Effective From Today, President Putin: Pay With Rubles Or Cut Our Gas Supply

JAKARTA - Russian President Vladimir Putin said foreign buyers would have to pay for Russian gas in rubles from Friday or the supply would be cut, a move Europe rejects and tantamount to "blackmail" according to Germany.

President Putin's decision on Thursday leaves Europe facing the prospect of losing more than a third of its gas supply. Germany, which is most dependent on Russia, has activated contingency plans that could lead to rationing in Europe's biggest economy.

Energy exports are President Putin's most powerful lever, as he tries to avenge Western sanctions imposed on Russian banks, companies, businessmen and Kremlin associates in response to Russia's invasion of Ukraine, with Moscow calling it a special military operation.

President Putin said buyers of Russian gas should open ruble accounts in Russian banks. It is from this account that payments will be made for gas deliveries starting tomorrow (today) or April 1.

"If the payment is not made, we will consider this a default on the part of the buyer, with all the ensuing consequences. Nobody is selling us anything for free, nor will we be doing charity work, that is, existing contracts will be terminated," he said. in a televised address, citing Reuters April 1.

Under the mechanism laid down by President Putin, foreign buyers will use a special account at Gazprombank to pay for gas. Gazprombank will buy rubles on behalf of gas buyers and transfer rubles to other accounts, the order said.

President Putin said the switch to the ruble would strengthen Russia's sovereignty. He said the West was using the financial system as a weapon, and it made no sense for Russia to trade in dollars and euros when assets denominated in those currencies were frozen.

"What really happened, what has happened? We have supplied European consumers with our resources, in this case gas. They receive it, pay us in euros, which they then freeze themselves. In this case, there is every reason to believe, we deliver some of the supplied gas to Europe at practically no cost," he explained.

"That, of course, cannot be continued," said President Putin, although he said Russia still values its business reputation and will continue to fulfill obligations under gas contracts and others.

It was not immediately clear whether in practice there might be a way for foreign companies, to resume payments without using the ruble, which has been ruled out by the European Union and the G7 Group.

Italy said it was in contact with its European partners to give Russia a firm response, adding that its own gas reserves would allow economic activity to continue even in the event of a disruption.

Meanwhile, German energy companies said they were in close talks with Berlin about how to respond to possible supply disruptions, drawing up a roadmap of what to do if Russia stopped gas exports.

A source told Reuters payments for gas delivered in April on some contracts started in the second half of April and May for others, suggesting that the taps may not be turned off soon.

Putin's decision to impose ruble payments has pushed the Russian currency, which fell to historic lows after the February 24 invasion. The ruble has since recovered a lot that was lost.

"What sounds grandiose has turned into a teacup storm. By making it a major beneficiary of gas money, it puts an extra shield against sanctions around Gazprombank," said Jack Sharples of the Oxford Institute for Energy Studies.

Western companies and governments have resisted any move to convert their gas supply contracts to other payment currencies. Most European buyers use the euro. Executives say it will take months or longer to renegotiate terms.

Payments in rubles would also blunt the impact of Western restrictions on Moscow's access to its foreign reserves.

Meanwhile, European countries have been racing to secure alternative supplies, but with global markets already tight, they have few options. The United States has offered more liquefied natural gas (LNG) but not enough to replace Russia.

"It's important for us not to give a signal that we will be blackmailed by Putin," said German Economy Minister Robert Habeck, adding that Russia had not been able to divide Europe.

Payments will continue to be made in euros, Germany said.

Separately, French Economy Minister Bruno Le Maire said France and Germany were preparing for a possible shutdown of Russian gas flows. He declined to comment on technical details related to Russia's latest demands for ruble payments.

To note, European gas prices have skyrocketed as tensions with Russia escalate, increasing the risk of a recession. Companies, including steel and chemical makers, have been forced to limit production. British and Dutch gas prices rose 4 percent to 5 percent after President Putin's announcement.