Putin-Scholz Phone Call on “Gas for Roubles” Mechanism Conforms to Our Assessment; Disputes Over Russia Force Reduction Around Kiev; West Pressure on China, India Continues

Putin-Scholz Phone Call on “Gas for Roubles” Mechanism Conforms to Our Assessment; Disputes Over Russia Force Reduction Around Kiev; West Pressure on China, India Continues 1

The Western press is widely describing Putin clarifying to German Chancellor Scholz how Germany could pay for gas in roubles as a climbdown. Since the Russian mechanism, of foreign gas buyers making their usual payments in the contracted currency, to an unsanctioned Russian bank, is the one we described as most likely and most consistent with Putin’s original announcement, it’s hard to see it as a retreat. And as we’ll describe, Russia accomplished several things with its move, starting with rattling Scholz enough to force him to speak to Putin.

By contrast, as we’ll explain soon, in the “No polite but largely empty gesture goes unpunished” category, a Russian free non-concession about making a substantial cut in military activity around Kiev is being spun as a Russian falsehood, despite the Guardian reporting that multiple sources, both US and UK, did note some reduction in Russian action. As we’ll explain, it’s not clear if Russia was being too clever by half, or whether this is yet another example of the US and Ukraine winning the PR war irrespective of facts on the ground, or both.

Back to the gas for roubles gambit. Let’s again see what Putin said”

And as we stated in our post on this story when it broke:

As we’ll explain, this counter-sanction does not amount to forcing (much) more demand for roubles (unless Russia sets an above-market rouble price for these gas buys). Russia has already imposed currency controls, including requiring major exporters to sell 80% of their foreign currency receipts and buy roubles. And contrary to popular mis-perceptions, the rouble is not collapsing….

Let us consider how Europe is buying gas from Russia now:

EU buyer pays Euros, to say Gazprom via one of Gazprom’s banks.

Either that bank is one of the non-sanctioned Russian banks, or Gazprom transfers the funds from a Eurobank to a non-sanctioned Russian bank to convert enough of the Euros to roubles to satisfy Russian requirements. Note that there are not enough roubles circulating outside Russia for it to be very likely that a garden-variety European bank could acquire enough roubles to pay Gazprom.2

So what is different now?

The EU buyer is now required to deliver roubles, not Euros, to Gazprom at an unblocked account or an unsanctioned bank. Since there is very little in the way of roubles outside Russia, the buyer will now need to open and maintain rouble accounts in a Russian bank. That means Russia controls whether or not the account is blocked on its side.

To put it more bluntly: To sell Euros, the EU needs to keep the Russian banks sanction-free, otherwise it can’t trade Euros for roubles to procure gas.

I didn’t say so explicitly but thought at the time that the press and political reaction was way overdone.

Mind you, this was the ONLY way Putin’s demand could be implemented without running afoul of the other boundary conditions he set forth, which was not to change volumes or pricing principles, which would also imply not changing the length of the contract (volumes and any long-term pricing depend on the contract term).

I am not sure how exact the captioned translation in the video is, but one could conceivably have seen the “We will start transferring payments for our natural gas supplies…to Russian roubles” as implying Russian entities would make the foreign exchange buy, which in turn implies the official payment to satisfy the contract would have to be made to a Russian financial institution.

Now has anything changed from that picture? Contrast that with the report in DW, Germany says Putin agreed to keep payments for gas in euros:

Germany’s government said on Wednesday it has received assurances from Russia that Europe would not have to pay for Russian gas supplies in rubles,

Olaf Scholz’s office said Russian President Vladimir Putin told the German Chancellor that European companies could continue paying in euros or dollars.

In a phone call with Scholz, Putin said the money would be paid into Gazprom Bank and then transferred in rubles to Russia, a German statement said. The bank is not currently subject to sanctions.

“Scholz did not agree to this procedure in the conversation, but asked for written information to better understand the procedure,” the statement added.

Putin said last week that Moscow would only accept rubles as payment for gas deliveries to “unfriendly” countries, including European Union nations.

Unfortunately, I had no luck in finding the readout on the German government website or the Chancellor’s subsite. This is the Russian readout:

Telephone conversation with Federal Chancellor of Germany Olaf Scholz

Vladimir Putin had a telephone conversation with Federal Chancellor of the Federal Republic of Germany Olaf Scholz.

March 30, 2022

18:10

Vladimir Putin informed the Federal Chancellor about the substance of the decision to switch to Russian rubles in gas transactions, for Germany in particular. The change in transaction currency is being introduced due to the fact that, in violation of international law, the foreign exchange reserves of the Bank of Russia were frozen by the EU member states. It was noted that the decision should not lead to a deterioration of contractual obligations for the European companies importing Russian gas. It was agreed that the experts of the two countries would discuss this issue further.

Vladimir Putin and Olaf Scholz exchanged views on the latest round of talks between Russian and Ukrainian representatives in Istanbul held the day before. Ensuring the safe evacuation of civilians from combat zones, primarily from Mariupol, was also considered.

