Poker player Putin plays shadowy game with rubles

The bank GPB International SA is located in an anonymous mirrored office building in the center of Luxembourg City. A bank with, in their own words, ‘in-depth expertise on both Russian and European financial markets’. GPB stands for Gazprombank, the investment bank of the Russian energy giant Gazprom. Gazprombank, part of the power structures of the Russian elite, does all kinds of things. Granting credit to oligarchs for example, including to the former son-in-law of President PutinKirill Shamalov, who needed more than a billion dollars in 2014 to buy shares in the petrochemical industry.

The main raison d’être of Gazprombank, Russia’s third largest bank, is to enable payments for Russian energy supplies. European customers can contact the subsidiary in Luxembourg. Also these days, as Russia is waging a brutal war against Ukraine. Because energy payments to Russia must continue, Western countries decided when they issued successive packages of sanctions against the Russian financial sector after the Russian invasion. Gazprombank was not sanctioned, unlike, for example, Sberbank (the largest bank in Russia) and VTB (the number two). Gazprombank can continue to use SWIFT, the identification system that other Russian banks have been kicked out of.

This week showed how central the role of Gazprombank is to Putin’s power base. On Thursday, the president announced the introduction of a system that would force Western buyers of Russian gas to pay with rubles. This is done via a switch trick at Gazprombank.

So far, Western buyers of Russian gas have paid in euros (estimated 60 percent) or dollars (40 percent). From now on, Western companies must open a special ‘ruble account’ in Russia into which they can deposit euros or dollars, as before, but these are converted into rubles in parallel accounts by Gazprombank. Western companies that do not cooperate with the system will simply no longer receive gas from Russia, Putin threatened.

The question is why President Putin actually wants those ruble payments. It caused some confusion this week. Not only because the measures were announced last week, were apparently withdrawn on Wednesday and again ratified by Putin on Thursday, but also because the search continues for the ratio, which Putin himself is also unclear about.

The direct exchange of hard, western currencies into rubles may have to support the rate of the Russian currency, which fell by about 40 percent in late February and early March – after being cut in half for a short time, partly due to sanctions.

The exchange rate of the Russian currency has also recovered sharply in recent weeks. The ruble rate is of great importance to Putin’s government, because inflation (14.5 percent according to the latest data, probably much higher) is largely due to expensive imports. The lower the ruble rate, the more Russia spends on imports of products. On Thursday, the ruble reacted positively to the announcement of the requirement for Western buyers to open ‘rouble accounts’.

Management and muscles

Carsten Brzeski, chief economist at ING, thinks the system devised by Putin offers some support to the ruble. But more importantly, according to him, the influx of rubles is good for Russia’s economic management at the moment. Because of the hundreds of millions in hard currency that so far come in daily in energy payments, the Kremlin doesn’t have much for that purpose now.

This point was also made this week by the German Economy Minister, Robert Habeck. The hard currency that Russia still receives for its gas, he said, ends up at the Russian central bank, which is under sanctions. The money is “not spent on tanks”, but “is with the central bank”. „That is why . says [Poetin]: you have to pay in rubles, so that I can really do something with that money.”

Habeck, German Chancellor Olaf Scholz and other European politicians on Thursday and Friday reiterated their refusal to comply with Russia’s requirement to pay for gas in rubles. It remains unclear whether EU and G7 countries will also refuse to cooperate in the shortcut via Gazprombank now devised by the Russians. It will probably be tense from the second half of April: then payments for the energy supplies for the month of April will start – the first to be covered by Thursday’s decree.

Brzeski thinks that for the time being it is mainly about a display of power. “Putin is showing his muscles.” But how much bluff is there in this poker game? Russia cannot survive for long without energy exports. Until recently (the figures are before the war) 55 percent of all Russian oil went to the EU, the United States and the United Kingdom. For gas this is 60 percent. A total Western embargo in response to Putin’s demand would, according to the Institute of International Finance (IIF) – a bank think tank – cause lost revenues for the Russian state of $120 billion for oil and oil products, and $145 billion for gas in a year. Together, that’s one-sixth of Russia’s GDP, and it’s comparable to nearly half of Russian government spending — including defense. Europe, Russia’s largest energy customer, continues to shy away from such an embargo.

And then there may be another symbolic reason for Putin to settle in rubles. Western countries are used to paying for their raw materials in their own currency. And that reflects the dominance of the dollar, and to a lesser extent the euro, in the global economy. Putin wants to take that privilege away. This reflects the tilting balance of power in the world. Not that the ruble will become a major currency now, but China will be happy with the erosion of the role of dollars and euros.

Gita Gopinath, the former chief economist of the International Monetary Fund and now its second-highest executive, told the Financial Times that sanctions against Russia are already undermining the dollar. Other countries will take precautions and become less dependent on the US currency – especially China.

Also read: Will the war lead to a regional bloc in Eurasia?

Western sanctions have so far sparked a major economic crisis in Russia – this week the European Bank for Reconstruction and Development (EBRD) forecast an economic contraction of 10 percent this year. But they have not dealt a final blow to the Russian financial edifice. IIF analyst Elina Ribakova noted this week that the banking system “appears to be stabilizing recently,” after reports from couch runs shortly after the start of the invasion. The Moscow stock exchange has been open again for a week, trading restrictions are gradually being released.

Restoration of the sanctions

The strengthening ruble price also seems to indicate a recovery from the shock of the sanctions. On Friday, the ruble was back at 81 rubles per dollar – almost as strong as it was before the war. Foreign currencies continue to flow in, which is good for the ruble in principle. Now that Russia still exports a lot (gas, oil, other commodities) but imports much less due to the sanctions, the balance of trade is improving visibly, as is the balance of payments: the sum of money entering and leaving the country.

The question is how much this all says. Significant restrictions on capital movements have also been imposed by Russia itself, foreigners are no longer or hardly allowed to sell their companies and it is not the case that a private individual can just go to his bank to exchange his rubles for dollars.

The difference between the buying and selling rates of rubles at banks in Russia is significant. Banks sell rubles for around 80 per dollar (Friday), but those who want to sell the rubles back for dollars, usually get about a quarter less dollars in return. And that is still theoretical. There is a quota of $5,000 per customer until September 1, but there must be good reasons for it – a business trip abroad, for example. If you get those dollars at all. So the question remains what the exchange rate is currently based on.

All this points to another ambiguity. If the ruble plummets again, will Europe – in rubles – suddenly pay an attractive price for its gas, or will the supply contracts be broken up again? That too is still foggy.

Meanwhile, the EU is reportedly preparing a new package of measures against Russia. Whether it concerns better compliance with the current sanctions, or new sanctions, is still unknown. Gazprombank, the financial hub of Europe’s gas supply, is likely to remain untouched. French economist Jean Pisani-Ferry, former adviser to President Macron, wrote this week that it is time for Europe itself to suffer a little. “Europe’s leaders must make it clear to the public that they cannot defeat an adversary willing to endure a 20% drop in national income if Europeans themselves are not prepared to risk a 2% drop in their income.”