Perhaps an allergy to finance, particularly among political leaders and media employees explains the widespread lack of comprehension of what the Russian “unfriendlies pay for gas in roubles” would amount to. Recall that in his original statement, Putin set forth boundary conditions, most importantly that existing pricing mechanisms would stay in place.
I have to keep recycling this clip because the Russian leader made clear from the get-go that the contract terms and economics would stay in place. What was being added was the requirement that the payment be tendered in roubles:
Folks, this is not hard unless you want to make it hard. It’s a mystery why the press went into MEGO (My Eyes Glaze Over) mode. If your going to leave the contract otherwise in place, all that Putin was appending was a requirement to exchange the euro/dollar/sterling amount due into roubles at the time of payment. Theoretically, Putin could have insisted on an above-market exchange rate, but that would conflict with his stipulation that price terms remain unchanged, since that would de facto change euro/dollar/sterling pricing for a new higher price stated in roubles.
We listed a whole set of advantages in our post yesterday that Russia would nevertheless get from a minor-seeming, technical change. The main one was to require gas buyers to tender payments to Russian banks, since only Russian banks could get their hands on enough roubles to execute the foreign exchange transaction (more on an important fine point soon). There aren’t a lot of roubles trading outside Russia. That would prevent the West from sanctioning more Russian banks, something they seemed intent on doing at last week’s series of European summits. It would also mean the foreign currency payments would be in the hands of Russian institutions, and hence not vulnerable to being “frozen,” aka expropriated.
The fact that the West seems willing to go along, and is now incorrectly depicting the Russian detailed explanation as a climbdown, makes it awfully hard for them to object when Russia, as it floated on Wednesday, extends this procedure to other commodities, like oil, lumber, wheat, metals, and fertilizer. That means in having payments from “unfriendly countries” on contracts denominated in their currencies be made to an account at an unsanctioned Russian bank with the customer also effectively ordering the currency exchange to roubles.
One additional advantage of this procedure: it greases the skids for Russia requiring future contracts to be set in rouble terms, not in “unfriendly country currency” terms. Expect Russia to be smart enough not to do this right away. And expect them to do this first on a long-term contract for a must-have commodity. Gas again seems like the prime candidate but another suitable contract expiration might occur at a propitious time.
At the end of this post, we’ve embedded two documents: one, the translation of Interfax’s transcription of Putin’s orders that describe the mechanics. It’s still a bit rough, but still understandable. The second is an official translation of Putin’s speech yesterday, nominally about how Russia is going to build and operate aircraft under sanctions. The opening section is devoted to operation of and rationale for the “roubles for gas” stipulation. Reader Safety First found the Russian text on Interfax. His recap is a lot smoother than the Yandex translation:
– LNG is excluded, we are only talking about “pipeline gas”.
– Gazprom is directly prohibited from shipping gas unless it is paid in rubles.
– To facilitate this, a) Gazprom Bank will open an account in rubles, and a parallel account in foreign currency (termed “K-accounts”, likely for some legal reasons); b) there is a section detailing how these accounts are opened by Gazprom without the “foreign owner” actually participating in the process, basically to get around anti-laundering laws.
– Customer will deposit euros (let’s say) with Gazprom Bank into “their” euro K-account, and instruct Gazprom to procure X rubles to make the payment for the gas. Gazprom Bank will sell the euros on the Moscow exchange, and credit the rubles thus received to the customer’s ruble K-account, and then pay Gazprom for the gas delivery from that ruble account.
– The Russian Central Bank is directed to establish all the necessary procedures viz. these K-accounts, then the Customs Service is supposed to confirm the procedures for release of the gas, both “within 10 days” of the decree’s effective date (March 31). The Central Bank also gets leeway to develop “alternative FX trading mechanisms”.
– There is a government official (from the Foreign Investments Commission) empowered to grant waivers to foreign customers, seemingly at will.
One change from the process we envisaged at the get-go is that Russia has stipulated one unsanctioned bank, Gazprom Bank, to be the payment recipient, as opposed to having any unsanctioned Russian bank be eligible.
