Deadline approaches for switching payments to rubles

Russia has given “hostile” countries a March 31 deadline to begin payments
for natural gas imports in rubles. The new currency-switch rule will
affect countries that imposed economic sanctions on the nation and froze
its foreign currency reserves. This particularly concerns some EU
countries that rely heavily on Russian energy supplies.

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What will happen after March 31?

Russia says Europe will not get free gas if countries refuse to pay in
rubles. “We are not going to supply gas for free, this is clear,” Kremlin
spokesman Dmitry Peskov said on Tuesday. When asked whether gas would be
turned off for non-payers, Peskov replied: “No payment, no gas.” He added,
however, that Russia is yet to make a final decision on how to respond
should European countries refuse to pay in the Russian currency.

How much does Europe depend on Russian gas?

Europe depends heavily on Russian gas for heating and power generation.
Russian gas accounts for some 40% of Europe’s total consumption. The EU’s
gas imports from Russia this year stood between €200 million and €800
million a day.

What happens in Europe without Russian gas?

The European Commission has said it plans to cut EU dependency on Russian
gas by two-thirds this year and end its reliance on Russian supplies “well
before 2030.” However, economists say it’s not easy to replace the 1,550
terawatt-hours of Russian gas delivered to the EU in 2021. Europe cannot
replace the supply shortfall quickly; it will need to curb demand.
Meanwhile, increased liquefied natural gas (LNG) imports in an already
tight global LNG market would place immense upside pressure on prices.
This would be a major hit to the European economy, which is already
suffering from sky-high energy prices. A prolonged halt in supply of
Russian gas would come at a cost for the EU and might even result in some
countries that are more exposed to Russian gas fluctuations, like Italy
and Germany, having to take emergency measures. German chancellor Olaf
Scholz has warned that a ban on Russian energy imports would trigger an
economic recession across Europe.

What are the wider implications?

There is a risk of a global energy crisis. Russia is the largest natural
gas exporter in the world and the second-largest exporter of crude oil
behind Saudi Arabia, according to the International Energy Agency.
Replacing Russian gas will not be easy. Europe will have to buy gas on the
open market, which means if they buy from countries like Qatar or the US
they will have to pay more. It also means that the gas they buy will not
go somewhere else. The result will be higher gas prices everywhere as
countries outbid each other for limited supplies.

Will oil prices be affected?

Russia supplies around four million barrels of oil per day to the European
Union. Unlike gas, the supply of which to a greater extent is still
regulated by long-term contracts, the price of oil is volatile and is
determined by supply and demand. If Europe still decides to abandon
Russian oil, then crude prices could soar to $200 per barrel, or even
higher, analysts warn.

Will Russia sell other commodities in rubles?

President Vladimir Putin has hinted during his payment plan announcement
that natural gas could be the first Russian commodity to be sold in
rubles. If the West imposes further sanctions, it raises the possibility
that other Russian export commodities could be priced in rubles, including
oil, metals, and grain.

Who will blink first as the payment deadline approaches?

So far, the EU and G7 nations have rejected Russia’s demand to switch
their payments for gas to rubles. Russia said it will not provide free gas
supplies, suggesting that it is ready to shut off the taps. If that
happens Moscow would lose between €200 million to €800 million each day of
the embargo. However, Russia could redirect some of the gas to Asia.
Europe would likely face an economic crisis not seen since WWII, as
soaring energy prices would send the region’s economies into recession.
So, who will blink first? Place your bets.