LONDON, March 23 (Reuters) – Russia will seek payment in roubles for gas sales from “unfriendly” countries, President Vladimir Putin said on Wednesday, sending European gas prices soaring on concerns the move would exacerbate the region’s energy crunch.

European countries’ dependence on Russian gas to heat their homes and power their economies has been thrown into the spotlight since Moscow sent troops into Ukraine on Feb. 24 and the subsequent imposition of Western sanctions aimed at isolating Russia economically.

With the financial noose tightening and the European Union split on whether to sanction Russia’s energy sector, Putin hit back with a clear message: If you want our gas, buy our currency.

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“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 top government ministers.

“The changes will only affect the currency of payment, which will be changed to Russian roubles,” he said.

Russian gas accounts for some 40% of Europe’s total consumption and EU gas imports from Russia have fluctuated between 200 million to 800 million euros ($880 million) a day so far this year. The possibility that a change of currency could throw that trade into disarray sent some European wholesale gas prices up to 30% higher on Wednesday. British and Dutch wholesale gas prices had jumped by Wednesday’s close.

The Russian rouble briefly leapt to a three-week high past 95 against the dollar and, despite paring some gains, stayed well below 100 after the shock announcement. The currency is down around 20% since Feb. 24.

“At face value this appears to be an attempt to prop up the Ruble by compelling gas buyers to buy the previously free-falling currency in order to pay,” said Vinicius Romano, senior analyst at consultancy Rystad Energy.

Putin said the government and central bank had one week to come up with a solution on how to move these operations into the Russian currency and that gas giant Gazprom (GAZP.MM) would be ordered to make the corresponding changes to gas contracts.

With major banks reluctant to trade in Russian assets, some Russian gas buyers in the European Union were not immediately able to clarify how they might pay for gas going forward.

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

In gas markets on Wednesday, eastbound gas flows via the Yamal-Europe pipeline from Germany to Poland declined sharply, data from the Gascade pipeline operator showed.

Moscow calls its actions in Ukraine a “special military operation” to disarm and “denazify” its neighbour. Ukraine and Western allies call this a baseless pretext that has raised fears of wider conflict in Europe.

A BREACH OF RULES?

According to Gazprom, 58% of 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% of gross sales and sterling around 3%.

The European Commission has said it plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies of the fuel “well before 2030.”

Russian President Vladimir Putin meets with Novgorod Region Governor Andrei Nikitin in Moscow
Russian President Vladimir Putin listens to Governor of the Novgorod Region Andrei Nikitin during a meeting at the Kremlin in Moscow, Russia March 22, 2022. Sputnik/Mikhail Klimentyev/Kremlin via REUTERS

But unlike the United States and Britain, EU states have not agreed to sanction Russia’s energy sector, given their dependency.

The Commission, the 27-country EU’s executive, did not immediately respond to a request for comment.

German Economy Minister Robert Habeck said on Wednesday that he would discuss with European partners a possible answer to Moscow’s announcement about the gas payments.

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

“However, there are no sanctions in place that would prohibit payments of Russian gas in roubles,” he said, adding that Russia’s central bank could provide additional liquidity to foreign exchange markets that would enable European clients and banks to source the needed amount of roubles on the market.

However, there are questions over whether Russia’s decision would breach contract rules which were agreed in euros.

“This would constitute a breach to payment rules included in the current contracts,” said a senior Polish government source, adding that Poland has no intention of signing new contracts with Gazprom after their current long-term agreement expires at the end of this year.

Germany’s Habeck also said Putin’s demand was a breach of delivery contracts.

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

“I can’t imagine we will agree to change the terms of that.”

Dutch Prime Minister Mark Rutte said on Wednesday that more time was needed to clarify Russia’s demand and how it would relate to sanction rules.

“In general, it’s up to market parties who buy Russian gas, how they deal with it,” Rutte said during a debate with parliament. “In their contracts it’s usually specified in what currency it has to be paid, so it’s not something you can change just like that.”

Russia has drawn up a list of “unfriendly” countries corresponding to those that have imposed sanctions. Among other things, deals with companies and individuals from those countries have to be approved by a government commission.

The list of countries includes the United States, European Union member states, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

Some of these countries, including the United States and Norway, do not purchase Russian gas.

($1 = 0.9097 euro)

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Reporting by Reuters reporters; writing by Nina Chestney; editing by Catherine Evans, Carmel Crimmins and Jonathan Oatis

Our Standards: The Thomson Reuters Trust Principles.

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