Ruble payments

Who gets to set the terms of sale?

We are now more than two months into Russia’s invasion of Ukraine. Though the US and Europe have moved to provide material support to Ukraine and its neighbors, sanctions are still the foundation of the international response. These have sought to disconnect Russia from the global financial system, in the hopes depriving the country of resources, and punishing its elite.

The task is complicated by dependence on Russia’s fossil fuel exports. From the beginning, the sanctions were written so as to carve out exceptions intended to keep oil and natural gas flowing out of Russia. This in turn means allowing international payments for these commodities to flow in. It is a difficult needle to thread, and it reveals the irony in trying to punish Russia’s bad behavior without losing access to its natural resources.

Payment in rubles

In response to the sanctions, Moscow has imposed a requirement that Russian fossil fuel exports be paid for in Russian rubles (RUB). It is not at first apparent why this should make any difference either to Russia or to buyers. But this week the European Commission warned European companies that paying for Russian energy exports in rubles would in fact violate the sanctions.

The devil is in the details. The T accounts below illustrate the mechanics by which a European energy company could pay for gas in rubles, following Moscow’s demands. The European company would sell its dollar-denominated deposit for a ruble-denominated deposit at the Russian bank Gazprombank. These ruble deposits could be used to complete a payment to the Russian exporter.

The point is that for the European company to make ruble-denominated payments on behalf of the European company, it needs access to the Russian payment system Mir, which is operated by the Central Bank of Russia. To provide this access, Gazprombank has to sell dollar reserves to CBR, likely deposits in London or New York, in violation of the sanctions.

In other words

Moscow is insisting, in effect, that payment be made within the boundaries of the Russian payment system. To participate in that system, foreign companies have to transfer dollar assets to the Central Bank of Russia. It is a not-too-concealed mechanism of avoiding sanctions.

But underlying all of this is the contradiction raised by the sanctions themselves: the US, UK and Europe are trying to use financial means to exact punishment on Russia, and to deprive the country of resources, all without stopping the flow of fossil fuels. These efforts rest heavily on a distinction between payments to Russian energy companies, which are permitted, and payments to the central bank, which are out of bounds. I have my doubts as to whether the distinction can hold up under the pressure.

Previously on Soon Parted

• We are in a global seller’s market

• The US Treasury published a Stablecoin report

• An outline of the PBOC’s balance sheet