A second fine point is that this process has the gas buyer “owning” the rouble account as well as the initial euro/dollar/sterling account into which the contactually due payment is initially made. So the gas buyer does in the end make payment in roubles because roubles go from his rouble account to Gazprom
The transaction mechanics above also means the payment to Gazprom is net of the foreign exchange transaction costs. Gazprom eats that, not the gas buyer.
Despite the formal statement seeming to make a big deal about setting up the dual currency accounts, this presumably has to do with anti-money-laundering and perhaps other requirements in setting up accounts for foreign entities. The dual currency part isn’t the reason why. Russia has had dual currency accounts for retail customers for years, so that isn’t the hard part.
A third interesting point is the requirement to execute the foreign exchange transaction on the Russian Stock Exchange. Bear in mind that Russian companies that sell oil and gas abroad now are required to convert 80% of their receipts to roubles, again on the Russian Stock Exchange. I am curious as to why Russia is so enamored of having exchange-traded foreign exchange. The norm in the rest of the world is for foreign exchange to be traded over the counter, out of bank treasury departments. One can argue that OTC trading is non-transparent, subject to more chicanery, and unlike one central exchange, cannot assure best execution.
Finally, the timing is fuzzy. Putin maintains that this mechanism is effective as of April 1. But as his statement indicates, it applies to gas shipped starting then. And you can’t demand that buyer jump through impossible hoops. Unless a gas customer happened already to have an account at Gazprom Bank, it’s hard to imagine them being able to set up new accounts in one day. Plus the details of the order give the authorities up to ten days to sort certain details out.
Gas payments under long-term contracts are made periodically, and it appears the first ones are not due until the end of April. Helpfully from another story on Interfax:
The practical implementation of the new procedure for paying for Russian gas supplies to Europe – in rubles – will begin at the end of April-May, a source familiar with the situation on the energy market explained.
The decree of the President of the Russian Federation on paying for gas in rubles applies to deliveries starting from April 1.
“Under some contracts, payments for Aprelsky gaz start in the second half of April, for others-in May,” the source said, answering the question of whether some of the customers will be left without gas as early as April 1.
Ordinarily, one assumes Russia won’t cut off gas unless a payment has actually been missed. But if buyers say “Nyet” before then, would Russia act sooner? So far, Scholz is digging his heels in. Yet another Interfax account:
German Chancellor Olaf Scholz said on Thursday that Germany’s payment for gas from Russia will continue to be made in euros in accordance with existing contracts.”We have reviewed the contracts. They say that the payment is made in euros. In a conversation with the Russian president, I explained to him that this should remain the case, and it will be so, ” Focus quotes him as saying from a press conference with Austrian Chancellor Karl Nehammer.
However, this remark appears to be a reiteration of Scholz’s phone call of the day prior; there’s nothing in it that indicates that he’s been briefed on the Putin decree. And as far as I can tell from a search, Scholz has not said anything since then. So this does not appear yet to be a final position.
This is from the front page of FAZ, above the fold, and you can see the story is fresh as of just after 6 AM EDT:
Google Translate would not give me a translation of this lead story at Die Zeit, and you can see the Yandex translation is not up to snuff. But it gives you an idea:
Guardian depicts the detailed plan as a retreat:
The threat of a gas shutoff was reduced, however, as details emerged about the new deal, which appeared to allow European buyers to continue to pay for gas in euros and dollars.
The decree Putin signed on Thursday authorises the state-controlled Gazprombank to open foreign currency and rouble accounts for gas purchases. European buyers would pay in foreign currency and then authorise Gazprombank to make the conversion into roubles, which would then be used to formally purchase the gas.
The convoluted scheme could allow the Kremlin to save face in its standoff with European governments while averting a potential gas shutoff to Europe over Putin’s demands to receive payment in roubles.
It’s frustrating to read this sort of thing, and then have the Guardian quoting an energy expert depicting Putin as not delivering on his “threat”. Again, the decree is consistent with Putin’s original statement and he made a point of indicating the change would be parsimonious and was intended to leave the contracts in place. And anyone who regards the procedure as complicated must never have looked at a credit card or brokerage agreement, or the rules of any exchange.
