Putin Edict on “Gas for Roubles” Consistent With Original Description (and Our Take); Western Officials Nevertheless Claim a Walkback

Putin Edict on “Gas for Roubles” Consistent With Original Description (and Our Take); Western Officials Nevertheless Claim a Walkback 1

Perhaps an allergy to finance, particularly among political leaders and media employees explains the widespread lack of comprehension of what the Russian “unfriendlies pay for gas in roubles” would amount to, when in his original statement Putin set forth boundary conditions, most importantly that existing pricing mechanisms would stay in place. I feel I have to keep recycling this clip because the Russian leader made clear from the get-go that the contract terms and economics would stay in place. What was being added was the requirement that the payment be tendered in roubles:

Folks, this is not hard unless you want to make it hard. It’s a mystery why the press went into MEGO (My Eyes Glaze Over) mode. If your going to leave the contract otherwise in place, all that Putin was appending was a requirement to exchange the euro/dollar/sterling amount due into roubles at the time of payment. Theoretically, Putin could have insisted on an above-market exchange rate, but that would conflict with his stipulation that price terms remain unchanged, since that would de facto change euro/dollar/sterling pricing for a new higher price stated in roubles.

We also listed a whole set of advantages in our post yesterday that Russia would nevertheless get from a minor-seeming, technical change. The main one was to require gas buyers to tender payments to Russian banks, since only Russian banks could get their hands on enough roubles to execute the foreign exchange transaction (more on an important fine point soon). There aren’t a lot of roubles trading outside Russia. That would prevent the West from sanctioning more Russian banks, something they seemed intent on doing at last week’s series of European summits. It would also mean the foreign currency payments would be in the hands of Russian institutions, and hence not vulnerable to being “frozen,” aka expropriated.

The fact that the West seems willing to go along, and is now incorrectly depicting the Russian detailed explanation as a climbdown, makes it awfully hard for them to object when Russia, as it floated on Wednesday, extends this procedure to other commodities, like oil, lumber, wheat, metals, and fertilizer. That means in having payments from “unfriendly countries” on contracts denominated in their currencies be made to an account at an unsanctioned Russian bank with the customer also effectively ordering the currency exchange to roubles.

One additional advantage of this procedure: it greases the skids for Russia requiring future contracts to be set in rouble terms, not in “unfriendly country currency” terms. Expect Russia to be smart enough not to do this right away. And expect them to do this first on a long-term contract for a must-have commodity. Gas again seems like the prime candidate but another suitable contract expiration might occur at a propitious time.

At the end of this post, we’ve embedded two documents: one, the translation of Interfax’s transcription of Putin’s orders that describe the mechanics. It’s still a bit rough, but still understandable. The second is an official translation of Putin’s speech yesterday, nominally about how Russia is going to build and operate aircraft under sanctions. The opening section is devoted to operation of and rationale for the “roubles for gas” stipulation. Reader Safety First found the Russian text on Interfax. His recap is a lot smoother than the Yandex translation:

– LNG is excluded, we are only talking about “pipeline gas”.

– Gazprom is directly prohibited from shipping gas unless it is paid in rubles.

– To facilitate this, a) Gazprom Bank will open an account in rubles, and a parallel account in foreign currency (termed “K-accounts”, likely for some legal reasons); b) there is a section detailing how these accounts are opened by Gazprom without the “foreign owner” actually participating in the process, basically to get around anti-laundering laws.

– Customer will deposit euros (let’s say) with Gazprom Bank into “their” euro K-account, and instruct Gazprom to procure X rubles to make the payment for the gas. Gazprom Bank will sell the euros on the Moscow exchange, and credit the rubles thus received to the customer’s ruble K-account, and then pay Gazprom for the gas delivery from that ruble account.

– The Russian Central Bank is directed to establish all the necessary procedures viz. these K-accounts, then the Customs Service is supposed to confirm the procedures for release of the gas, both “within 10 days” of the decree’s effective date (March 31). The Central Bank also gets leeway to develop “alternative FX trading mechanisms”.

– There is a government official (from the Foreign Investments Commission) empowered to grant waivers to foreign customers, seemingly at will.

One change from the process we envisaged at the get-go is that Russia has stipulated one unsanctioned bank, Gazprom Bank, to be the payment recipient, as opposed to having any unsanctioned Russian bank be eligible.

A second fine point is that this process has the gas buyer “owning” the rouble account as well as the initial euro/dollar/sterling account into which the contactually due payment is initially made. So the gas buyer does in the end make payment in roubles because roubles go from his rouble account to Gazprom

The transaction mechanics above also means the payment to Gazprom is net of the foreign exchange transaction costs. Gazprom eats that, not the gas buyer.

Despite the formal statement seeming to make a big deal about setting up the dual currency accounts, this presumably has to do with anti-money-laundering and perhaps other requirements in setting up accounts for foreign entities. The dual currency part isn’t the reason why. Russia has had dual currency accounts for retail customers for years, so that isn’t the hard part.

A third interesting point is the requirement to execute the foreign exchange transaction on the Russian Stock Exchange. Bear in mind that Russian companies that sell oil and gas abroad now are required to convert 80% of their receipts to roubles, again on the Russian Stock Exchange. I am curious as to why Russia is so enamored of having exchange-traded foreign exchange. The norm in the rest of the world is for foreign exchange to be traded over the counter, out of bank treasury departments. One can argue that OTC trading is non-transparent, subject to more chicanery, and unlike one central exchange, cannot assure best execution.

