Putin says Russia will make 'unfriendly' countries pay for gas in rubles

Russia will seek payment in rubles for gas sold to "unfriendly" countries, President Vladimir Putin said on Wednesday, and European gas prices soared on concerns the move would exacerbate the region's energy crunch.

European nations and the United States have imposed heavy sanctions on Russia since Moscow sent troops into Ukraine on Feb. 24.

But Europe depends heavily on Russian gas for heating and power generation, and the European Union is split on whether to sanction Russia's energy sector.

Putin's message was clear: If you want our gas, buy our currency. It remained unclear whether Russia has the power to unilaterally change existing contracts agreed upon in euros.

The ruble briefly leapt after the shock announcement to a three-week high past 95 against the U.S. dollar. It pared gains but stayed well below 100, closing at 97.7, down more than 22 per centsince Feb. 24.

Some European wholesale gas prices up to 30 per centhigher on Wednesday. British and Dutch wholesale gas prices jumped.

Russian gas accounts for some 40 per centof Europe's total consumption. EU gas imports from Russia this year have fluctuated between 200 million to 800 million euros ($880 million US) a day.

"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 meeting with government ministers.

"The changes will only affect the currency of payment, which will be changed to Russian rubles," he said.

Breach of contract

German Economy Minister Robert Habeck called Putin's demand a breach of contract and other buyers of Russian gas echoed the point.

The move, according to asenior Polish government source, "would constitute a breach to payment rules included in the current contracts." The source added thatPoland has no intention of signing new contracts with Gazprom, the Russian and largely state-owned energy giant,after their existing deal expires at the end of this year.

Major banks are reluctant to trade in Russian assets, further complicating Putin's demand.

A spokesperson for Dutch gas supplier Eneco, which buys 15 per cent of its gas from Gazprom's German subsidiary Wingas GmbH, said it had a long-term contract denominated in euros.

"I can't imagine we will agree to change the terms of that."

According to Gazprom, 58 per centof its sales of natural gas to Europe and other countries as of Jan. 27 were settled in euros. U.S. dollars accounted for about 39 per cent of gross sales and sterling around threeper cent. Commodities traded worldwide are largely transacted in the U.S. dollar or the euro, which make up roughly 80 per centof worldwide currency reserves.

"There is no danger for the [gas]supply, we have checked, there is a financial counterpartin Bulgaria that can realize the transaction also in rubles," Bulgarian Energy Minister Alexander Nikolov told reporters in Sofia. "We expect all kinds of actions on the verge of the unusual but this scenario has been discussed, so there is no risk for the payments under the existing contract."

Several firms, including oil and gas majors Eni, Shell and BP, RWE and Uniper Germany's biggest importer of Russian gas declined to comment.

"It is unclear how easy it would be for European clients to switch their payments to rubles given the scale of these purchases," said Leon Izbicki, associate at consultancy Energy Aspects.

He said, however, that Russia's central bank could provide additional liquidity to foreign exchange markets that would enable European clients and banks to source needed rubles.

Moscow calls its actions in Ukraine a "special military operation." Ukraine and Western allies call this a baseless pretext.

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