On Wednesday, Putin ordered that gas contracts with “unfriendly” countries—those responsible for sanctions against Russia—be settled in rubles rather than in foreign currencies, and gave Russia’s central bank and gas suppliers like Gazprom one week to implement the change. In the third quarter of 2021, about 58% of Gazprom’s foreign gas sales were in euros, and an additional 39% were in U.S. dollars.

Putin argued that foreign currencies like the dollar and euro were now “compromised” due to sanctions on the country’s foreign reserves, which freezes Russia’s holdings of foreign currency held in overseas banks.

The Russian president’s currency play may put pressure on European economies, which get about 40% of their natural gas from Russia. The European Union has not banned Russian oil and gas, though it pledged to reduce Russian gas imports by two-thirds by the end of the year.

Japan—another “unfriendly” country—also imports liquefied natural gas (LNG) from Russia. Almost 9% of Japan’s LNG imports in 2021 came from Russia, mostly from the Sakhalin-2 project in the Russian Far East. Japan has ruled out an import ban on Russian gas. On Thursday morning, Japan Finance Minister Shunichi Suzuki said that he didn’t “quite understand” what Russia’s intention is with the ruble payment order, or how Russia would carry it out.

Rousing the ruble

Putin’s order “appears to be an attempt to prop up the ruble by compelling gas buyers to buy the previously free-falling currency in order to pay,” says Vinicius Romano, senior analyst for Rystad Energy, in an analyst note.

Energy payments are a lifeline for the increasingly isolated economy. After crashing by as much as 40% in the wake of Russia’s invasion of Ukraine, the ruble has since recovered much of its lost ground, now down only about 25% compared to its preinvasion level. The ruble briefly strengthened to a three-week peak of 95 rubles to the U.S. dollar on news of Putin’s order, before settling weaker at 98 rubles to the dollar.

Natural gas prices in Europe also surged, with some gas prices increasing by over 30%, up to over 132 euros per megawatt-hour. 

Putin’s ruble demand may also be evidence of Russia’s efforts to find workarounds to the West’s sanctions—minimizing their effect on the Russian economy and perhaps redirecting some of the fallout from economic sanctions onto Western economies and companies.

Timothy Ash, an emerging market sovereign strategist at BlueBay Asset Management, told Politico Putin “wants to force the West—if they want to continue with energy imports from Russia—to transact with Russian entities.”

Assuming Russia is successful in forcing ruble payments, foreign gas importers would need to buy Russian currency from somewhere in order to purchase energy. Importers could get rubles from Russia’s central bank, another Russian bank, or from selling goods to Russia but sanctions make those transactions difficult, if not impossible.

Skirting sanctions

Demanding gas payments in rubles isn’t the only time Putin has flirted with forcing foreign companies to confront restrictions created by Western sanctions. Last week, Russia made a critical bond payment in U.S. dollars despite speculation that it might default or choose to pay in rubles.

On Tuesday, Russia suggested that it might compensate jet lessors for foreign-owned planes appropriated by domestic airlines—yet lessors have been hesitant to negotiate with Moscow, in part because any financial settlement might violate Western sanctions.

But it’s unclear what the outcome of Putin’s rubles-for-gas policy will be. European governments argue that any change in payment currency would be a breach of contract and analysts are skeptical Putin’s ruble ruse will work.

“In an extreme scenario, insisting on ruble payments may give buyers cause to re-open other aspects of their contracts—such as the duration—and simply speed up their exit from Russian gas altogether,” says Romano.