Putin would n’t cut off gas supplies, would he?

He would n’t would he?

Decent FT explainer around the gas crisis.

https://www.ft.com/content/f4699b68-cf17-4b97-aaf0-336b541bb7f1

Just thinking around the European gas supply issue a few thoughts from me:

I guess the first question is why would Putin go thru the effort in trying to get Western countries to pay for gas and other commodities in rubles? And then threaten that if they fail to do this he will cut off gas supplies, thereby risking a European gas crisis. Why bother?

What are the benefits/costs here to Putin?

(+/-) It’s hard to see much benefit in terms of bolstering demand for the ruble by changing contracts over to rubles. There is already an 80% FX surrender requirement on exporters and given most of the companies dealing with energy and commodities are either state owned or state directed then this number could easily be pushed up to 100% anyway. This scheme hence does not change much.m in terms of demand for roubles.

It has been argued that by forcing the final payment to be made in roubles it will make it harder for the West to impose sanctions on these transactions - for example in a food for oil type scheme. But in reality I think if we end up there OFAC will make sure the buyers of gas comply and in hard currency. This scheme will not help Russia evade any such scheme.

The biggest benefit perhaps is a PR win for Putin in that it sends a message that Western companies are being forced to transact in rubles. Herein since the Russian invasion of Ukraine and the imposition of sanctions Western companies have tried to avoid transacting in anything to do with Russia and as a sign of this transaction volumes in rubles have collapsed. But even here it is not really the Western energy importers transacting in rubles but Gazprombank the entity thru which energy importers now need an FX and ruble account. But it’s Gazprombank doing the FX transaction, not the foreign entity. So I don’t think it signals anything particularly. I would perhaps argue that if anything it sends a signal that Moscow is an unreliable partner, likely to change long agreed contracts at a whim of Putin. So still why get into any transactions related to Russia?

Perhaps Moscow thinks that by forcing payment in rubles it will somehow erode the dollar, and euros, position as major reserve currencies. But no way are any major energy companies going to move away from pricing energy in anything but hard currencies. They do this as they see the dollar of euro having security of value, accepted internationally. The ruble just fails to have this status and even less so after Putin’s invasion of Ukraine.

(+) The biggest win here for Putin is perhaps changing the info narrative. Without this news story about the risk to European gas supplies the international media would be all focused on Putin’s humiliating defeat in the battle for Kyiv and the embarrassing retreat now of the Russian military in the north of the country. As is the media is back trying to second guess Putin’s tactical play here on energy - is he still a tactical genius? It helps keep that view alive - despite his humiliation in Ukraine.

(+) I guess if Putin is threatening to cut gas supplies to Europe it forces European politicians to work overtime to try and keep energy supplies from Russia flowing. They almost end up doing Putin’s work for him. It takes momentum thereby away from efforts to impose an energy embargo on Russia for the invasion of Ukraine. It’s a big game of double bluff by Putin. It enables his allies in Europe to argue why impose an energy embargo as Putin himself does not seem to care and he is threatening this himself? They will argue why give Putin what he wants anyway, a European gas crisis?

(+) I guess threatening gas supply disruptions boosts energy prices and yields Russia an energy price windfall which boosts the balance of payments, supports the ruble and helps fund the war. Putin hence feels the more noise about energy supply disruptions, the better.

(+) By threatening an energy supply crisis in Europe, Putin gives himself more leverage. He wants Western leaders like Scholtz and Draghi to have to call him to plead for assurances of gas supply - in those calls he can push for quid pro quos on Ukraine. No doubt he will be pushing for the likes of Italy and Germany to push Ukraine to concede to Russian demands in peace talks.

(-) The big negative here is that in trying to change existing energy contracts, Putin underlines the fact that Russia is an unreliable energy partner. Russia cannot be trusted to supply regular uninterrupted energy supplies to Europe. It hence accelerates the process of Europe diversifying away from Russia. This process was already underway as a result of the invasion of Ukraine but will accelerate now because Putin is messing around with gas pricing and contracts.

But is Putin actually willing to cut off gas supplies?

Well he turned off the taps once before, back in 2004 over a gas dispute with Ukraine - but quickly reversed that as he realised that being seen as an unreliable energy supplier was counterproductive.

But it feels like things have changed this time around. Primarily here you could argue that Putin no longer cares about being seen as a reliable energy supplier - as he assumes the carbon transition and sanctions because of his invasion of Ukraine means that Europe is not going to be a significant market for Russian energy for very much longer. Energy supply to Europe is a card for him, but with a short expiry date - likely this winter only. Indeed, here we are already close to being thru the winter, only a few weeks left of peak European energy use. If he cuts energy supplies to Europe now, Europe could probably get thru the remaining weeks of winter - it would be damaging from a price/cost of energy perspective but perhaps not actual supply. We might see some energy rationing but I doubt it would be as crippling if energy supply had been cut off before Christmas. Sure, it raises issues about supplying into storage for next winter. But really if Putin is going to act to cut supplies it is really now. If he waits until the end of the month of April, his leverage kind of dissipates.

People do argue why would Putin kill the golden goose - if he cuts gas supplies to Europe, it’s not as though he can easily divert this supply elsewhere. He either has to divert into storage which will fill quickly, flare (oil derived gas) or simply cut production. There is a financial hit to Russia - but does he care given he will assume this business is dying anyway. And perhaps having withstood the first sanction impact, having stabilised the ruble, he thinks he is well set for another round of geopolitical battles with the West over Ukraine but played out in energy markets.