Finally, the timing is fuzzy. Putin maintains that this mechanism is effective as of April 1. But as his statement indicates, it applies to gas shipped starting then. And you can’t demand that buyer jump through impossible hoops. Unless a gas customer happened already to have an account at Gazprom Bank, it’s hard to imagine them being able to set up new accounts in one day. Plus the details of the order give the authorities up to ten days to sort certain details out.

Gas payments under long-term contracts are made periodically, and it appears the first ones are not due until the end of April. Helpfully from another story on Interfax:

The practical implementation of the new procedure for paying for Russian gas supplies to Europe – in rubles – will begin at the end of April-May, a source familiar with the situation on the energy market explained.

The decree of the President of the Russian Federation on paying for gas in rubles applies to deliveries starting from April 1.

“Under some contracts, payments for Aprelsky gaz start in the second half of April, for others-in May,” the source said, answering the question of whether some of the customers will be left without gas as early as April 1.

Ordinarily, one assumes Russia won’t cut off gas unless a payment has actually been missed. But if buyers say “Nyet” before then, would Russia act sooner? So far, Scholz is digging his heels in. Yet another Interfax account:

German Chancellor Olaf Scholz said on Thursday that Germany’s payment for gas from Russia will continue to be made in euros in accordance with existing contracts.”We have reviewed the contracts. They say that the payment is made in euros. In a conversation with the Russian president, I explained to him that this should remain the case, and it will be so, ” Focus quotes him as saying from a press conference with Austrian Chancellor Karl Nehammer.

However, this remark appears to be a reiteration of Scholz’s phone call of the day prior; there’s nothing in it that indicates that he’s been briefed on the Putin decree. And as far as I can tell from a search, Scholz has not said anything since then. So this does not appear yet to be a final position.

This is from the front page of FAZ, above the fold, and you can see the story is fresh as of just after 6 AM EDT:

Putin Edict on “Gas for Roubles” Consistent With Original Description (and Our Take); Western Officials Nevertheless Claim a Walkback 2

Google Translate would not give me a translation of this lead story at Die Zeit, and you can see the Yandex translation is not up to snuff. But it gives you an idea:

Putin Edict on “Gas for Roubles” Consistent With Original Description (and Our Take); Western Officials Nevertheless Claim a Walkback 3

Guardian depicts the detailed plan as a retreat:

The threat of a gas shutoff was reduced, however, as details emerged about the new deal, which appeared to allow European buyers to continue to pay for gas in euros and dollars.

The decree Putin signed on Thursday authorises the state-controlled Gazprombank to open foreign currency and rouble accounts for gas purchases. European buyers would pay in foreign currency and then authorise Gazprombank to make the conversion into roubles, which would then be used to formally purchase the gas.

The convoluted scheme could allow the Kremlin to save face in its standoff with European governments while averting a potential gas shutoff to Europe over Putin’s demands to receive payment in roubles.

It’s frustrating to read this sort of thing, and then have the Guardian quoting an energy expert depicting Putin as not delivering on his “threat”. Again, the decree is consistent with Putin’s original statement and he made a point of indicating the change would be parsimonious and was intended to leave the contracts in place. And anyone who regards the procedure as complicated must never have looked at a credit card or brokerage agreement, or the rules of any exchange.

But again, it’s all good for Russia for the West to regard Putin as having conceded when he’s getting what he wanted. So kudos to non-finance-savvy foreign policy types and the media for creating a phony panic that worked to Russia’s advantage.

Finally, RobertC highlighted a new Reuters article that describes how the US is upset that it hasn’t cratered Russia’s economy:

Senior U.S. officials fanned out this week to press world leaders to keep piling pressure on Moscow or join the campaign of sanctions and other measures, as the war in Ukraine enters its fifth week and the initial economic shock to Russia seems to be ebbing….

The effort comes as the initial impact of unexpectedly tough sanctions on Russian banks, oligarchs and companies begins to wear off somewhat, and the United States considers its next economic steps to isolate Russian President Vladimir Putin.

Within days of cutting off key Russian banks from the international SWIFT financial transactions network and immobilizing the bulk of the Russian central bank’s $630 billion foreign exchange war chest, the rouble lost half its value, prompting U.S. officials to declare that Moscow was battling a financial crisis.

But a month later, the rouble has largely recovered to its level just before the invasion, propped up partly by Russian capital controls, government orders for export firms to sell foreign currency and companies gathering funds to make quarter-end tax payments. Shares on Russia’s stock market are trading again, although they have dropped in value.

Russian bank VTB (VTBR.MM), a principal sanctions target, remains open for business in Europe, where it has gathered billions of euros in deposits, mainly from German savers….

The Biden administration is making sure European allies are firmly aligned on punishing Putin, while working to sway leaders who have sat on the sidelines as the war stretches on, officials say.

“We’ve got to continue to raise pressure on Russia and increase our support for Ukraine,” one senior U.S. official said, speaking on condition of anonymity. “This is a challenge that is facing the free world and all democratic nations. And we need to be prepared for it to last a long time.”

Xi is set to have a videoconference with European leaders today. Western stories made clear that their officials intended to press Xi yet again. The Chinese government-connected Global Times effectively said that was not on, the meeting was to discuss EU-China matters. Recall Xi had said in his call with Biden that China had no nexus to this Western crisis, and invoked a pet saying: “He who puts the bell on the tiger needs to take it off.”

Chi

00 Putin’s decree on the procedure for paying for Russian gas by foreign buyers

00 Putin Videoconference Sanctions, Gas, Airlines etc. 3-31

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