Putin’s gas-for-roubles gambit could trigger EU-wide recession

Russia's threat to seek payment in roubles for gas sales to "unfriendly" countries has the potential to trigger an EU-wide recession, Carsten Brzeski, chief economist at Dutch bank ING, has warned.

Russian president Vladimir Putin’s gas-for-roubles gambit is an attempt to test the West’s resolve on sanctions, he said, noting it can play out in a number of ways.

If such a demand was adopted and western countries began paying in roubles, this would undermine rather than breach existing sanctions against Moscow, while potentially stabilising the rouble and financing Russia’s war machine, according to Mr Brzeski.

Russia's currency has plummeted in value since the imposition of sanctions in response to its invasion of Ukraine.

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Alternatively, countries heavily reliant on Russian gas such as Germany could refuse the roubles demand, triggering a potential stand-off and the possibility of Russia turning off the tap, Mr Brzeski said.

Germany, which imports more than half its gas requirement from Russia, has already indicated that any shift to roubles in its contracts with Russian oil giant Gazprom and others would be treated as a de facto breach of contract.

“The question is, would Germany be willing to pay the economic price,” Mr Brzeski said.

While German households could cope with a shock to supply, particularly as it is no longer winter and therefore heating requirements are lower, he said, German businesses could not, and the result would be a major disruption to production in the euro zone’s powerhouse economy.

“We would be looking at a stagflation scenario for Germany” if the country banned Russian gas or Russia refused to supply, Mr Brzeski said, a scenario that could tip the entire euro zone into recession. Stagflation is defined as a period of high inflation coupled with low growth.

Mr Brzeski said the German government could be faced with having to offset the impact in terms of insolvencies and unemployment with another round of supports and furlough schemes on a par with those introduced at the start of the pandemic.

There was only a limited possibility of Germany being able to substitute in energy from other countries, he said, while noting it was already trying to source substitute supply from Qatar, Norway and the Netherlands in response to the crisis.

The potential standoff and threat to supply sent some European and British wholesale gas prices up by 15-20 per cent earlier this week.

Muireann Lynch of the Economic and Social Research Institute (ESRI) said if EU countries were to pay in roubles it could potentially lower energy prices (given the Russian currency's weakness), but it would also have the effect of propping up Russia and undermining sanctions.

Justin Doyle, a currency trader with Investec, said Putin was trying to counter-sanction the West in an attempt to strengthen the rouble. "It appears to be a breach of contract as most of European end-receivers of Russian fuel are already locked into euro contracts."