Market Views

Rouble Trouble: why the new Russian gas payment scheme matters.

In a Decree signed on March 31st, Russia’s president Putin ordered that payment for the supply of Russian gas to foreign buyers from  “hostile countries” be made in roubles from now on. The announcement has been received by European countries with mixed feelings. France and Germany rejected the order as “blackmail”, Hungary said it was willing to abide by it, and Slovakia stated that it could not afford being cut off Russian gas and therefore it would pay in roubles if it had to. The Italian minister for energy transition, on the other hand, argued that the request would not change much as “Putin could show that the Europeans are paying in roubles and Europe could pay in euros”.

Is the new rouble payment scheme really just an inconsequential technicality about the currency of gas invoicing? Upon reading the small prints, it would appear not. From the perspective of Russia, it is rather functional to the achievement of several strategic objectives for both short-term war outlook, and longer-term geo-economic positioning in an increasingly fragmented international monetary system.

Cutting the Middleman

Currency is a key variable in contracts for energy supply, and most gas trade is invoiced and paid for in euros or dollars. Gas contracts typically structure payment as a direct transfer from the buyer to the seller’s designated account at a European bank, with the payment obligation deemed fulfilled when this transfer comes through. Gazprombank – the financial arm of Gazprom – plays a central role in these transactions and maintains correspondent-banking relationships with Western banks such as JPMorgan Chase, Deutsche Bank, Bank of New York Mellon, or Commerzbank, which are used for energy payments.

Figure 1 – Current structure of gas payments
Source: Algebris Investments

The Presidential Decree alters this procedure significantly. From an operational standpoint, it prescribes for foreign buyers from “hostile countries” (which accounted for 70% of Gazprom 2021 export revenues to open a special rouble account “of type K” and a special currency account at Gazprombank. These accounts must be used for gas payments. Foreign buyers will then need to transfer funds in the foreign currency specified in the gas supply agreement to their newly created special currency account at Gazprombank, and Gazprombank will operate the conversion in roubles, by selling all the foreign currency it received from the buyer on the Moscow stock exchange and crediting the proceeds in rouble to the newly created rouble account of the foreign buyer. The rouble funds would ultimately be transferred to the Russian supplier in the latter’s authorized rouble account at Gazprombank (Figure 2).

Figure 2 – The new gas payment structure
Source: Algebris Investments based on the Presidential Decree of March 31st, 2022

From a technical standpoint, the impact of this structure on forced conversion of FX is relatively limited: rather than having to sell 80% of its FX revenues to the CBR, Gazprom will be forced to sell 100% of it on the Moscow stock exchange. Depending on whether the extra 20% is bought by the CBR through new rouble issuance or by other banks with the existing rouble money supply, the impact on the rouble exchange rate might be slightly different at the margin (but the exchange rate is already largely the artificial result of capital controls in place since end of February). What is more important, however, is that the new payment structure completely cuts off the middleman (i.e. the European banks) and as such it significantly increases the risk that Russia can undermine and circumvent sanctions imposed so far.

Undermining Sanctions

While a lot of press has focused on the currency conversion element in the scheme, what the Russian government is demanding is not exactly to be paid for gas in roubles. The substance of the request is to be paid in hard currency in an account at government-owned Gazprombank in Russia, rather than at a Gazprom account in any Western bank.

From Russia’s perspective, this achieves two strategic results. First, it prevents Europeans from enacting sanctions that would freeze gas payments in escrow accounts at European banks – to be accessible to Russia only after it withdraws troops from Ukraine. This option has been discussed recently, but the Russian Decree makes it very clear that Europeans cannot have their cake and eat it: as long as they want gas delivered from Russia, they will have to pay for it into a Gazprombank Russian account that cannot be frozen. If the payment is not performed according to the procedure described in the Decree, supply of gas can be halted (see next section). This puts European governments in a corner: if they want to stop Russia from accessing energy-related funds, they will have to take the politically much more difficult decision to stop importing Russian energy rather than just keep buying and withhold the money. This has already proved to be a divisive topic across the EU and the Russian move risks increasing political fragmentation at the worst time.

Second, gas payments under the scheme could significantly undermine already imposed sanctions. So far, Gazprombank has been allowed to maintain SWIFT access due to its role in energy transactions. But creates a risk that the bank becomes a conduit for sanctioned businesses to and from Russia. Experiences in other sanctioned jurisdictions (Iran and Venezuela) suggest that banks can become masterful at setting up front companies and layering opaque transactions so that it is almost impossible to tell who the ultimate beneficiaries of transfers are. The new gas payment scheme presents a similar opportunity: once the FX reaches Gazprombank, it becomes impossible to trace it across the system.

Weaponizing Uncertainty

Another important change introduced by the presidential Decree regards the stage and the conditions at which the payment for natural gas would be deemed fulfilled. Under the “normal” payment procedure, the buyer has full ownership of the payment process, and the obligation is considered fulfilled once the currency transfer from the buyer’s account reaches the seller’s account. Under the new scheme, on the other hand, the obligation for the foreign buyer to pay for the supply of gas is considered fulfilled only from the moment the funds received from the sale of foreign currency are credited – i.e. when Gazprombank converts the euros it received into roubles.

