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While the plural of anecdote is not data, Lambert and I noticed that the news flow today seems peculiarly, erm, flaccid. That seems peculiar since the geopolitical-fault-lines testing war in Ukraine is still on, and NATO and the G7 had a summit in Brussels yesterday, plus we have the new elephant in the room of the Russian only-rouble-payments-for-gas-if-you-whacked-our-banks counter-sanction.
Normally big players have some press set pieces ready to launch after major meetings, as foretold by Reuters: Biden’s Brussels trip to highlight new Russia sanctions, NATO posture plans. Japan was also set to announce additional sanctions and actually will, according to Nikkei:
Japanese Prime Minister Fumio Kishida promised to impose high tariffs on Russian imports on Thursday as the leaders of the Group of Seven nations gathered here to turn up the diplomatic and economic pressure on Moscow.
It turns out this centerpiece is ending Russia’s most favored nation status, which the countries that participated in the economic sanctions pledged to implement, so moving forward with that measure isn’t exactly a new sanction. However, Japan is barring exports to Russian defense-related companies and of luxury goods, and will try to prevent cryptocurrencies from being used to evade sanction.
But according to Nikkei the US did add to its Russian sanctions, although it’s not surprising that the press didn’t tout them, since they are symbolic:
The U.S. also announced a wave of fresh sanctions Thursday against Russian lawmakers, defense companies and individuals including the head of Sberbank, Russia’s largest bank.
Nikkei confirmed no big actions were taken at the summits:
The first face-to-face G-7 summit since Russia’s invasion of Ukraine served to showcase unity against Moscow. But the bloc’s joint statement includes no specific proposals for new responses or additional sanctions. It is unclear whether the meeting alone can alter Russian President Vladimir Putin’s behavior.
So one has to wonder what happened, since the intent of a session like this is to convey resolve. Was it that the leaders got realistic briefings on how the war is going? Or did Russia’s gas counter-sanction rearrange the agenda?
As far as the Russia gas-only-for-roubles counter-sanction, a lot of the commentary, particularly from officials, was not well informed. But this one at Reuters was an eye-opener:
Asked whether the United States would allow European nations that cannot manage without Russian gas to process payment in roubles without finding themselves in a breach of sanctions, a White House official said Washington was consulting with its allies.
So much for national sovereignity.
The Wall Street Journal reports that the US is happy to take advantage of the gas price squeeze taking steps to reduce the impact of the economic war it set off: U.S. to Boost Gas Deliveries to Europe Amid Scramble for New Supplies.
But the IEA had already pointed out that Europe was going to need to do a lot of energy belt-tightening over the next four months alone. And I have yet to see any energy expert indicate that it is possible for Europe to plug its energy hole in anything less than a few years, let alone the even bigger gap set to open up for countries who refuse to authorize payments in roubles.
Some examples of economic confusion. From DW:
ING bank’s chief economist, Carsten Brzeski, said that any attempt at trading currencies with India or China wouldn’t help either because Russia simply can’t make any payments to Western countries under the boycott. “Putin needs rubles to finance his war. In this sense it [the gas-for-ruble demand] is a smart move,” Brzeski told DW
Um, Russia is a sovereign currency issuer so it can always simply net spend to pay for internal expenses. However, in one of Putin’s speeches announcing the Ukraine campaign (forgive me for not looking it up), Putin made a point of saying Russia had the funds to go to war and would not need to “print”. From this remove, Russia has seemed to be concerned about deficit spending. Given that it has a financial crisis in the 1990s, likely means the government believes it needs to demonstrate fiscal rectitude to support the rouble.
Another argument made is that the Russian move will backfire because Russia needs those Euros and dollars. This of course ignores that the accepting dollars and Euros in the past allowed the West to expropriate them, and that the effect of the sanctions is also to prevent Russia from being able to make much use of these currencies abroad. Moscow Times added another bit of intel:
In many ways, it was Western countries that pushed Russia to take such a step because European companies’ suspension of trade with Russia led to a sharp decline in imports, and when there are no imports of goods and services, there is no need for the euro as a means of payment, Director of BCS World of Investment’s regional network for high-end clients Grigory Sosnovsky emphasized.
“Perhaps the move is a message or the first step on the long but inevitable road to Russia’s departure from dollar and euro payments. One thing is clear: the freezing of Russia’s assets cannot go unnoticed and Moscow will keep reacting to it,” the analyst concluded.
This part from DW also appears incorrect:
Putin’s gas-for-rubles plan would also bring Russia’s central bank back into the global financial system after sanctions have virtually cut it off from financial markets. “Putin would reinstall the central bank as a key player in the market because it is essential for paying gas bills with rubles,” [Jens] Südekum [a professor at the Institute for Competition Economics of Dusseldorf University] told DW.
Payments for Russian gas purchases are usually so large that the amount of rubles needed cannot currently be secured on foreign currencies’ markets. Western buyers will most likely need to go via the Bank of Russia to make their payments, essentially undercutting sanctions against the Russian central bank.
It is true, as we stated yesterday, that there aren’t enough roubles circulating outside Russia for non-Russian banks to be able to buy enough roubles to tender as payment (except at most on behalf of very small buyers).
However, the sanctions were designed to allow commodity payments to continue to be made; that’s why only some Russian banks were booted off SWIFT.
