Putin Demands Rubles For Gas, Refused Nabiullina Resignation

If you’ve been “unfriendly” to Russia lately, you may need to pay Vladimir Putin in rubles for any gas you still want.

“I have taken a decision to switch to ruble payments for our natural gas supplies,” Putin declared, during a Wednesday chat with Kremlin officials, who were told to “stop using the compromised currencies in such transactions.”

To state the obvious, there’s only one “compromised currency” in this equation, and it’s not the dollar. It’s not the euro or sterling either.

The decree, as detailed in a transcript of the meeting published by the Kremlin, prompted a 34% spike in European gas prices, accompanied by a knee-jerk rally in the ruble, although it was difficult to quantify the scope of the currency’s response because prices are mostly indicative. The market’s hopelessly thin, and basically untradable.

The idea (I suppose) is to engineer appreciation by forcing buyers of Russian gas to also buy the ruble. Putin (rightly) assessed that it’s nonsensical for Russia to accept payments for exports in currencies it isn’t allowed to use. At the same time, though, Russia issues rubles and no one wants them, so other than injecting more uncertainty into an already fraught energy market in a doomed attempt to bolster the currency, it wasn’t immediately clear what Putin hoped to accomplish.

He gave Elvira Nabiullina one week to create a facility to enable the payments. Nearly 60% of Gazprom’s gross gas receipts are derived in euros. Putin who, forgive me, isn’t in rare form these days, insisted that Russia “will definitely continue to supply natural gas in line with the volumes and prices and pricing mechanisms set forth in the existing contracts.” I won’t pretend to know what, exactly, those contracts entail, but demanding everyone pay in rubles is sure to be a headache for someone, somewhere.

Separately, Bloomberg reported that Nabiullina tried to resign when Putin invaded Ukraine, only to be told she couldn’t. She was nominated for a new five-year term last week, and sources said any attempt on her part to leave her post “would be seen as a betrayal.” Although the two have a rapport built over almost 20 years, I don’t think I need to elaborate on what the consequences might be for Nabiullina if she were to “betray” Putin in the current circumstances. No one, least of all Nabiullina, responded to Bloomberg’s request for comment.

People familiar with the situation who spoke anonymously for the same linked article laid bare the scope of Moscow’s miscalculation. Officials, the people said, planned for a prospective SWIFT ban, “but considered the possibility of sanctions on the central bank’s reserves too extreme to be anything but hypothetical.” Oops.

Nabiullina hiked rates to 20% following the SWIFT bans in an effort to prevent bank runs. The figure (below) gives you some context, but as the chart heading suggests, it’s anyone’s guess how things progress from here.

In a statement issued late last week accompanying a decision to leave rates at 20%, Nabiullina painted a grim picture without resorting to language that might draw Putin’s ire. “Relative prices cannot adjust to changes instantly [which] means inflation will stay elevated for a certain period,” she said, in the course of promising not to let prices “spiral out of control.”

“It is quite difficult to give any specific figures or forecasts,” she continued, saying inflation would exceed estimates “this year and most probably next year” while GDP would contract for at least the next two quarters.

It’s a tragedy within a tragedy. To call Nabiullina’s tenure a success story would be to understate the case. She is, in the most straightforward terms, a world-class policymaker. All of her work went up in flames late last month. Putin has destroyed her legacy, just as he’s in the process of destroying Russia itself.

Earlier this month, Alexander Lukashenko attempted to inject some optimism into the dire situation he and his benefactor in Moscow now face. During a meeting, Lukashenko reminded Putin that the Soviet Union endured sanctions too. “You’re right,” Putin responded. “The Soviet Union lived all the time under sanctions but it developed and made colossal achievements.”