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How EU energy firms plan to pay for Russian gas without breaking the law | Russia

Energy companies in Germany and Hungary have confirmed they intend to comply with Vladimir Putin’s demand that buyers of Russian gas pay in roubles. But the EU has said there is a risk the companies would be in breach of sanctions prohibiting transactions with Russia’s central bank. The stakes are high because the Kremlin has already switched off supplies to Poland and Bulgaria.

What did Russia demand?

Putin said buyers from “unfriendly” countries must start paying for their gas in roubles. Usually, the vast majority of buyers would pay in euros or dollars. Their bill from Russia’s state energy group Gazprom would be deemed settled once the payment went through.

Under decree 172, which Putin issued in March, buyers have to take part in a new payment system that requires the opening of two accounts at Gazprombank. Money would be paid into one account in euros and dollars before being converted by the bank into roubles and paid to Gazprom from the second account. Only at that point would the buyer be deemed to have fulfilled its legal obligation to pay for the gas.

Who has agreed and who hasn’t?

Hungary has said it is happy with the plan and, according to reports, three of Europe’s biggest gas companies – Germany’s Uniper, Italy’s Eni and Austria’s OMV – are also examining ways to comply with Putin’s decree.

Until this week it was unclear whether Putin would make good on his threat to cut off buyers who refuse his demand. But on Wednesday Gazprom suspended gas supplies to Bulgaria’s Bulgargaz and Poland’s PGNiG after they declined to pay in roubles.

What about everyone else?

This is where it gets thorny. European leaders, including the European Commission president, Ursula von der Leyen, have said they will not do Putin’s bidding.

The EU’s preliminary analysis, issued earlier this month, found that to do so would be a breach of sanctions imposed on the Kremlin. This is because the currency conversion process at the heart of it involves the Russian central bank, which is under sanctions.

“As the conversion process may take an undefined amount of time, during which time the foreign currency is entirely in the hands of the Russian authorities including the central bank, it may even be considered as a loan granted by EU companies,” the commission said.

On Thursday, EU officials confirmed that any company agreeing to open a rouble account in Russia and pay for gas that way would be in breach of sanctions.

But is there a loophole?

Possibly. According to further guidance issued by the EU last week, the Kremlin’s decree does not stop gas importers asking Gazprom to agree the purchase is legally complete once the first payment, in euros or dollars, has been deposited at Gazprombank.

Any conversion into roubles would take place thereafter, meaning the buyer would not technically have breached sanctions. Another option, the guidance says, is for buyers to make a public declaration that they consider the purchase complete once their dollar or euro payment is made. The only obstacle to this, according to the guidance, is the need for “confirmation from the Russian side” that all of this complies with decree 172.

In other words, Gazprom – or effectively the Kremlin – has to be onboard. Gazprom and Gazprombank are not subject to EU sanctions, so buyers are permitted to negotiate such labyrinthine proposals without breaching sanctions.

Tactics like these appear to be what the likes of OMV and Uniper are examining. Uniper said it was looking into “concrete payment modalities” that would allow it to pay while complying with sanctions.

This apparent legal loophole significantly clouds the picture over the true nature of compliance with Putin’s demand. For instance, responding to reports that OMV was preparing to make rouble payments, the Austrian chancellor, Karl Nehammer, insisted this was not the case.

Why does Russia want payments in roubles?

Putin’s “weaponisation” of Russian gas exports is part of a strategy designed to shore up the economy that was announced shortly after the war began.

The decision by the west to impose sanctions prompted a sharp fall in the value of the rouble and increased the threat of hyperinflation. In response, Russia imposed strict capital controls under which exporting companies were forced to convert their foreign currency earnings into roubles.

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Liam Peach, an emerging market economist at Capital Economics, said the capital controls had made the rouble a one-way bet for currency traders, helping to explain why it had recovered to its pre-invasion levels against the dollar.

Peach said this week’s action against Poland and Bulgaria would not have a major economic impact on Russia. “European importers will continue to pay Gazprombank in euros, which it will then convert into roubles. It doesn’t make a big difference,” he said. “Politically, Putin is trying to show Russia is standing up to sanctions and is able to apply a bit of pressure.”

Why doesn’t Russia want euros and dollars?

There are two possible explanations for this. The first is that payments in euros or dollars would add to Russia’s foreign currency reserves, which have been frozen since the start of the war. Payment in roubles for Russia’s gas supports the economy at a time when it is facing a deep recession.

The second reason is that Russia has gradually been moving away from settlement in dollars and euros since it annexed Crimea in 2014. Russia has been seeking to increase payments in roubles and yuan for its energy, and the war in Ukraine has accelerated that trend.

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