But again, it’s all good for Russia for the West to regard Putin as having conceded when he’s getting what he wanted. So kudos to non-finance-savvy foreign policy types and the media for creating a phony panic that worked to Russia’s advantage.
Finally, RobertC highlighted a new Reuters article that describes how the US is upset that it hasn’t cratered Russia’s economy:
Senior U.S. officials fanned out this week to press world leaders to keep piling pressure on Moscow or join the campaign of sanctions and other measures, as the war in Ukraine enters its fifth week and the initial economic shock to Russia seems to be ebbing….
The effort comes as the initial impact of unexpectedly tough sanctions on Russian banks, oligarchs and companies begins to wear off somewhat, and the United States considers its next economic steps to isolate Russian President Vladimir Putin.
Within days of cutting off key Russian banks from the international SWIFT financial transactions network and immobilizing the bulk of the Russian central bank’s $630 billion foreign exchange war chest, the rouble lost half its value, prompting U.S. officials to declare that Moscow was battling a financial crisis.
But a month later, the rouble has largely recovered to its level just before the invasion, propped up partly by Russian capital controls, government orders for export firms to sell foreign currency and companies gathering funds to make quarter-end tax payments. Shares on Russia’s stock market are trading again, although they have dropped in value.
Russian bank VTB (VTBR.MM), a principal sanctions target, remains open for business in Europe, where it has gathered billions of euros in deposits, mainly from German savers….
The Biden administration is making sure European allies are firmly aligned on punishing Putin, while working to sway leaders who have sat on the sidelines as the war stretches on, officials say.
“We’ve got to continue to raise pressure on Russia and increase our support for Ukraine,” one senior U.S. official said, speaking on condition of anonymity. “This is a challenge that is facing the free world and all democratic nations. And we need to be prepared for it to last a long time.”
Xi is set to have a videoconference with European leaders today. Western stories made clear that their officials intended to press Xi yet again. The Chinese government-connected Global Times effectively said that was not on, the meeting was to discuss EU-China matters. Recall Xi had said in his call with Biden that China had no nexus to this Western crisis, and invoked a pet saying: “He who puts the bell on the tiger needs to take it off.”
India has gotten a barrage of visits this week, from UK Foreign Secretary Liz Truss, from US Deputy National Security Advisor for International Economics Daleep Singh, and from Russia’s Foreign Minister Sergei Lavrov. Australia is piling on per Time.news:
Meanwhile, the US and Australia sent a warning message to India. “It simply came to our notice then. It is time for the United States and other countries to stand up for the freedom, sovereignty and democracy of the Ukrainian people, rather than pay for Putin’s war, “said Gina Raymond, US Secretary of Commerce in Washington. Australian Trade Minister Dan Tehn made a similar point.
The other members of the “Quad” are reportedly unhappy with India over standing out the Ukraine conflict. But with India getting direct pressure from the US and Japan (via a recent visit), it’s not obvious how much Western bleating “the Quad is mad at you” matters, since there’s no reason to think that group matters more to India than the bi-lateral country relationships.
Indian officials so far appear to be continuing to resist Western pressure. The Scroll recapped the set of foreign visits, and put Lavrov in the headline: India in favour of resolving disputes through diplomacy, S Jaishankar tells Russian foreign minister. The story also indicated that while Truss said the UK “respects” India’s decision to buy discounted Russian gas, the US was still making threats:
On Thursday, United States Deputy National Security Advisor for International Economics Daleep Singh said that countries attempting to circumvent the sanctions imposed on Russia will face consequences.
The US fails to understand that Russian sanctions were the best thing that ever happened to Putin. Why do they not anticipate other backfires when they inflict economic punishment on countries with real heft, including nukes?
I’ve been wondering lately when the sum total of American diplomacy devolved into making threats. Kind of a waste of a State Dept.