So Russia does not see this as a retreat, even though the West is braying that it is, despite this minimalist-seeming change as clearly the most probable and intended outcome.

Russia is not going to relent on having the gas payment made directly to a Russian bank, say as opposed to a Gazprom account at Deutschebank (a company of the scale of Gazprom will have accounts at non-Russian banks). So it appears that the only possible bone of contention (unless Germany and other EU nations are determined to engage in self-harm to hurt Russia too) is whether the European gas buyers have to instruct Gazprom to convert their payments to roubles, or whether they are told Gazprom will do that automagically.

And even though Germany is acting like it hasn’t agreed, one can’t see how it can’t. The domestic backlash would be considerable. Why should Germany industry and consumers suffer for what most German citizens would regard as an unimportant, at most technical, change, particularly since the media is depicting Russia as having capitulated?

So what did Russia accomplish?

First, they derailed the big series of US-Europe summits last week. Recall the US and even the Japanese press was preparing the public for a new round of economic sanctions, and maybe also some action on the military front. Instead the meetings delivered only a damp squib. For instance, the sanctions announced were either reruns (measures previously announced but not yet implemented) or small beer new ones, like sanctions of individuals.

Second, they reminded the West that its depends on Russian energy and has no alternatives in anything less than the intermediate term, short of serious deprivation.

Third, not certain but highly likely, by presumably getting gas buyers to make gas payments to accounts at unsanctioned Russian banks (here Gazprom’s bank), Russia hopes to have forestalled any further sanctions on Russian financial institutions. Or put it another way, if the West sooner or later tries to go there, Russia has laid the groundwork for denying Russian commodities to Western buyers.

Fourth, Russia primed the West to accept this payment process for other Russian goods. From Reuters yesterday:

Russia will not immediately demand that buyers pay for its gas exports in roubles, the Kremlin said on Wednesday, promising a gradual shift and saying Russia should work on an idea to widen the list of its exports requiring rouble payment….

Earlier on Wednesday, Russia’s top lawmaker Vyacheslav Volodin said the European Union would have to pay in roubles if it wanted Russian gas and said oil, grain, metals, fertiliser, coal and timber exports could be priced the same way.

Fifth, as an unexpected bonus, Putin and Scholz had a direct conversation. When two national leaders are seriously at odds, any interaction that is less than testy is a minor de-escalation.

I have to confess I still managed to get spun by the Western press. Putin in his March 23 statement said that he wanted his experts to come back within a week with their recommendations. My dim recollection (due to the state of search it is pretty much impossible to make fine-grained queries) is that the 31st was the intended date for Gazprom to explain what the new drill would be. Gazprom either missed that deadline or the Putin-Scholz talk was intended to stand in its place.

The reason that that matters is it appears a lot of parties who ought to know better acted as if the (planned) March 31 announcement was the effective date for the process change. In fact it does take a bit of time to set up new payment processes, which is what Russia had in mind.

If the gas for roubles gambit is going well for Russia, with Russia on the way to getting what it wanted while the West able to claim a victory of sorts, a no-concession by Russia at the close of the Istanbul negotiations with Ukraine has turned into a backfire.

I have yet to find a translation of the remarks at the close of the sessions on Tuesday. The Financial Times recap is representative:

Russia has decided to “dramatically” scale back its military activities in the Kyiv area, a top Moscow defence ministry official said…

Alexander Fomin, Russia’s deputy defence minister, said the move was intended to “increase mutual trust” as he announced it in Turkey after face-to-face talks concluded on Tuesday.

Other accounts used the word “significantly” or “substantially”. Regardless, this concession wasn’t meaningful. The Russian Ministry of Defense stated earlier this week that it had successfully concluded the first phase of its operations among other things by taking Mariupol. The Ukrainian forces in the east have substantially reduced warmaking capabilities due to depletion of supplies, destruction of fuel and ammunition depots, and Russia succeeding in preventing resupply. The two reasons for having a substantial military presence around Kiev was to pin Ukraine’s western forces there and to pressure the government to negotiate.

So it was reasonable to assume that Russia was going to reduce force levels in the west so it could sent some to the east, both to relieve units that has been engaged in serious fight and to assist in capturing the largely-surrounded Ukrainian troops there.

But the use of a word like “dramatic” plus the failure to indicate timing let the US and Ukraine take control of the spin. The US, even before Russia had done anything, was pooh-poohing the Russian move. Again from the Financial Times:

But western officials cautioned against taking Moscow’s pledge at face value. “Nothing we have seen so far suggests that Putin and his colleagues are particularly serious about the talks. They are likely just playing for time,” said one.

On Tuesday US President Joe Biden said he wouldn’t “read anything into” Russia’s decision.

