Germany: Putin's demand for gas payments in rubles is 'blackmail' (but Russia doubles down)

Last week, Putin announced that “unfriendly counties” would need to start paying for oil and gas in rubles instead of dollars or euros. This was a transparent attempt to undermine western resolve on sanctions by driving a wedge between the US and UK, who’ve already cut off Russian oil, and the EU which has not done so because it is too dependent on it.

Secondly, if the EU complied with the demand it would also go a long way toward propping up Russia’s currency since the EU would be forced to buy billions of rubles to pay for energy in that currency. More demand for rubles means the impact of sanctions on Russia would be less severe.

Yesterday the G7 firmly rejected Putin’s demands and said they would continue to pay for Russian energy in the currency written into the contracts:

German energy minister Robert Habeck told reporters that “all G-7 ministers agreed completely that this (would be) a one-sided and clear breach of the existing contracts” for natural gas, which is used to heat homes, generate electricity and power industry.

The energy ministers of France, Germany, Italy, Japan, the United States, the United Kingdom and Canada, as well as the European Union energy commissioner, met by videoconference and reaffirmed that contracts “must be respected,” with most stipulating payments be in euros or dollars, a G-7 statement said.

“Payment in ruble is not acceptable, and we will urge the companies affected not to follow (Russian President Vladimir) Putin’s demand,” Habeck said.

Germany Finance Minister Christian Lindner went a bit farther than that saying his country would not give in to Putin’s blackmail. “It’s is blackmail. There are treaties. Treaties are in dollars and euros,” he said. He added, “It’s a trick. He wants to circumvent the sanctions but we won’t allow this.” So what happens if Putin turns off the supply? Lindner says Germany will find a way to deal with it but won’t agree to pay in rubles lest they give Putin a way to fund his war machine.

For Russia’s part, they responded to the G7 today and basically doubled down on their demand.

Russia reiterated Tuesday that it will only be accepting payment for gas deliveries to the EU in rubles after G7 ministers called this arrangement “unacceptable.”

“Nobody will supply gas for free. This is just impossible. And it can only be paid for in rubles,” Kremlin spokesman Dmitry Peskov told reporters.

“Companies must understand the completely changed environment that has arisen in the conditions of the economic war waged against Russia,” he said.

The environment has changed but the contracts have not. Still, Russia does hold some leverage here because Germany’s economy is dependent on Russian gas:

If Germany does not secure enough gas, industry will be hit first. It accounts for a quarter of German gas demand.

“This means that industrial production gets lost, that supply chains get lost,” Leonhard Birnbaum, chief executive of German energy group E.ON (EONGn.DE), told public broadcaster ARD. “We are certainly talking about very heavy damages.”

Private households will have priority over industry, while hospitals, care facilities and other public sector institutions with special needs would be last to be affected by a disruption.

Still, I’m not convinced that Russia is really in a position to cut off oil and gas to all of Europe. Russia was able to shrug off our decision to stop buying their fossil fuels because they represent a tiny fraction of their total exports. But Europe is another matter. Turning off the gas would hurt Europe but it would hurt Russia’s economy just as much.

So maybe we’re at a point where Putin has decided if Russia’s economy is going to collapse, the rest of the world is going to suffer with him. At least he’s counting on the EU to believe he’s at that point so he can blackmail them into saving him from the consequences of his own decisions.