Russia’s demand that European Union (EU) members pay for natural gas imports in rubles has had no immediate effect on prices, but it has the potential to roil the market in the coming weeks.

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Since Russian President Vladimir Putin signed a decree on March 31 requiring buyers from “unfriendly” countries to pay in rubles, European natural gas prices have declined. 

The market has seemed to shrug off the demand for now. Many EU member countries are still assessing the decree, but it could ultimately test the bloc’s unity. The way members respond could also establish how far Russia is willing to go if its requirements aren’t met and exports are halted in the worst-case scenario.

Russia is requiring buyers to open two accounts at Gazprombank, which plays a key role in commodity transactions and has thus far been excluded from Western sanctions. 

According to the decree, buyers are required to transfer foreign currency into one account. At that point, Gazprombank would exchange the currency for rubles, which would then be deposited into a second ruble-denominated account. In a final step, Gazprombank would transfer the ruble payment from the second account to state-owned gas supplier Gazprom PJSC.

Analysts at Goldman Sachs Commodities Research said that while demands for ruble payments initially spooked the market, prices have since fallen because buyers can still pay in foreign currencies and the ruble conversion is made in Russia. Most gas supply agreements (GSA) in Europe are denominated in dollars or euros. 

Several problems could still present themselves and spark further volatility in the market. 

The Oxford Institute for Energy Studies noted that the decree requires a different payment method than those stipulated in supply contracts. 

“This is a case-specific exercise, but it is apparent that the new mechanism differs from the most basic (and common) payment mechanism in a GSA involving one simple transfer of funds from the buyer’s bank account to the seller’s,” wrote the institute’s Agnieszka Ason, a visiting research fellow, in a recent paper. Ason added that the “decree forces the buyer to transfer its obligation to pay to another person.”

If payment is not received, she wrote, the decree allows a “customs authority” to ban gas delivery. 

“The decree potentially changes the tone of the discussion since it effectively transfers the decision on the potential supply halt from Gazprom (as a seller exercising its rights under the relevant GSA) to the customs authority (under the decree),” Ason added. “This maneuver could have several implications and potentially prepare the ground for a potential Gazprom force majeure case.”

It remains unclear how European buyers will handle Russia’s request for rubles. The continent relies on Russia for roughly 40% of its natural gas supplies. Lithuania and Denmark have rejected the decree. More recently, Hungary said it would comply with it. 

Hungarian Foreign Minister Peter Szijjarto reportedly said the EU doesn’t need to respond uniformly to Putin’s demand because the bloc itself is not a party in supply contracts between Gazprom and buyers on the continent.  

“This statement reveals fissures in what has so far been a common response from the EU: that such a unilateral demand was against the terms of their contracts,” said Rystad Energy Analyst Vinicius Romano. 

Romano cautioned that it could stoke competition and an “every man for himself” approach if other nations follow Hungary’s lead. He also stressed, however, that Russia could have operational issues if it has to choose which countries don’t get gas supplies for noncompliance. 

Moreover, Russia does not currently have alternate markets for some of its natural gas, making any halt in deliveries difficult to conceive considering the financial losses it would involve. 

The decree requires ruble payments for gas deliveries after April 1. The market’s response has also been tepid since payments for current gas deliveries aren’t due until later this month or in May as the Kremlin has said, setting the stage for further supply concerns in Europe as those dates near. 

Demand is dropping as warmer weather settles in, but the continent will still need to replenish depleted storage inventories ahead of next winter.  

Editor’s Note: This segment is one in a series by NGI’s LNG Insight aimed at educating the North American market about the global LNG trade.