WSJ had an above the fold article on its app yesterday saying “Russia Set for Steep Slump, Long Stagnation.” There was no similar headline for, say, the USA, whose currency is currently on fire, where everything is getting unaffordable for anyone but the top 10% of earners, with things set to only get worse because of sanctions and turmoil.
Clearly there was no gaming out of sanctions. Our ruling class is much more interested in Twitter likes than they are in the nitty gritty of commodity prices.
FWIW, the Russian Central Bank is predicting a pretty big GDP fall this year and high inflation for 2022. But they predict stabilization and a big drop in inflation in 2023 and pretty good growth in 2024. This may seem like wishful thinking but the I am told the Russian Central Bank is pretty good by central bank standard at forecasting.
Thank you, Yves.
The central bank is good, but a bit eager to please western observers, many of whom are just BSers. I dealt with the bank a dozen years ago over what became known as Basel III. They were too hasty in trying to move their banks from the standard approach to calculating capital to the advanced approach. Neither, did the bank have the technicians to supervise. Even the ECB didn’t at the time, so it was no disgrace.
Colonel — I dealt with the bank a dozen years ago…
Could you share your thoughts on the bank’s performance since Elvira Nabiullina’s appointment June 2013. Thanks.
European buyers would pay in foreign currency and then authorise Gazprombank to make the conversion into roubles, which would then be used to formally purchase the gas.
The convoluted scheme…
One of my first real fulltime jobs was at State Street working with mutual funds that invested in other nations by purchasing foreign stocks on their local stock exchanges. Any purchase of foreign stock required us to create a form to purchase FX to cover the trade (foreign exchange to purchase the currency equal to the stock purchase). Later this was automated.
I didn’t know at the time I was just part of a convoluted scheme.
On the TV news they were talking about EU members reacting to this development and ‘hissy fit’ does not come even close to covering it. Here is an article giving these reactions-
https://www.reuters.com/business/energy/reactions-russia-saying-gas-buyers-must-pay-roubles-2022-03-31/
My award for Best Reaction (which I saw him say on the news) was French Economy Minister Bruno Le Maire when he said in an outraged voice “Contracts are contracts!” Pull the other one, Bruno. It plays Jingle Bells.
Thank you, Rev.
A month ago, Le Maire said the EU was declaring war on Russia. When asked to elaborate, Le Maire backtracked by saying he meant an economic war.
Sadly, this is just all too typical of the European elite. They have yet to come to terms with the past month and how it’s not just Russia that is no longer playing ball.
Didn’t Ursula von der Leyen also say a month or so ago that the goal was to essentially destroy Russia economically? It would seem that if someone says they’re out to destroy you, you’d do whatever you could to defend yourself.
It’s quite an adjustment, going from rule maker to rule taker. Few can do it with grace
> It would also mean the foreign currency payments would be in the hands of Russian institutions, and hence not vulnerable to being “frozen,” aka expropriated.
This confuses me. As I understand it (from prior NC articles) the “physical location” of the foreign currency is a computer ledger at the central bank of the currency issuer, recording reserves in an account owned by the Russian institution. In principle, that central bank could ‘freeze’ those reserves. If that’s right, it seems to me that the protective nature of the new payment arrangement is that the Russian institution could refuse to accept Euro payments if its ECB account were frozen, which would prevent ruble conversion, payment and gas delivery. Presumably the ECB would not want to take that risk.
Limiting the permitted recipients of Euro payments to a single bank might be a clever concession to Western hostility — the fewer non-sanctionable banks there are, the happier the sanctioners will be, even if the net effect on R economy is not much different. It might be a financial equivalent of the “no more force than necessary” military approach taken in the Ukraine intervention.
re: the messaging ‘fail’ in characterizing Putin’s decree as a ‘climbdown’, I continue to wonder, only half tongue-in-cheek, whether there might be a secret ‘peace movement’ within parts of the Western foreign policy establishment. Maybe they’re not all deranged.
No, I never said any such thing. There is no such thing as foreign currency independent of a financial asset or contract. You can trade dollar spot (cash), futures, forwards, hold dollar bonds, dollar stocks, dollar derivatives. The Fed most assuredly does not have entries with respect to all of these. The daily computational demands would be massive.
