Putin Cannot Force Anyone to Buy Rubles

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Putin’s counterattack against Europe, the USA, and all other countries that have imposed sanctions on it is also an attempt to save the ruble and Russian monetary policy, which has few tools at its disposal to pull not only the ruble but the entire economy out of the abyss. However, the decision to charge for delivered energy resources, oil, and gas in rubles rather than euros or another agreed currency may not be technically feasible. Austrian OMV has already responded that it does not intend to act, that is, to pay outside of what is stipulated in the contract.

On the other hand, both the Russian central bank and most of its largest banks have been expelled from SWIFT, so it is unclear how payments in rubles would even be possible. If, however, the extortion of payment in rubles holds water (the EU currently has almost no choice or new sufficient markets from which it can procure oil and gas), this would mean that buyers must purchase rubles (thus increasing their value), which then puts sanctions into question – how will sanctions against financial institutions be enforced when an open payment channel is needed for transactions in rubles? Most analysts therefore believe that Putin cannot force anyone to buy rubles, as they are technically impossible to purchase when both banks and the central bank are blocked.

Desperate Rescue of the Ruble

Putin, on the other hand, sends a message with his decision: deliveries will continue in the quantities and prices stipulated in the contracts, and a directive on the new method of accounting will be sent to Gazprom. At this moment, it is only clear that Putin is trying to stop the fall of the ruble, which at one point lost as much as 35 percent of its value.

How will this interplay affect currencies, markets, and inflation? Josip Kokanović, the operational director of the Gold Center Croatia, says that the exchange rate of the Russian ruble against the US dollar and euro is currently about 25 percent below the level it was at before the Russian invasion of Ukraine. – The sudden drop in the ruble’s exchange rate may be the best indicator of Russia’s economic weakness. Although it is a geographically large country rich in ores and energy resources, the GDP of the Russian economy after economic sanctions will likely fall to the level of Indonesia and Mexico’s GDP, and below Spain’s GDP, and few consider these countries to be economic powers.

The Russian central bank is now desperately trying to strengthen the ruble (such as insisting that gas be paid exclusively in rubles), but it is unrealistic to expect that the ruble will return to the level it was at before the war in the next few years. Trust in that currency has now been practically irretrievably lost by both Western investors and Russian citizens, and the Russian currency is currently used only by those who must. Western countries like Germany are aware that they are currently in a better negotiating position than Russia and are unlikely to agree to such extortion. The current situation will likely contribute to an increase in the inflation rate in Europe and the USA, but the exchange rates of the major world currencies will be much more stable than the ruble’s exchange rate. If the situation escalates further, additional strengthening of safe havens such as the US dollar, Swiss franc, and an increase in the price of gold, which has always gained value in uncertain times, can be expected – concludes Kokanović.

Europe Will Not Yield to Pressure

Analyst Velimir Šonje also assesses that Europe will not yield to pressure. Noting that the information about Germany’s stance may not be accurate or that some compromise interpretation may follow, he says that it seems that even the Germans, who are key to blocking the embargo on Russian energy exports, will not agree to the ruble.

– In any case, things could get complicated – especially since key meetings are taking place in the next two days, and the EU will send a clearer message about what it intends to do with Russian energy resources and their payment. All this is happening after there were reportedly problems with an oil pipeline going through Kazakhstan, causing crude oil prices to rise significantly again. Yesterday, London Brent was again above 120 dollars per barrel! It is impossible to predict, but sooner or later, one should expect a price escalation, regardless of whether it will be caused by some future hard embargo, a soft gradual embargo, an inability to agree on payment terms, or some fourth reason.

When there is war, all sorts of circumstances can entangle in ways that no mastermind has predicted. The most we can do in such conditions is to be prepared to absorb possible shocks, and at all costs. I hope that no serious person is considering that new cost shocks can be passed on to end consumers, whether households or corporations. There are instruments and fiscal space for cushioning the shocks, that is, reserves in the budget – Šonje is categorical.

Finance Minister Zdravko Marić will certainly not be the happiest with this, but it was already clear after the launch of the anti-inflation aid package that 4.8 billion kuna would be just a drop in the ocean of needs. It is time for the state to give up part of its enormous bite into energy prices. For starters!