The fulfilment of the buyer’s payment obligation is de facto transferred to an agent (Gazprombank) and taken entirely out of the buyer’s control. If payment is not fulfilled according to the procedure laid out in the Decree, supply of gas under existing contracts can be halted at the discretion of the customs authority. It follows that the continued and stable flow of gas to Europe under this new setting would hinge not on the buyers’ paying their bill but on Gazprombank operating the EUR-RUB conversion according to the letter of the Decree and within the time limits stipulated in the contracts.

Figure 3 – Typical gas payment timeline
Source: Algebris Investments based on Ason (2022)

Based on the typical gas payment timeline (Figure 3) the risk of disruptions for European countries could start materializing at the earliest around end of April and early May. In case of an interruption in supply, European buyers would likely invoke a breach of contract – suing Gazprom for non-performance. It is however not clear whether such case would be successful. A recent commentary published by the Oxford Institute for Energy Studies suggests that by transferring the ultimate decision to terminate supply away from Gazprom (as a seller exercising its rights under the relevant gas contract) to the customs authority, the Decree strengthens Gazprom’s case to plead force majeure. If the customs authority ordered a stop of delivery to a client due to the payment not meeting the terms of the Decree, Gazprom could seek to be excused from liability for non-performance by arguing the stop had been imposed by an act of government. This gives Russia significant leverage to weaponize the uncertainty of gas supply to Europe.

Forcing Ruble-ization

The new rouble payment scheme should also be looked at in a broader strategic geoeconomics context. The Central Bank of Russia has depleted USD 38.8bn of reserves between February 18th and March 25th, in an attempt to prop up the currency. Of these, USD 34 bn were spent before March 4th, and likely reflect initial currency stabilization as well as the cost of the CBR pledge to support the FX needs of the Russian banking system, and after February 28th the CBR is likely to have used FX it held onshore. After March 4th, however, international reserves have stabilized. This has been the combined result of capital controls that slowed the outflow and the Russian government requiring exporters to sell 80% of their FX to the CBR – a measure that according to estimates reported in Interfax could be worth ~ USD 400bn in 2022.

Figure 4 – CBR International Reserves
Source: Algebris Investments based on CBR data

In a move that went largely unnoticed in Western media, the CBR also started to buy gold from domestic banks at a fix rate of 5000 RUB per gram on March 28th. This move is consequential for two reasons. First, by offering to buy gold from Russian banks at a fixed price per gram, the CBR has de facto linked the rouble to gold. Since gold trades in US dollars, this also sets a floor for the rouble in US dollar which helps stabilize the exchange rate. Second, by demanding rouble payment of gas, Russia has also implicitly drawn a link between the price of natural gas and the price of gold – which could ultimately allow Russia to accept direct gold payment for gas exports. This in turn would boost Russian reserves further.

Russia is one of the world’s largest exporters for a broad range of commodities. If the rouble payment scheme were extended (as recently proposed) to oil and/or other commodities and accepted by Western buyers, the role of the rouble as a global currency could be significantly strengthened for as long as the West remains reliant on Russian commodities which, as we discussed here and here, are difficult to substitute over a short time horizon. This development is aligned with other recently created schemes such as the rouble-rupee exchange, the Saudi’s openness to accept yuan for oil, Iran’s acceptance of Russian MIR payment system as a SWIFT alternative, the co-badged Mir-UnionPay cards issuance by Russian banks and – more strategically – the will expressed by Russian-led Eurasian Economic Union to create an alternative monetary and financial system as part of a broader move towards extending the EAEU-China financial cooperation. According to a survey run by Kommersant, business clients at Russia’s largest banks began to actively open accounts in yuan during March 2022, as well as sharply increase account balances in Chinese currency. At the same time, the volume of yuan transactions on the Moscow Stock Exchange has increased by 4-5 times in March compared to the previous months.  

Why does it matter?

In conclusion, the new rouble payment scheme laid out in the March 31st Presidential Decree is far from inconsequential. It deprives European gas buyers of control on the fulfilment of their payment obligations, which is outsourced to a Russian bank in Russia. It increases the risk of Russia being able to undermine and circumvent sanctions, by cutting the middleman role currently performed by the European correspondent banks network.

It also gives Russia full control on weaponizing the uncertainty of gas supply, by tying the fulfilment of the buyers’ payment obligation to the EUR-RUB conversion and strengthening Gazprom case for force majeure. As such, it looks more like a calculated counter-sanction move from Russia than an act of desperation – as some have described it.

Moreover, the rouble gas payment scheme, together with the CBR’s recent initiation of gold purchases at fixed price, sets the basis for gas to be linked to gold through an artificially inflated rouble. Although the gold buying operation is currently set to expire on June 30, and it is therefore too early to talk about a ‘Russian Gold Standard’, this is strong evidence that the ongoing conflict will have profound and long-lasting impacts on the structure of the international monetary system as we know it. Like other wars before this one, we can expect the Ukraine-Russia conflict to be a structural break in the patterns of global economic integration and multipolar cooperation.


Silvia Merler Head of ESG and Policy Research


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