Russia Insisting Payment For Gas Supplies To Be Made In Rubles Only

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EU will have to choose between maintaining its own sanctions or being cut off from LNG supplies

Gazprom has proposed today (July 4) switching to only approving the payment for supplies of Russian liquefied natural gas (LNG) to unfriendly countries in Rubles. This was announced on Monday, July 4, by Kirill Polous, deputy head of the company’s department, during a round table of the State Duma Energy Committee, which discussed the Energy Strategy of the Russian Federation for the period up to 2050.

Gazprom considers it necessary to introduce mechanisms for coordinating the export of pipeline gas and LNG. “In our opinion, with the introduction of counter-sanction measures in terms of a special procedure for the fulfilment by foreign buyers of obligations to Russian suppliers, namely Decree No. 172 of the President, the development and implementation of this mechanism is becoming increasingly important strategic importance for the country and now, more than ever, such a mechanism really needs to be brought in,” he said.

The company noted the emergence of competition between the export of pipeline gas and LNG, since the former is paid in Rubles.

“One of the possible methods of regulation may be customs regulation, that is, in terms of creating some economic incentives for the direction of this gas not in the western, but to the eastern direction.” Polous added (meaning that supplies would be incentivized for delivery to Asian buyers).

On March 31, Russian President Vladimir Putin signed a decree on paying for gas supplied to unfriendly countries in Rubles. According to the decree, buyers must open Ruble accounts in Russian banks, they will be used to pay for gas delivered starting from April 1 of this year. In case of non-fulfillment of payments, the Russian Federation will regard this as a default by the buyer and has the right to terminate delivery.

Some EU buyers have resisted, with Dutch company GasTerra refusing to pay for Russian gas in Rubles – as this could lead to a violation of sanctions imposed by the EU. The Danish energy company Orsted announced that Denmark would not switch to paying for Russian gas in Rubles and would continue to carry out transactions in Euros. Termination of supplies to Orsted has not been ruled out, as Gazprom continues to demand payment for gas supplies in Rubles.

Prior to this, the European Commission (EC) issued a new regulation , according to which European importers will be able to continue to pay for Russian gas without violating the sanctions imposed on Moscow . The EU’s executive body told the EU governments in a closed meeting that the authorities were not preventing companies from opening accounts with Gazprombank and would allow them to buy gas in line with EU sanctions.

However, European Commission Vice-President Frans Timmermans said that it was not normal to pay for gas in Rubles and that European companies should pay for it exclusively in Euros and Dollars. Dmitry Belik, a member of the State Duma Committee on International Affairs, commenting on Timmermans’ position has stated that Europe must recognize that paying for Russian gas in Rubles is the only option for the EU.

Putin’s instruction to convert gas transactions into Rubles came against the backdrop of anti-Russian sanctions imposed by a number of foreign countries in response to Russia’s ongoing special operation in Ukraine.

The gas supply conflict is essentially a battle of wits between Russian payments laws and regulations and EU sanctions. Russia though holds the cards as it is the supplier, with time running out for the EU to compromise as Russia dictates the terms of its own product.

The EU will get a taste of what this means as Russia is turning off the still-operating Nordstream 1 pipeline for ‘routine scheduled maintenance’ from next Monday, July 11th to July 21st.

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Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact us at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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