There is no reason for any gas buyer to deal directly with Russia’s central bank. They can open an account with a non-sanctioned Russian bank, make payments in euros or roubles, and have the bank buy roubles for them.
The only way a Western institution would deal with the Bank of Russia would be if a Western bank, on behalf of its gas customer, were to go to the Bank of Russia to make the currency exchange. Unless that bank has previously had a clearing account with the Bank of Russia, this would be a non-starter independent of the sanctions, plus we see no reason for a Western bank to stick its neck out this way. Gas buyers who want to deal with Russia will need to open accounts with non-sanctioned Russian banks, if they don’t have them already.
Having said that, it is possible that Russia will offer buyers a central bank account for those who want to avail themselves of it, just to make a point.
As far as which countries are willing to pay in roubles, so far we have only snippets of response. As far as we can tell from the English language press:
Poland and Italy have said no
Japan is doing Japanese discretion, feigning confusion, which given the lack of details from Russia, is not unreasonable. But Japan is almost certainly going to want to see how key players respond before it decides what to do.
Germany has said no and German gas companies are signaling high levels of anxiety
Some readers have wondered operationally how Gazprom and any other Russian gas pipeline providers could shut off supply to particular countries. I have not yet seen anyone get into the weeds, but I assume that pipeline operators have to be able to shut off sections of pipe, if nothing else to deal with leaks and for maintenance. So the question seems to be if shutoffs can be done an a granular (utility buyer) or country basis.
The Economic Times of India helpfully provided a currency breakdown:
According to Gazprom, 58% of its sales of natural gas to Europe and other countries as of Jan. 27 were settled in euros. U.S. dollars accounted for about 39% of gross sales and sterling around 3%.
Western officials loudly cried foul, saying Russia was not allowed to break its contracts. For instance, from Radio Free Europe:
“This would be a unilateral decision and a clear breach of contract, and it would be an attempt to circumvent the sanctions,” European Commission President Ursula von der Leyen said at the start of an EU summit in Brussels on March 24….
“This is basically a breach of contract, this is important to understand,” Italian Prime Minister Mario Draghi said of Putin’s move.
It’s remarkable but also predictable that no Western leader (save perhaps in South Korea, which is reportedly unhappy with the sanctions) is willing to see Russia’s move as a tit for tat in response for the West effectively stealing $300 billion of Russian central bank assets and the other sanctions. Recall that both Russia and China regard them as illegal since they were not approved by the UN. And no country has ever seized the assets of another except in event of war. And none of the sanctioning countries has declared war with Russia.
Responsible Statecraft was one of the few publications to depict how radical and dangerous the $300 billion asset grab was. Key bits from its must-read article that Lambert also highlighted yesterday in Links
The recent act of “the West” — governments and central bankers in league and in unison — to expropriate what Biden called “Putin’s $630 billion war fund” is really off the charts by way of economic warfare, something that just wasn’t done in the 18th and 19th centuries, even in terrible extremities. Debts were paid, even to cretins. The reputation for trustworthiness was the banker’s most precious asset, and it became the creed of nations. Only by an authoritative legal process, governed by the law of nations, might someone else get their hands on your stash.
In the three centuries before 1914, beginning the age in which all restraints in war, military and economic, were obliterated, such a default was seen in “civilized Europe” as equivalent to the method of “the barbarian” — “we like, we take.” But not only by them. Vigorous shakings of the head in disapproval would also have come from the Princes of Africa, the Sultan of the Turks, the Kings of Persia and China, the Great Mogul of India, the Grand Duke of Moscovy, the Emperor of Ethiopia (Prester John), the rulers of Japan and Morocco, and the Khanate of Crimea. …
The commentariat treats this Vast and Unprecedented Expropriation, this Financial H-Bomb, alongside things like sanctioning Putin’s niece as just parts of a generic class of “sanctions,” as if they were two peas in a pod, when the Central Bank Expropriations are a revolutionary stake into the heart of the global economic system. They will one day be seen as hurtling us to a new monetary order, distinguished across the East-West divide by a rabid neomercantilism, wealth-destroying but inexorable.
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Some of the less knee-jerk reactions to Russia changing the payment terms posit that Russia will do additional high-handed things like shorten the term of the contracts or change them from long-term pricing to spot. But pay attention to what Putin said:
I want to emphasize that Russia will definitely continue to supply natural gas in line with the volumes and prices and pricing mechanisms set forth in the existing contracts.
Effectively only two changes are being made are to the payment currency, which since the payment was originally set in Euros, dollars, or sterling, requires setting a foreign currency/rouble conversion rate. As we said, here is where Russia could be additionally difficult by setting an above-market price. Then this scheme would be seen as an brute force way to support the rouble.
However, Russia could also accept the buyers simply making their exact same old Euro/dollar/sterling payments as stipulated in their agreements, but effectively add a rider requiring the deposit be made in one of a short list of Russian financial institutions, and that the institution be instructed to exchange the payment into roubles. This would leave the existing contracts almost entirely untouched and could not be construed as forcing buyers to pay more or reopen other contract terms.
A way to be not nice but arguably still preserve the existing contract terms would be, for long-term contracts, to use the foreign currency to rouble rate in effect when the deal was inked. That would almost certainly be higher than the current level. My assumption is Russia’s intent is not to be punitive but also not to allow itself to be screwed again. But we’ll know more when Russia presents its payment scheme, presumably next week.
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