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
Hi Daniel and many thanks for all your helpful articles.
The roubles-for-gas issue is of particular interest for me.
I have a few questions I am trying to clarify, I wonder if you might have any views:
1. Your schematic has Gazprombank (GpB) 'transferring' USD reserves to CBR.
My conception of this is that they would stay at GpB, CBR would have a USD deposit with GpB. Is this materially different? Does it have any impact on sanctions status?
2. The decree states the USD-RUB exchange will be carried out on the Moscow Stock Exchange by GpB as if there might be counterparties apart from CBR. I assume with sanctions this is not true?
3. I have seen reports that GpB is already required by Russian authorities to exchange 80% of their foreign ccy receipts into RUB, even without this decree. With what counterparty? if CBR, so how is it making use of the foreign ccy it is getting currently through this channel?
One explanation of all this is that despite all the concern over how much the West is contributing to Russia, thus far sanctions have stopped the Russian state accessing the foreign ccy gas receipts & this move is to allow the state to actually use them.
If not the issue seems cosmetic to me, more about perception than anything else.
Thanks for any views you care to offer.
I'm not professionally involved in this by the way, my interest is just personal, trying to understand the mechanics of an important topic.