Why “Paying in Rubles” May Prove Irrelevant

Russia has announced that, as of April 1, the natural gas it supplies to countries deemed “unfriendly” must be paid for in rubles rather than in dollars or euros. France and Germany, among others, have responded that their contracts are not in rubles and they will continue to pay only in the currencies negotiated in their contracts. The outcome of this dispute may be important in terms of political posturing, but it is unclear whether it makes a great deal of difference in economic terms.

Ostensibly, the economic goal of Russia in this dispute is the strengthening of the ruble, by creating a greater demand for the currency. But the ruble is of little use for trade outside of Russia, a fact that has only been reinforced by the country’s invasion of Ukraine.

Before this latest decree, Russian officials had already required that Russian companies relinquish a large percentage of their foreign currency revenue to the Russian central bank in return for ruble balances. In effect, the sole difference made by the new decree is in the order in which transactions occur: Rather than transferring euros to Russian energy suppliers, who then pass them to the Russian central bank, European purchasers of natural gas are now to send euros directly to the central bank and receive rubles, passing those rubles to their Russian suppliers (who will then presumably redeem what they can for needed foreign currency).

Effectively, the only possible difference is the percentage of revenue Russian energy suppliers are permitted to retain in foreign currency. But since the Russian government has the power to change those amounts at will, the difference is meaningless, except to the extent that they are unable to track energy suppliers’ receipts. As such, the edict to “pay in rubles” may prove irrelevant.

Of course, the Russian government has the power to set the official exchange rate for rubles. It might decide to require European buyers of Russian energy to buy rubles at an official exchange rate above the open market rate, thus effectively raising the price of oil and natural gas. Such an official exchange rate would have no effect on a market exchange rate for rubles. In the short run, it would probably increase Russian revenue from energy production, just as would any tax on an inelastically demanded good. Putting such an emergency tax on an export is certainly within the power of any government, with or without an exchange rate requirement, although it might be harder to disguise the effect were the tax denominated in euros.

Ultimately, the terms of any existing contract may be irrelevant: Russia and European purchasers will likely bargain afresh based on their needs and interests. The most important factors determining the terms of trade may be agreements that Europe can establish for alternative gas sources and arrangements that Russia can devise to bypass its foreign currency shortages.