Paul H. Dembinski – Director of the Finance Observatory
Now the war in Ukraine has entered its second month. The implementation of sanctions continues with, sometimes, unexpected turnarounds. After cutting off the Russian Central Bank from access to its reserves deposited with Western private and public institutions and excluding a number of Russian banks from the Swift interbank payments system, countries importing Russian energy were recently urged by Putin himself to pay their bills in roubles from now on. On March 28, meeting by videoconference, the G7 ministers rejected this request, describing it as contrary to the stipulations of the corresponding contracts.
The Russian injunction of March 24 calls for three remarks. The first concerns the risk taken by European officials, especially German ones, in publicly highlighting their reluctance to cut themselves off from Russian exports because of energy dependence. This vulnerability dramatized during the European summits has, without a doubt, attenuated the firmness of the European position on the matter. Not only for decades, in all geopolitical naivety, has Germany let itself be caught in the nets of gas pipelines woven by the long-term Russian strategy, but it has also accentuated its dependence by deciding, in 2011 after Fukushima, to leave nuclear. Process which was originally supposed to end in 2022. Probably, under the pressure of current events, the ruling coalition in Berlin will be inclined to review this point in its program of government.
The second remark relates to the lack of imagination of the West as to the Russian reaction to the first waves of sanctions. Thus, Westerners remained locked into the idea that Russia’s need for dollars and euros was more acute than the EU’s dependence on Russian gas. They are therefore taken for granted that the Kremlin was at their mercy and that it would wait, passively and with beating heart, for the outcome of successive European summits. The Russian decision to reverse the roles and to demand payments in rubles has, therefore, undoubtedly caused a wave of panic to blow in Berlin and Brussels. Today, it is in fact perfectly plausible to envisage Russia turning off the gas tap if Europe does not comply with its demand to align the roubles.
Third remark finally, the Russian requirement to pay in rubles is also a symbolic snub. Indeed, it would force Western buyers of gas to exchange their euros or dollars for rubles with Russian banks, which would act as branches of the Central Bank for lack of liquidity. However, it is precisely these same banks – public and private – that the first waves of sanctions sought to cut off from the international system.
For the past month, the ruble market has been, to put it mildly, disturbed until the suspension of the international quotation of the ruble, the excess of sellers having pushed the exchange rate of the euro in very few time from 90 rubles to nearly 150. If, overnight, Russian gas buyers were to want to buy rubles, the Russian Central Bank would have a good chance of taking its revenge and reversing – almost arbitrarily – the trend on the “ exchange market” that it would be able to manipulate. Russia’s ultimatum is therefore a bitter lesson for Europe in terms of economic and financial interdependence, also known as globalization. The only possible way out of this imbroglio is the radical and almost immediate reduction of dependence on Russian energy. It would have been better to have thought of it sooner.