EUROPE IS PREPARING for the worst after Russian President Vladimir Putin threatened to cut off natural gas supplies to the region unless future payments for the country’s exports of the fossil fuel are made in the Russian currency.
Yesterday, Putin signed a decree demanding that “unfriendly countries” — those that have placed sanctions on Russia following the invasion of Ukraine — will be required to pay for gas deliveries in roubles from April.
In response to the threat, Austria and Germany — the bloc’s largest economy, which imports about 40% of its gas supplies from Russia — have warned their citizens that gas rationing could be implemented if flows are interrupted.
“We are in a situation where — I have to say this clearly — every kilowatt-hour of energy saved helps,” German economy minister Robert Habeck said this week.
“And that’s why I would like to combine the triggering of the warning level with an appeal to companies and private consumers to help Germany, help Ukraine, by saving gas or energy as a whole.”
Although Ireland imports none of its gas from Russia, economists say the implications of German or European gas rationing could be profound.
So what’s it all about?
Why is Putin suddenly asking for payments in roubles?
It’s not entirely clear, to be honest. More than likely, European officials believe it could more of a “bluff to ward off further sanctions”, Reuters reported today.
Another motivation (assuming Europe acceded to the demand in the first place) would be to help further bolster the Russian currency after weeks of volatility.
In the initial wake of the invasion in late February, the currency’s exchange rate with the euro and the dollar took a hammering on international markets.
Although it has since recovered strongly, the value of the rouble dropped to around all-time lows against both the euro and dollar in the immediate aftermath of the invasion and the first wave of Western sanctions.
Now, in a situation where a currency enters freefall due to a wave of speculative selling, a central bank would be able to intervene by mobilising its reserves of foreign currencies and other financial assets to buy back its own currency and help stabilise its value.
But in late February and early March, Russia found itself largely hamstrung.
Why? Because among that first wave of retaliatory measures announced by the US and its allies were a range of harsh sanctions aimed squarely at the Russian central bank.
In a nutshell, America, Europe and the United Kingdom effectively blocked Russia from accessing a large portion of its store of over $600 billion in foreign reserves, hampering the central bank’s response.
The rouble had, at the time of writing, effectively returned to where it was against the euro and the dollar pre-invasion. But more roubles means more currency stability for the Russian currency and economy, to oversimplify it massively. Greater currency stability could help insulate the economy from more sanctions.
A declining or devalued currency, however, would also see the Russian economy bringing in less money from exports. But (again, to oversimplify it), the higher the value of the rouble, the more cash that flows into Russia from its exports.
How has the rouble recovered so quickly?
Again, there is some debate about this. But while the Russian central bank has been cut off from a large chunk of its war chest of reserves, it has intervened in other ways.
For one, it introduced a range of capital controls, aimed at keeping roubles in the country by temporarily banning citizens from withdrawing large sums in foreign currencies. It also hiked interest rates to 20%, encouraging Russian citizens to keep their money in the bank.
Russia’s economy also continues to pull in large sums of money in foreign currencies from energy exports — specifically, crude oil and natural gas.
Although governments across the world have promised to wean themselves off Russian energy and western companies are effectively ‘self-sanctioning’ by declining to purchase Russian oil, natural gas flows from Russia to its largest trading partner, the European Union, have remained relatively steady since the start of the war.
That could change rapidly in the event of an outright embargo on Russian energy. But that hasn’t happened yet and Putin’s threat to cut off gas flows could be a way of testing Europe’s resolve.
How has Europe responded to Putin’s ultimatum?
Pretty much as expected. Germany, which relies on Russia for between 40% and 55% of its natural gas imports, has rejected the demand.
The ruling coalition government on Wednesday said it would prepare to ration gas rather than pay for its energy imports in roubles, issuing an official ‘early warning’ on its gas supply levels.
Today, Berlin said it had received the “decree” in writing and was evaluating it “to determine its specific impact”.
An economy ministry spokeswoman told reporters that it was too soon to assess the effect of the new Russian policy but noted that it gives the Gazprom Bank, charged with implementing the policy, “10 days to explain the details of the procedure” for payment.
All G7 members have, in fact, rejected the ultimatum.
Will the stand-off have any impact on gas and electricity prices in Ireland?
Well, it remains to be seen how the Kremlin responds to Europe’s rejection, which was always probably the most likely outcome.
But if Russia follows through on threats to slow or cut off energy supplies to Germany, that could have a profound impact on the Irish economy down the line.
Ireland imports none of its natural gas from Russia. But in the event of a loss of supply to Europe, that likely wouldn’t matter — gas prices could skyrocket further and genuine questions about the security of supply would rear their heads.
Ireland having little direct reliance on Russian gas is not a strong protection against a supply shock next winter. Both because of the price implications but also if the EU solidarity mechanism kicks and/or other gas supplies were re-directed.https://t.co/rVMjTRZwyP
— Gerard Brady (@GerardBrady100) March 30, 2022
Why? Because as Muireann Lynch, an energy economist with the ESRI, told The Journal recently, “there are EU treaties in place, which essentially mandate equal sharing of gas” in the event of “physical security” of supply issues.
In other words, if the bloc’s largest economy introduced gas rationing, Ireland “can’t just say: ‘Well, we get our gas from Great Britain via Norway so we’re all good and the Germans can just suffer.’
“We actually have agreements in place to ensure that we do share equally,” Lynch explained.
So aside from higher prices, we could be dealing with an actual energy supply shock if Russia does cut off supplies altogether.
But that outcome is far from certain. Neither is it clear how serious Russia is about its threat, given the potential loss of precious revenue it could entail.
A Russian government spokesperson told reporters today that gas flows aren’t going to be shut off overnight. The demand for payments in roubles will only affect settlements due later this month, he added.
Regardless, more anxiety lies ahead for Ireland and the rest of Europe.
— Additional reporting by – © AFP 2022
To embed this post, copy the code below on your site
have your say