Who will chicken out first? Europe facing Russia´s demands for gas payments in roubles

By Barbora Volková

This article is written by the newest addition of the editorial team: Barbora Volková (Czech, cohort 2021/2023). She studied in Udine during her first semester and is currently doing her second semester in Groningen.

It has been more than a month since Russian troops without justification attacked Ukrainian territory on the 24th of February. As a result, Moscow has been facing massive sanctions, pushing the Federation to the edge of its economic limits. President Vladimir Putin at the end of March announced a signature of a decree allowing payments for Russian gas only through accounts in Russian banks. What does it mean for the future of European energy trade?

The decision is aimed at the “unfriendly countries” such as the United Kingdom, EU members and the United States. European countries are traditionally heavily dependent on foreign gas which they still import from Russia despite the ongoing war. The EU depends on Russian gas for 45% of its imports and around 40% of its consumption – a key reason why it has not applied its sanctions to Russia’s energy industry like the UK and US. The G7 has already refused any of Moscow´s demands to pay for Russian natural gas exports in rubles before Putin´s decree and accused the Federation of breaching international contracts. Russia has meanwhile set an ultimatum: “unfriendly countries” have until May to make the appropriate payments in roubles.

In doing so, Putin set off “The game of Chicken”, a dangerous game theory model of conflict between two players heading towards each other. The danger of this game lies in the fact that both players can assume the opponent will act reasonably and step back to avoid a clash. However, if all players think this way, a crash will inevitably result and everyone loses. The stakes for both sides are exceptionally high.

European countries have traditionally paid for gas in euros. Putin´s decision comes as a surprise to many experts since the Russian economy needs a supply of foreign currency in order to pay for imports on the international market and the energy sector is one of the few sources of foreign money left. However, Western sanctions have prevented Russia from selling off its euros. The rouble fell to its historical minimum after the invasion, but its value has been recovering. Russia hopes that the shift from the euro and dollar will further increase demand for its own currency and ease the effect of imposed sanctions.

The Kremlin´s decision forces importers to find a bank that would exchange euros for roubles, which is difficult with many Russian banks being cut off from the SWIFT financial system. It is also challenging to make payments in a manner that avoids sanctions. On the other hand, the largest state-owned Russian supplier of natural gas to Europe Gazprom cannot make foreign debt payments or purchase supplies abroad without hard currency and it has already sold 80% of its foreign currency to Russia´s central bank.

EU nations don´t want to pay for gas in the rouble because keeping it weak puts pressure on the Russian economy. However, thanks to their heavy dependence on Russian gas, the situation becomes very tricky. By refusing to pay in roubles, Russia could potentially completely cut off European energy supplies. But that would not be an ideal situation for Russia either because it would lose its key revenue of finances. Therefore, many experts suspect Putin of bluffing in order to put pressure and further divide the West which can in the end result in adding to Russia´s already dramatic economic decline. If Russia tries to force its demands, European countries could reach the Stockholm arbitration court, but such a process can take years. According to the international contracts, in case of such a major dispute, the gas should continue flowing until the matter has been sorted by the court.

A week after Putin´s announcement, Hungary announced it is ready to pay in roubles for Russian gas, breaching the EU´s unity. Victor Orbán, who was recently elected as the country´s Prime Minister for the 4th time, has traditionally maintained good relations with Moscow hiding behind the concerns for safe energy supplies to Hungarian citizens. However, the European Commission has warned that paying in roubles may break the sanctions applied to Russia because the proposed new system would guarantee Moscow control over the timing and rate of foreign currency conversion. Meanwhile, Germany and the Netherlands already refused to sign any new contracts with Gazprom and other countries such as Poland and Italy are currently waiting for further analysis of the situation.

European leaders have been distancing themselves from a total boycott of Russian oil and gas focusing instead on reducing imports. The European Commission has prepared a plan to cut the EU´s dependency on Russian gas by two-thirds until the end of 2022 and completely “well before 2030”. Therefore, the Union is looking for new energy sources for example in form of liquefied natural gas from Japan, South Korea, China and India. However, removing such high dependence is going to take time and will not be solved within a month.

Will Putin avoid the crash in the game of chicken? The truth is, he cannot afford to finance his war in Ukraine without European money. Europe on the other hand has the support of the International Energy Agency and enough gas in emergency stocks for up to 100 days. A possible halt to imports from Russia would be very painful for EU consumers, but it would significantly contribute to the downfall of Vladimir Putin and European dependency on Russian gas. With the payment deadline reaching close, we will wait to see whether will someone chicken out and subordinate to the demands of the other or whether we will witness a new game called “Who will last Longer”.


Picture Credit: TASS News Agency

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