For instance, see this:
https://tfm.fiscal.treasury.gov/v1/p5/c600.html
The system referenced, OTCnet, is a Treasury system. Nothing to do with the Fed.
Thanks for this clarification!
Trying to understand, does this mean:
Gazprom Bank gets what is essentially a “promise to pay” Euros from the gas buyer.
Am I right in thinking that the R central bank must have an account with Gazprom Bank which becomes the “location” of the “promise to pay” after the Euro/ruble conversion.
Since the Euro obligation exists as a contract between the buyer and the R institution, rather than a ledger entry at the ECB, it is an asset of the R CB that is beyond the ECB’s reach.
Just trying to understand the ‘plumbing’ and its implications.
> the ‘plumbing’ and its implications
(sorry about the name typo; auto-complete gives me a range of past mis-spellings, and I sometimes select the wrong one)
It would be handy to have one of those multi-column ledger tables that are sometimes used to explain MMT descriptions of central bank/treasury and private bank operations.
No, please no. MMT is not helpful here.
Banks create deposits out of thin air, remember? The only central bank involvement is creating the necessary reserves, which they have to do if they are going to maintain their policy rate.
Some cursory research shows German and Swiss banks are connected to SFPS (Russia’s Swift contingency payment system). But I can’t find anything more than the same article recycled.
Do any readers know which banks these are and if this is another route for western firms to buy rubles (to make their gas payments)?
Please read the post. You give the very strong impression you didn’t, otherwise you would not be asking about how to get roubles.
1. Putin specified how this trade gets done. You as gas buyer set up a dual currency account at Gazrprom Bank in your regular payment currency and in roubles. You make your regular, contractually specified payment in the currency you have always used into that account. You have standing instructions for it to be converted to roubles through the Moscow Stock Exchange and then for those roubles to re remitted to Gazprom (which to be clear is a different legal entity than the bank).
There is no reason to hunt for roubles. In fact, hunting for roubles guarantees you will have the wrong amount. You tender your foreign currency payment and the amount of roubles is determined by the spot price on the Russian Stock Exchange. There is no mechanism to back into a rouble amount.
2. You completely missed the point. The point is not the roubles. The roubles are the pretext for forcing the payments to be made at an unsanctioned bank, now specified as Gazprom Bank, to prevent further sanctioning of Russian financial institutions.
3. The market for roubles outside Russia is very thin. Any effort to buy enough roubles to make a gas payment would drive the price up and it would almost assuredly be higher than in Russia.
Thank you, Yves.
One wonders if that flexibility / concession could be extended to Lukoil, which has its own bank and branches into the EU from its Swiss entity, emulating Gazprom on both counts. HSBC is their London correspondent bank.
Shame on me. I didn’t realize garzprom a Russian bank was exempt from swift sanctions but should have. They would also have a pipeline to buy rubles.
Slamming the door in the face of facts and nuance is what’s required in the msm’s brand of “all spin all the time” journalism. The shackles of the responsibility “to keep the public informed with objective, fair and truthful reporting” that used to be the stock-in-trade of the profession have been broken and it’s now open season for journalists to merge fact and fiction until they’re virtually indistinguishable in order to befuddle the public. With respect to the Ukraine Russia conflict, a fine grained analysis of the situation comparable to this post is simply unimaginable in the western mainstream press because their marching orders are to depict Putin as completely incapable of outmanuevering his moral and intellectual superiors in the white house and EU.
Framing the exposition of the rubles for gas mechanics as a Putin climbdown is on-brand and on-message, after all, lest we forget, “Russia is losing”.
From the Reuters piece:
“The effort comes as the initial impact of unexpectedly tough sanctions on Russian banks, oligarchs and companies begins to wear off somewhat, and the United States considers its next economic steps to isolate Russian President Vladimir Putin.”
We could try a blockade of St. Petersburg. It worked so well for the West during WWII and would be especially upsetting for Putin personally.