In the wake of Russia’s invasion of Ukraine, the European Union has imposed significant sanctions. However, a notable exception is Gazprombank, crucial for European gas importers as it handles euro and dollar payments for Russian gas. This raises a critical question: can Russia access these payments and convert them into rubles to sustain its economy?
To counter potential limitations on accessing foreign currency, Vladimir Putin issued a decree on March 31st, mandating that European gas exports be paid in rubles. This mechanism requires European importers to navigate a new financial landscape, opening both ruble and foreign currency accounts with Gazprombank. Euros or dollars are then transferred, converted into rubles, and used for gas payments. This article delves into the rationale behind this shift and its potential implications, particularly concerning sanctions evasion and the intricacies of the Euro Rouble exchange.
The Sanctions Challenge and the Euro Payment Flow
EU sanctions targeting the Bank of Russia aim to restrict Russia’s access to foreign assets. If these sanctions are interpreted broadly to include all foreign currency earned from gas sales, and effectively enforced, Russia would be unable to directly access euro or dollar payments.
Under the conventional euro payment system, a European gas importer pays euros to Gazprombank. If Russia’s state entities are sanctioned, direct access to these euro funds is blocked. The euros paid to Gazprombank would become essentially frozen, hindering Russia’s ability to utilize these revenues.
Even with a euro claim on Gazprombank, sanctions prevent the Russian state from converting these euros into rubles domestically. Any attempt to exchange euros, whether through markets or the Bank of Russia, would involve the Target 2 system – the Eurozone’s settlement system – and thus fall under the scope of sanctions.
Therefore, under strict sanctions, euro payments for gas effectively become stranded within Gazprombank, mirroring the freezing of Russia’s foreign reserves at the onset of the conflict in Ukraine. The Russian state’s claim to these new foreign assets is effectively suspended.
The Ruble Payment Solution: A Sanctions Bypass?
Putin’s decree for ruble payments appears designed to circumvent these sanctions. It mandates European gas importers to establish both ruble and foreign currency accounts with Gazprombank. The payment process, as we understand it, unfolds as follows: The importer’s bank deposits euros into the foreign currency account at Gazprombank.
Gazprombank then executes a currency exchange, converting the received euros into rubles. This conversion is achieved by Gazprombank borrowing rubles from the Bank of Russia, thereby increasing its reserves held at the central bank. The euros received from the gas importer can serve as collateral for this ruble borrowing. Subsequently, Gazprombank transfers these newly acquired rubles to the gas importer’s ruble account. Finally, acting on behalf of the importer, Gazprombank pays the Russian state in rubles, drawing down its deposits at the Bank of Russia.
This mechanism achieves several key outcomes:
- Sanctions Compliance (on the surface): The transactions directly involving sanctioned entities are conducted in rubles (Gazprombank borrows rubles from the Bank of Russia). This eliminates the need for euro settlements via Target 2 involving sanctioned entities, seemingly adhering to sanctions.
- Euro Assets Untouched: The euro funds paid into Gazprombank remain outside the direct reach of sanctioned entities. Consequently, no further Target 2 settlement involving sanctioned parties is required, again appearing to respect sanctions.
- Implicit FX Transaction & Potential Costs: While seemingly avoiding direct euro transactions with sanctioned entities, an implicit foreign exchange operation occurs between the Bank of Russia and Gazprombank through deposit exchanges. Although gas prices are euro-denominated, the euro-to-ruble exchange rate theoretically shouldn’t impact the final gas price. However, Gazprombank could impose a commission for this FX operation. Given the potential illiquidity of the ruble market, this commission could be substantial, effectively increasing the gas price. This could serve as a price lever controlled by the Russian state. An indicator of this possibility is the increased FX fees levied by Russia’s VTB Bank for ruble/dollar transactions with private customers since the war began.
- Suspended Euro Claim: The Central Bank of Russia may possess a euro claim on Gazprombank if euros are used as collateral for ruble loans. However, this claim is likely suspended due to sanctions, limiting direct access to the euro funds.
Ultimately, this system allows the Russian state to receive ruble funds, accessible for domestic spending, without resorting to direct monetary financing. However, direct access to the euro funds held by Gazprombank remains restricted as long as sanctions persist.
Ruble Valuation and Geopolitical Implications
The value of the ruble and energy prices typically exhibit a positive correlation: rising energy prices tend to strengthen the ruble. However, the onset of the Ukraine war disrupted this pattern.
Russia’s invasion triggered a ruble devaluation despite rising oil prices, largely attributed to the impact of sanctions. Interestingly, the ruble has since recovered, with Russia’s demand for ruble-based gas payments coinciding with a significant acceleration of this recovery.
While ruble payments via Gazprombank technically might not breach sanctions, they potentially violate existing gas contracts, which are typically euro-denominated. From the European importer’s perspective, payment finalization occurs upon euro transfer. However, the ruble payment decree implies that for the Russian exporter, payment isn’t complete until ruble funds are received. This introduces counterparty risk for European importers during the euro-to-ruble conversion period. Furthermore, Gazprombank’s potential FX commission could represent a breach of contract and a covert gas price increase, a concern already voiced by European nations.
Sanctions are rarely foolproof and often provoke countermeasures, leading to uncertain outcomes. Directly violating sanctions carries considerable risks for Russia, as entities facilitating such actions could demand significant compensation due to the risk of detection by European and US authorities. Therefore, sidestepping sanctions through ruble payment mandates may appear as a more advantageous strategy for Russia.
Recommended citation:
Demertzis, M. and F. Papadia (2022) ‘A sanctions counter measure: gas payments to Russia in rubles’, Bruegel Blog, 19 April
Appendix: Simplified Balance Sheet Transactions
The following tables illustrate the transaction flows using simplified balance sheets. These representations are not strictly sequential but highlight the changes associated with euro/dollar and ruble gas payments. Transactions potentially affected by sanctions are marked in red. For simplicity, Gazprom and the Russian State are consolidated as ‘Russian State’. Similarly, the euro/ruble FX transaction is implicitly represented as a deposit exchange between Gazprombank and the Bank of Russia, omitting an intermediary bank for clarity.
