The Russian economy is struggling thanks to unprecedented western sanctions. The value of the ruble has been down below a penny for the past few weeks as investors and regular Russians are doing their best to avoid it. Remember those long lines to take out dollars and euros at Russian ATMs?

Russia has done its best to stabilize the ruble by raising interest rates, but with the central bank cut off from accessing about half of its reserves held in foreign banks (in the US, Europe and Japan), it’s mostly been a losing battle. Today however, Putin has announced a new strategy which, if it works, would shore up the ruble and create a divide among his western enemies.

“I have made a decision to implement in the shortest possible time a set of measures to switch payments for … our natural gas supplied to the so-called unfriendly countries to Russian rubles,” Mr. Putin said on Wednesday…

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the action means that every time a Western country buys a barrel of oil it would be “propping up his domestic currency.”

Here’s video of Putin’s announcement:

Путин объявил, что теперь за российский газ недружественные страны будут платить в рублях:

«Поставлять наши товары в ЕС и США, и получать оплату в долларах и евро не имеет смысла» pic.twitter.com/fKR2xetxEg

— Кремлевский пул РИА (@Kremlinpool_RIA) March 23, 2022

Putin’s strategy had an immediate impact with the ruble improving to 95 to the dollar.

Russia demanded rubles for natural gas payments. Ruble rises 10% today against dollar. Russia is making $1 bn a day from oil and gas shipments. pic.twitter.com/dbooZHMMe2

— David P. Goldman (@davidpgoldman) March 23, 2022

Gas prices in Europe also shot up:

#Russia plans to demand #Ruble payments for natural gas purchases from European nations, deepening its standoff w/west and potentially aggravating Europe’s worst energy crunch since the 1970s. European gas prices surged >30% after the news. https://t.co/RElFpNzIYE pic.twitter.com/9BEx780xft

— Holger Zschaepitz (@Schuldensuehner) March 23, 2022

Just as importantly, Putin’s announcement creates a potential split between the US and UK, who have already stopped buying Russian oil and gas, and the EU which can’t afford to do so because it makes up about 40% of their energy supply. Andrew Weiss, who does Russia related research for the Carnegie Endowment for International Peace, posted a thread about Putin’s move to damage western unity.

Germany's Olaf Scholz announced in a speech today that Europe should not impose sanctions on Russian oil/gas, raising the spectre of massive job losses and a Europe-wide recession. https://t.co/Aowgws4Cmx 3/x pic.twitter.com/QfjVFy7K4Y

— Andrew S. Weiss (@andrewsweiss) March 23, 2022

Germany has been wobbly on confronting Russia from the start and now the Chancellor is signaling weakness to exactly this kind of Russian arm twisting.

The bigger question for Biden, Scholz, et al is how to manage this crisis over the long-term and to deal with the limitations of the West's toolkit. What if Putin refuses to slow down his devastating attacks on major cities across Ukraine and kills huge number of civilians? 5/x

— Andrew S. Weiss (@andrewsweiss) March 23, 2022

But money is always fungible (esp if you're in the oil/gas business!), and there is a big timing mismatch between the imposition of sanctions and the impact on the Kremlin. How long will it take to starve the Russian war machine? 7/x

— Andrew S. Weiss (@andrewsweiss) March 23, 2022

The moral imperative to support Ukraine in their defense against a Russian invasion is 100% unquestionable. Yet Ukraine's remarkable s/t successes on the battlefield may not immediately impact Kremlin decisionmaking about how much punishment Russia is willing to absorb. 9/x

— Andrew S. Weiss (@andrewsweiss) March 23, 2022

I don’t want to oversimplify what he’s saying but Putin may have decided he can stalemate the economic battle with the west even if he’s losing the actual battle in Ukraine. Or if he can’t quite stalemate it, at least he endure more pain than the west will be willing to endure. And he could be right about that. In the west, ordinary people will complain about high gas prices and in Europe cutting of Russian gas would indeed mean significant economic pain for Germany, all of which will be transmitted back to elected leaders.

But Putin has set himself up as President for life. He can ignore all of the messages already coming from Ukraine, and from the oligarchs whose superyachts have been seized, and from regular Russians who oppose the war and who will suffer most because of the sanctions. Putin’s position isn’t based on winning the war or keeping his cronies happy and certainly not on the support of the Russian people. Until we reach the point where a coup is possible, Putin can do whatever he wants.

And while all of this is happening, Xi Jinping is sitting on the sidelines taking notes. If Putin demonstrates that economic dependency is enough to get the west to back down and let him get away with an invasion, that lesson won’t be lost on the PRC.

Another German politician tweeted that Germany and the EU needed to immediately unify and refuse to bow to Putin. I hope the EU is listening.

#Putin demands that we pay for oil & gas imports in #rubles. That would massively undermine our central bank sanctions! It is thus impossible & must immediately be rejected by 🇩🇪 & 🇪🇺. We urgently need unity that Europe will not bow down to #Putin while Ukrainians are fighting!

— Norbert Röttgen (@n_roettgen) March 23, 2022