubel is expected to keep going down as sanctions rachet up.
I mean, how is this any different than Chucky Cheese saying I cannot pay for a pizza with American dollars, they will only take Chucky Cheese tokens, which are on sale in the arcade and can be purchased with American dollars?
I guess (and I invite correction from smarter people) it’s like if you went to Chuck E Cheese and the arcade games could take token or quarters. You’d never buy tokens (assuming a 1:1 exchange) because, at the end, any tokens you don’t spend on arcade games are junk. You might as well just use quarters, right? Then your leftover quarters can be spent on low-grade pizza and sugary drinks. But if Chuck E Cheese only accepts tokens for their games, then the value of their tokens rise up to some degree. Maybe everyone doesn’t value them at 25¢ but they’re worth something to anyone who wants to play games.
Likewise, right now the value for rubles is pretty low. The only place to spend them is in Russia and, due to sanctions and general conditions, your ability to do so is limited. So no one wants them and they’re worth less which hurts those who have a pocket full of rubles. If Russia accepts euros for their energy, everyone will just use euros because it’s like quarters at Chuck E Cheese – when you’re done buying Russian petroleum and natural gas, you can spend them on anything else. But if Russia forces you to buy their arcade tokens to access their energy products, then those tokens/rubles have more value which raises the value for everyone holding rubles. Not as much value as without sanctions but better than having a currency that is ignored and worthless on the world stage.
I’d also guess the demand would add uncertainty to the market and cause a further spike in oil and gas prices, which means Russia earns more money. Which is in fact exactly what has happened.
When I first read the article, my initial thought was that it was a pretty clever way to peg the devalued and falling ruble to a more stable (and rising) commodity: oil. Forcing a purchaser of your oil to first purchase your currency increases the currency’s value. And to the extent that Russia can control how much oil it sells, it can make the oil even more expensive and, as if ruble’s value continues to fall, force you to buy even more rubles.
Worth noting that Russia has been getting a much higher daily income from its gas and oil since the invasion started then before it. That holds true even if you only look at Europe. Daily payments from the EU to Russia before the invasion were around €250m per day and as low as €194m in late February. On 4th March alone the EU paid €802m to Russia due to stockpiling and the increased cost.
Modelling by the Belgian think tank Bruegel, based on the daily European gas spot price, shows that the value of daily EU imports of Russian gas increased from around €200m at the start of the year to more than €800m at the start of March
