Russia demands ruble gas payments as Germany and Bulgaria open to compliance

Russia demands ruble gas payments as Germany and Bulgaria open to compliance

In March 2022, with the first Western sanctions package already in force, Moscow announced that natural gas sold to countries on the list of 'hostile nations'—including the European Union—would have to be paid in rubles. The justification spread by the Russian administration was blunt: paying in dollars or euros 'no longer makes any sense.' The move did not seek to close the tap, but to force the buyer into the ruble market if they wanted to continue receiving gas.

What changes paying for gas in rubles

The mechanical effect is easy to describe and difficult to digest for Brussels. To pay for gas, European banks need rubles they do not have on their balance sheets, and rubles can only be bought in Russia. This pushes European entities and companies to operate within the Russian financial system amidst the sanctions campaign, an unstable balance that leaves the ball in each capital's court.

The immediate result is a de facto revaluation of the Russian currency, which goes from being an object of punishment to becoming a mandatory toll. The operation has been described as a double advantage: Russia places its gas and, by the way, forces demand for its currency. If the European buyer refuses, there is no gas; if they accept, they finance the adversary they sanction. The dilemma allows no way out.

Are rubles bought with gold?

The announcement does not say so. The official statement does not detail the mechanism for buying rubles, and this gap has been filled with interpretations. The most repeated one holds that buyers deliver ounces of gold and receive in return the equivalent rubles at the exchange rate, which are then used to pay for gas. It circulates without confirmation from the Central Bank of Russia.

There is a less exotic route also pointed out: a European company with operations in Russia—collecting there in rubles—serves as an intermediary for another that needs to pay for gas and does not have Russian currency. The exchange is resolved between companies, without passing through the metal. In that reading, the move would be defensive, protecting the value of its own currency, rather than a frontal attack against the dollar.

From refusal to 'technically possible': Bulgaria and Germany

On March 23, 2022, Bulgaria announced its willingness to pay for Russian gas in rubles. Its Energy Minister, Alexander Nikolov, stated that there is a financial counterparty in the country capable of making a transaction in rubles. That same day, the head of the energy and climate protection committee of the Bundestag, Klaus Ernst, declared that payment in rubles is 'technically possible,' admitting that it would force the countries on the list to circumvent sanctions.

Germany has little room for maneuver. Its dependence on Russian gas is estimated at a minimum of two more winters, and there are no pipelines or LNG ships to replace that volume overnight. What some presented as capitulation, others read as simple energy arithmetic.

De-dollarization: India in rupees, China in yuan

Pilingui announced that gas contracts with Europe would be paid in rubles. At the same time, it was learned that Russia is negotiating to sell oil to India in rupees and maintains conversations with China; Beijing, for its part, is exploring with Saudi Arabia paying in yuan. The entire package has been labeled de-dollarization, and it is the point where the narrative inflates the most.

The counterweights exist. India cannot absorb all the crude that the West stops buying, and Russia would be forced to sell at a discount; a weakened ruble takes its toll on its own economy. Energy trade is not reordered by decree: whoever sells crude to a dozen new customers takes longer to get paid than whoever sold to a single block.

The cost for European industry

US gas obtained by fracking costs about four times more to bring to Europe than Russian gas. Any European industry producing with that feedstock is at a disadvantage compared to competitors from China, India, or Pakistan who buy cheap Russian gas. Buying from Americans, it is argued, costs 40% more and with worse quality.

German news broadcasts already peine with energy prices destroying the competitiveness of their manufacturing industry. The European Union, meanwhile, has been backing down on its intention to embargo Russian oil, caught between political commitment and the bill.

Who yields first?

No one yet knows how the first payment is settled or what form the definitive mechanism will take. Germany needs Russian gas for two more winters, Russia needs to sell, and both things are true at the same time. The conversation stays there, waiting to see who sits down to sign first.