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

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.

As Nakedcapitalism explained when the news first broke about the gas-for-rubles deal:

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.

[But 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.

The newest statements today were:

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.

…

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.

…

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.

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.

The article goes on to explain how several media outlets - and by extension, us - mistook the 31st of March deadline as the deadline when all western countries would need to pay in rubles, when it wasn’t - it was the deadline when Gazprom would tell Putin what the new drill would be. And it would take some time to reorganize everything even if Russia was explicitly trying to bring down Europe’s economy (it doesn’t seem to be, because that would also hurt Russia).

Nevermind.

Russian president Vladimir Putin has signed a decree that demands ‘unfriendly countries’ must pay for Russian gas in rubles. The new law dictates that ‘unfriendly countries’ must open accounts in Russian banks and will come into force on April 1. Current gas supply contracts will be stopped if buyers from ‘unfriendly countries’ do not meet new payment terms.

It also goes into the whole “Is Russia withdrawing from Kiev/Chernihiv or not?” thing that’s been running around in the media. It says that a day or two is not long enough to conclude much of anything, but also that Russia is still shelling all over Ukraine and hitting military targets, and Russia may still be pinning Ukraine at Kiev anyway. So we’ll have to wait and see.

The article continues by saying that the US continues to try and bring India and China to its side. It is obviously failing in China. India, to its credit, turned down $42 billion in investment from Japan (as an incentive to criticize Russia).