Why Putin wants Russia to be paid in rubles

According to a decree passed on Thursday, governments actively opposing the invasion will have to open up an account with lender Gazprombank, part of Russia’s state-owned energy giant, and settle all bills in rubles. 

By weaponizing his trade surplus, Putin not only props up the ruble but demonstrates internally his sway over Europe: Importers like Germany would be forced to weaken their own currency and strengthen his just to keep the lights on back home.

“That would massively undermine our central bank sanctions,” thundered Norbert Röttgen, the former chairman of the parliamentary foreign affairs committee, last week after the threat was first made.

At the outset of the invasion, Putin had hoped to weatherproof his economy from the worst effects of sanctions long enough to achieve his military aims. 

Yet he overestimated his military capability and underestimated the severity of sanctions.

These included a ban from the international SWIFT payment system, export bans of any goods that can be used for military as well as civilian applications, and freezing much of his central bank assets abroad.

Thursday’s decree may mark a dramatic turn.

Only three weeks ago, Morgan Stanley predicted “the most likely scenario” for Russia was a default in the course of this month.  

Moscow faced the very real risk a collapsing ruble could prompt depositors to withdraw their savings and convert them into hard currency, eliciting a wide-scale banking crisis. 

This would have escalated protests and undermined support for his war.

But apart from rare and notable instances of dissent, such as from journalist Marina Ovsyannikova, there have been precious few signs that Putin has anything to fear from his people.

That may be because the Central Bank of the Russian Federation (CBR) has proved far more skillful at accomplishing its goals under extreme duress than the country’s military. 

Even without access to a large share of its $600 billion in hard currency reserves, it has been able to prop up its banking sector via a range of targeted measures. 

Short-selling has been temporarily banned on the stock market, conversions of hard currency are limited to just $10,000 for individuals through the end of this year, and the CBR is lending out funds daily to commercial banks depending on need to mitigate liquidity risks.

With the ruble recovering now to prewar levels, critics of President Biden are declaring his sanctions regime has backfired, triggering soaring prices at the pump for U.S. consumers while failing to force a cease-fire.

Although Putin may receive more attention with his nuclear saber-rattling, his natural gas exports are the autocrat’s most effective tool against economic reprisals imposed by Western allies. 

“A shift of the exchange rate risk from Gazprom as exporter to its importer counterparts in the ‘unfriendly’ countries could potentially result in rising energy costs if the ruble gains value in the medium to longer run,” wrote Alexander Mihailov, an economist at the University of Reading in the U.K.

For now, the next steps remain unclear.

For the moment, it looks as if Putin has caved, with both German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi claiming nothing will change since Moscow will not risk unilaterally breaching contracts. 

“The payment for the supply of Russian gas is handled in euros and dollars in accordance with existing contracts. That’s how it is now, and it will stay that way, something I made clear during my conversation with President Putin yesterday,” Scholz said. 

Draghi, the former European Central Bank president credited with saving the euro during the continent’s sovereign debt crisis a decade ago, said Russia will internally settle the foreign exchange transaction itself, precluding a need to pay in rubles.

At least that is what he “understood,” the Italian said.