Explanation: Russia wants countries to pay for gas in rubles. Will buyers comply?

HOUSTON/LONDON, April 26 (Reuters) – Russian energy giant Gazprom told Poland and Bulgaria it would cut gas supplies from Wednesday, deepening Moscow’s feud with Western nations who oppose his invasion of Ukraine.

In March, Russian President Vladimir Putin said the world’s largest natural gas producer would require “unfriendly” countries to pay for fuel in rubles by opening accounts at Gazprombank and making payments in euros or dollars to be converted into rubles. Read more

Poland and Bulgaria would be the first countries to have their gas cut off by Russia since Moscow launched what it calls a military operation in Ukraine on February 24.

Join now for FREE unlimited access to Reuters.com

Register

Several countries have said they will not comply with Moscow’s demands. Russia and swaths of its businesses are under sanctions for the invasion. Read more

The Russian economy has been hit by Western sanctions, even though the European Union has refrained from limiting energy imports.

Europe gets around 40% of its gas from Russia, paying 200-800 million euros ($880 million) a day so far this year.

Currently, almost all Russian gas purchase contracts are denominated in euros or US dollars, according to consultancy firm Rystad Energy. Ruble payments would benefit the Russian economy and strengthen its currency. .

Several buyers said they would continue to pay in euros because their contracts do not allow changing currencies. Some legal experts say it is unlikely that Russia could unilaterally change the terms of the contracts.

“Contracts are made between two parties, and it’s usually in US dollars or Euros. So if one party unilaterally says ‘no, you’re going to pay’, well, there’s no contract,” said said Tim Harcourt, chief economist at the Institute for Public Policy and Governance at the University of Technology Sydney.

Only a few buyers of Russian gas, such as Hungary and Uniper (UN01.DE), the main German importer of Russian gas, said it would be possible to pay for future supplies under Moscow’s announced program without breaching sanctions. of the EU.

Another complication is the wariness of Western banks to trade Russian assets.

“Even if a buyer is willing to pay in rubles, it can be quite difficult given the sanctions in place against a number of Russian banks,” ING Bank said.

A source familiar with talks with gas buyers who declined to be named said there was no clarity on how the program would be implemented, but work continued. Read more

Payments in rubles are technically possible because the sanctions are only partial, said a banking executive specializing in foreign exchange markets. A Western buyer could pay euros or dollars to their bank, which in turn would send it to a Russian bank and ask them to pay Gazprom in rubles, he added.

It is unclear whether the Russian central bank can provide enough ruble liquidity to allow European customers to stock up on foreign currency.

Until now, it was unclear whether Poland or Bulgaria would comply with Moscow’s demands. Both countries rely heavily on Russian imports by pipeline.

Polish gas company PGNiG (PGN.WA), whose gas deal with Russia expires at the end of this year, has repeatedly said it will not comply with the new regime. He also said he would not extend the contract.

Poland says it doesn’t have to cut deliveries to customers. The country can obtain gas supplies via two links with Germany, one of which runs counter-current on the Yamal gas pipeline, a link with Lithuania with an annual capacity of 2.5 Gm3 which will open on May 1 and via an interconnection with the Czech Republic up to 1.5 Gm3.

Bulgaria also had a contract with Gazprom which was due to expire at the end of the year. The country is almost entirely dependent on Russian gas imports and has taken steps to find alternative supply arrangements, its energy ministry said in a statement. Bulgaria consumes about 3 billion cubic meters of gas per year and imports more than 90% from Russia. Read more

Earlier, Bulgarian Energy Minister Alexander Nikolov said a counterparty in Sofia could process transactions in rubles, without giving details.

Join now for FREE unlimited access to Reuters.com

Register

Reporting by Arathy Somasekhar in Houston and Nina Chestney in London; additional reporting by Paritosh Bansal in New York and Sujata Rao in London; Editing by David Gaffen, Gary McWilliams, Sam Holmes, Andrew Heavens and David Gregorio

Our standards: The Thomson Reuters Trust Principles.