Russia has a brilliant plan to boost its currency, which experienced a sudden collapse after the U.S. and Europe imposed economic and financial sanctions on Moscow due to Ukraine invasion. The “Ruble” plunged to its record low of 151 to a US dollar on March 7. But even before the latest plan is executed, the Russia’s currency has improved to 97.25 on Monday (March 28).

 

It appeared that Russian President Vladimir Putin had done his homework and preparation before launching the “special military operation”. After all, how could you not prepare for the worst when Joe Biden, like a broken record, had warned his Russian counterpart for months that the U.S. and allies would slap sanctions “like none he’s ever seen” in the event of an invasion on Ukraine?

 

The strategy was to limit ruble selling and force ruble buying. First, Russia’s central bank immediately hiked interest rates to 20% from 9.5% to limit withdrawal as fresh sanctions by Western countries put pressure on the country’s financial system. Then it capped the amount of dollars (US$10,000 limit) that every Russian can withdraw from foreign-currency bank accounts.

Next, local banks were barred from selling foreign currencies to customers for the next 6 months (till Sept 9). At the same time, brokerages are not allowed to let foreign clients sell securities. The capital controls kicked in to fight the U.S. and its allies’ attempt to isolate Putin and Russia, hoping the economic disaster would trigger an uprising and regime change.

 

But instead of public uproars and uprising, Putin managed to rally the people behind him. The Russian supremo’s speech at the Luzhniki Stadium in Moscow on March 18 attracted 200,000 people, according to local police. Dressed in a turtleneck and coat, Putin used the pro-war rally to justify the military operation – it was necessary because the U.S. was using Ukraine to threaten Russia.

 

In retaliation against the European Union’s economic and financial sanctions, Putin has just dropped a bombshell – Russia wants “unfriendly countries” to pay for Russian natural gas in rubles. Russian gas accounts for some 40% of Europe’s total consumption and EU gas imports from Russia contributes up to US$1 billion – every day – to Moscow even during the ongoing war.

Gas giant Gazprom has been ordered to make the corresponding changes to gas contracts and present the ruble gas payments to Putin by this Thursday (March 31). According to Gazprom, 58% of its sales of natural gas to Europe and other countries were settled in Euros, while US dollars accounted for about 39% of gross sales and British pound sterling around 3%.

 

The list of unfriendly countries includes the U.S., E.U., Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine. While the European nations have not sanctioned Russian oil and gas, the European Commission has said it plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies “well before 2030”.

 

Moscow’s unexpected retaliation saw the ruble hit 95 against the dollar as the plan will push demand for the Russian currency. But a change of currency for import of Russian energy could create more havoc and trouble for the EU, which has already seen some European and British wholesale gas prices up to 30%, sparking the risk of inflation and escalating cost of living.

German Economy Minister Robert Habeck called Putin’s demand a breach of contract. Likewise, Poland said – “This would constitute a breach of payment rules included in the current contracts”. Energy ministers from the Group of Seven industrialized nations rejected the ruble payment demands, saying – “All G7 ministers have agreed that this is a unilateral and clear breach of existing contracts”.

 

However, Putin said – “Russia will continue, of course, to supply natural gas in accordance with volumes and prices … fixed in previously concluded contract. The changes will only affect the currency of payment, which will be changed to Russian rubles”. Moscow could also argue that any contract is void the moment the U.S. and EU unilaterally seized its foreign reserves.

 

The move to banish major Russian banks from SWIFT has put a limit to Moscow’s use of its US$630 billion war chest. The reason why the Russian currency collapsed so easily and quickly was because the U.S. and its allies shut off the Russian central bank’s access to most of its US$630 billion of foreign reserves – effectively emptying its coffers critical to support the rubles.

Exactly why can the Western powers broke the laws by confiscating US$630 billion belonging to the Russians, but Moscow cannot demand gas exports to be paid in rubles? The EU, together with the U.S., was responsible for making ruble a “pariah” currency, the same Russian currency that Putin now wants it to accept in exchange for oil and gas.

 

On Monday (March 28), the Kremlin said it will not supply gas to Europe for free if they refused to pay in ruble – suggesting that President Putin is ready to shut down the supply. Even though the United States said on Friday that it will work to supply 15 bcm of liquefied natural gas (LNG) to the European Union this year, it will be too little too late.

 

Analysts said U.S. LNG plants are already producing at full capacity, and any additional U.S. gas sent to Europe would have to come from exports that would have gone elsewhere. No matter how you calculate it, the EU will definitely struggle to replace all Russian gas exports in a short period of time. The commodity is not some Instagram photos that you can upload or download instantly.

Putin wanted to reverse the current flow of money, forcing nations responsible for the collapse of ruble to support the currency instead. As the country continues to sell its oil, despite the economic and financial sanctions, the revenue generated is more than it needed for imports. Oil prices above US$100 a barrel are boosting its revenue, even when it sells at a discount.

 

It would be interesting to see how much the ruble could appreciate since Russia controls the printing of the currency. It was a dumb move by the European countries to announce its plan to shift away from Russian energy in the coming years. Moscow has no incentive to play nice anymore, but to throw everything including the kitchen sink to disrupt the oil supply to the EU.

 

Mr Putin does not care even if his demands would fundamentally change contracts and render them null and void. Either way, Europe needs Russian energy more than Russia needs the Euro currency. The EU needed Russian natural gas to generate electricity, heat homes and supply industry. Putin has nothing to lose since Russia is already being isolated by the Western nations anyway.

Not only the European Union depends on Russia for 40% of its gas, it also relies 27% of its oil imports and 46% of coal imports from the country. Charles Michel, president of the European Council, said – “We are much more dependent on Europe in comparison to the situation in the United States. That’s why we must be intelligent. The goal is not to be painful for ourselves.”

 

The question is whether Russia was bluffing when it said it could halt the gas supply to Europe if its demands are not fulfilled. In the same breath, will the Europe eventually blink when Moscow makes good on its threat to close the tap on the commodity? This is another brinkmanship game between Russia and the Europe. Putin’s message was clear – “if you want our gas, buy our currency”.

 

Perhaps this is one of the reasons President Joe Biden went off-script, wishing for a regime change – “For God’s sake, this man cannot remain in power” – only for the White House to make a U-turn. It was a display of desperation as economic sanctions fail to bring Putin down to his knees. The U.S. and E.U. have underestimated Russian’s powerful leverage on its oil and gas.

 

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March 29th, 2022 by financetwitter

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