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Why Did Russia Decree that Gas Sales to Europe Must Be in Rubles?

Up to 40% of Europe’s gas purchases come from Russia.

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Russian President Vladimir Putin has instructed the management of the gas company Gazprom to convert all natural gas purchase contracts to rubles for all countries declared as enemies by the Kremlin itself. This is another maneuver to force European countries to buy rubles and thus stabilize the value of the depreciated currency.

“Both the United States and the European Union, in principle, have defaulted on their obligations to Russia. And now everyone knows that obligations in dollars and euros may not be fulfilled,” Putin told a meeting with his cabinet on Wednesday.

“It is quite obvious that in this regard, to supply our products to both the European Union and the United States and receive payment in dollars, euros, and a number of other currencies do not make any sense for us. Therefore, I have decided to implement in the shortest possible time a set of measures to transfer payments for our natural gas supplies to countries hostile to Russian rubles,” the dictator determined.

rubles
The gas company Gazprom will only sell natural gas to Europe in rubles. (Image: EFE)

Up to 40 % of European natural gas purchases come from Russia, however, demand is concentrated during the winter months.

Natural gas accounts for up to one-fifth of Europe’s energy sources and up to 20 % of electricity generation. While 40 % of European demand is supplied by gas from Russia, in some countries, such as Sweden and Finland, dependence is 100 %. Poland and Austria are 50% dependent, and Germany is 40% dependent on Russian gas.

After Russia, the other major supplier, with 30 %, is Norway with its North Sea fields. In third place is Algeria, whose supplies reach the Mediterranean countries: Spain, Portugal, Italy, and France.

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Russia’s Central Bank takes special measures to contain the fall of the ruble

Putin instructed the Central Bank and the government to determine in the coming weeks the order of operations necessary to institutionalize the purchase of rubles on the domestic market by European gas buyers.

The exchange rate between the dollar and the ruble fell below 100 rubles per dollar for the first time since March 3, the exchange rate with the euro stood at 106 rubles per euro.

Since the imposition of sanctions by the West, the Central Bank has implemented a series of measures to prevent the collapse of the ruble, such as forcing domestic companies to exchange 80% of their international reserves for rubles, limiting the purchase of foreign currency by Russian citizens.



rubles
During February the value of the ruble plummeted, only to recover slightly in March. (Image: EFE)

The Russian Central Bank has also doubled the interest rates, raising them from 9.25 % to 20 %, an almost unusual move, but which is aimed at discouraging the sale of rubles, raising the profitability of the Russian currency, but making credit more expensive for companies and consumers.

The measures imposed by the entity managed to partially stabilize the value of the ruble, however, some measures such as raising the interest rate to 20% cannot be sustained for long, as they risk increasing the cost of leverage in the economy.

Since the sanctions began, the Russian stock exchange has remained closed, and was only able to resume operations on Monday of this week, where it is only allowed to sell debt bonds of Russian companies, but not stock shares.

The Kremlin’s latest determination aims not only to raise the value of the Russian currency, but also forces European gas importers to have to pay in euros to Russian banks in order to be able to acquire the rubles with which the contracts with Gazprom will be closed.


With this new stratagem, Putin hopes that Russian bankers will partially recover the foreign currencies necessary to integrate into international trade and severely limited after the sanctions imposed by the G-7 countries.

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