Russia wants countries to pay for gas in roubles. Will buyers comply?

Rouble payments are technically possible as sanctions are only partial. PHOTO: REUTERS

HOUSTON/LONDON (REUTERS) - Russia's energy giant Gazprom has told Poland and Bulgaria it will halt gas supplies beginning Wednesday (April 27), escalating Moscow's row with Western countries who oppose its invasion of Ukraine.

In March, Russian President Vladimir Putin said the world's largest natural gas producer would require "unfriendly" countries to pay for fuel in roubles by opening accounts at Gazprombank and make payments in euros or dollars to be converted into roubles.

Poland and Bulgaria would be the first countries to have their gas cut off by Russia since Moscow started what it calls a military operation in Ukraine on Feb 24.

Several countries have said they will not comply with Moscow's demands. Russia and swathes of its companies are under sanction for the invasion.

What is behind the change?

Russia's economy has been hit by Western sanctions, though the European Union has stopped short of placing curbs on energy imports.

Europe gets about 40 per cent of its gas from Russia, paying €200 million (S$293 million) to €800 million per day so far this year.

Currently, nearly all Russian gas purchase contracts are denominated in euros or US dollars, according to consultancy Rystad Energy. Payments in roubles would benefit the Russian economy and shore up its currency.

Is it legal?

Several buyers have said they will continue paying in euros as their contracts do not allow a change in currency. Some legal experts say it is unlikely Russia can unilaterally change contracts terms.

"Contracts are made between two parties, and it is usually in US dollars or euros. So if one party unilaterally says 'no, you're going to pay in this' Well, there's no contract," said Prof Tim Harcourt, chief economist at the Institute for Public Policy and Governance at the University of Technology, Sydney.

Only a few Russian gas buyers, such as Hungary and Uniper , Germany's main importer of Russian gas, have said it would be possible to pay for future supplies under the scheme announced by Moscow without breaching EU sanctions.

Another complication is Western banks' wariness of trading Russian assets.

"Even if a buyer is willing to pay in roubles, it may prove quite challenging given the sanctions put in place against a number of Russian banks," ING Bank said.

A source familiar with the talks with the gas buyers who declined to be named said there was no clarity on how the scheme would be implemented, but work continued.

Rouble payments are technically possible as sanctions are only partial, one banking executive with expertise in forex markets said. A Western buyer could pay euros or dollars to their bank, which would in turn send it to a Russian bank and ask them to pay Gazprom in roubles, he added.

It remained unclear whether Russia's central bank can provide enough rouble liquidity to enable European clients to source the currency.

What is Russia demanding and will Poland and Bulgaria go along with Moscow's demands?

So far, it was unclear whether Poland or Bulgaria will comply with Moscow's demands. Both countries rely heavily on Russian imports via pipeline.

Polish gas company PGNiG, whose gas deal with Russia expires at the end of this year, has repeatedly said it would not comply with the new scheme. It has also said it would not extend the contract.

Poland says it does not have to cut supplies to customers.

The country can source gas via two links with Germany including a reverse flow on the Yamal pipeline, a link with Lithuania with an annual capacity of 2.5 billion cubic metres (bcm) that will open on May 1 and via an interconnector with the Czech Republic for up to 1.5 bcm.

Bulgaria also had a contract with Gazprom due to expire at the end of the year. The country relies almost completely on Russian gas imports, and has taken steps to find alternative arrangements for supply, its energy ministry said in a statement. Bulgaria consumes about 3 bcm of gas per year and imports over 90 per cent of it from Russia.

Previously, Bulgarian Energy Minister Alexander Nikolov had said a counterparty in Sofia could handle transactions in roubles, without giving details.

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