In fact, the Guardian reported the next day:

In Ukraine’s latest intelligence report as of 10pm local time, its military claimed Russian troops continue to withdraw from Kyiv and Chernihiv but the movement is merely “a rotation of individual units” and aims to “mislead the military leadership” of Ukraine…

Moscow’s lead negotiator, Vladimir Medinsky, said Russia’s promise to “drastically reduce” military operations does not represent a ceasefire. In an interview with the Russian state-owned Tass news agency, Medinsky said there is still “a long way to go” to reach a mutual agreement with Ukraine.

Following Russia’s announcement, two senior US officials said the US was seeing Russia beginning to withdraw some of its forces from the Ukrainian capital, Kyiv, in what it believes is a “major” change in Russian strategy. Another US official said any movement of Russian forces from around Kyiv would constitute a “redeployment, not a withdrawal”.

The UK has also seen signs of “some reduction” in Russian bombardment around Kyiv, Downing Street said. But it insisted the UK will judge tentative steps towards a possible peace deal by actions rather than words. “We don’t want to see anything less than a complete withdrawal of Russian forces from Ukrainian territory,” the PM’s spokesperson said. The UK’s Ministry of Defence (MoD) said in its latest updated that “it is almost certain that the Russian offensive has failed in its objective to encircle Kyiv”.

Yet we see on the Republic TV Arnab debate show, a Ukrainian lawmaker hyperventilating about continuing Russian attacks, based at best on anecdata. He may well be correct that nothing much changed in one day. And even if Russia really, truly, cross my heart is on its way to lowering troop counts and activity around Kiev, one day is too little time to conclude much of anything. But Russia allowed others to define expectations.

Today, the New York Times is claiming Russia increased activity around Kiev and that Russian troops are defying Putin, in Russia Steps Up Attacks Amid Reports of Rifts in Moscow. From its summary:

Despite claims of de-escalation, Russian forces turned their fury on Chernihiv and the suburbs of Kyiv. U.S. officials say they believe Vladimir Putin’s aides are misleading him about the war.

While anything is possible, the Russian order of battle is not to take cities but to take armies and destroy military infrastructure and resources. The Wall Street Journal has a more plausible account in Russia Plays Down Progress in Peace Talks, Intensifies Attacks in Eastern Ukraine:

Moscow dismissed a diplomatic overture by Ukraine in peace talks, while Russian forces hit targets around Kyiv on Wednesday despite saying they would limit attacks there as they stepped up ground and air assaults in eastern portions of the country.

Kremlin spokesman Dmitry Peskov said talks Tuesday in Turkey between Ukrainian and Russian delegates didn’t represent a turning point in the conflict. “No one said that the sides have made headway,” he said. “We can’t point to anything particularly promising.”…

The Kremlin’s previously announced military strategy shift, Western officials have said, suggests a greater focus on securing and expanding one of its strongholds inside Ukraine, potentially as a bargaining chip in peace talks.

While Russian attacks appeared focused on areas away from the capital on Wednesday, most Russian forces around Kyiv haven’t been redeployed elsewhere, according to a Pentagon assessment.

“The airstrikes have not stopped. Not at all. So Kyiv is very much under threat,” said Pentagon spokesman John Kirby.

Ukraine’s military, while saying it saw signs that Russian forces were regrouping to focus on the east, also expressed doubt that Moscow had given up its efforts to take Kyiv.

Finally, the US is still trying to pressure China and India to take a stand against Russia. China does not seem receptive. From Global Times:

President Xi will meet EU leaders by video link on Friday, including European Council President Charles Michel and European Commission President Ursula von der Leyen….

The EU said it wants to put pressure on China “to be neutral with its stance” over Russia’s recent military operation in Ukraine, CNBC reported on Wednesday, citing unnamed sources. The goal of the summit is “ensuring, in a way, the neutrality of China so they don’t help Russia,” an EU official was quoted in the media report.

And another official also described the summit as a defining moment for EU-China relations and if China “aligns themselves with Russia that will obviously have a very negative impact on relations with the EU,” the official said, according to CNBC.

Chinese experts believe that it’s inappropriate to connect the Russia-Europe conflict with China-EU relations as the issue is not the problem that must be solved and tackled within the framework of China-EU relations but can only be considered as one factor affecting the relations.

The Indian government is set to be swarmed with foreign diplomats competing for its favor. Russian Foreign Minister is set for a two day visit starting Friday. But America’s Deputy National Security Advisor for International Economics Daleep Singh was set to be in New Delhi on Wednesday and Thursday. And according to Scroll, UK Foreign Secretary Liz Truss is arriving Thursday.

While it’s possible that India will relent, it didn’t budge when Japan offered $42 billion of investment in what was widely seen as an incentive to criticize the Russian campaign. And it also appears the West has managed to overlook was a massive snub the AUKUS deal was to India. India’s Foreign Minister gave an unusually harsh statement that boiled down to, “We need to rethink who are friends are.”

So many stresses are being applied to economic and political structures. Those of us who are at a bit of a remove from the immediate effects should consider ourselves to be very lucky.

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