Putin announces sanctions: West to pay for oil in rubles

President Vladimir Putin has imposed his own sanctions against the United States and its Western allies.

The Russian leader announced on Wednesday that Russia will seek payment for gas sales from “unfriendly” countries in rubles, driving gas prices up 30% and deepening what many believe is the worst energy crisis Europe has faced since the 1970s.

"Russia will continue, of course, to supply natural gas in accordance with volumes and prices ... fixed in previously concluded contracts," Putin said at a televised address. “The changes will only affect the currency of payment, which will be changed to Russian rubles.”

Putin also ordered the central bank to develop a mechanism to make ruble payments for natural gas within one week. Although details of the new directive remain unclear, by forcing Western governments to pay for gas in rubles, Putin could be attempting to prop up Russia’s currency and replenish foreign currency holdings, Bloomberg reported.

Russian gas accounts for approximately 40% of Europe’s total gas consumption, and EU gas imports from Russia have fluctuated between $220 million and $880 million a day so far in 2022. For this reason, experts fear that a change of currency could throw that trade into disarray.

Major banks are reluctant to trade in Russian assets and so it is not immediately clear how some buyers in the European Union would be able to pay for gas going forward.

"At face value this appears to be an attempt to prop up the Ruble by compelling gas buyers to buy the previously free-falling currency in order to pay," Vinicius Romano, senior analyst at consultancy Rystad Energy, said.

Putin said the government and central bank had one week to come up with a solution on how to move these operations into the Russian currency and that gas giant Gazprom would be ordered to make the corresponding changes to gas contracts.

Although Europe has not pledged to boycott Russian gas like the U.S. and Britain have, several European leaders have voiced opposition to Putin’s move. Italy, Europe’s second biggest buyer of gas, said it would not pay for Russian gas in rubles because that could weaken the West’s sanctions.

“My view is is that we pay in euros because paying in rubles would be a way to avoid sanctions, so I think we keep paying in euros,” Prime Minister Mario Draghi’s economic adviser Francesco Giavazzi said at the Bloomberg Capital Market Forum in Milan

Furthermore, while there are no sanctions against paying in rubles, there are questions over whether Russia's decision would breach contract rules which were agreed in euros.

"This would constitute a breach to payment rules included in the current contracts," said a senior Polish government source.