On Thursday, President Vladimir Putin threatened to stop European gas supplies if they were not paid in Russian currency. This was his strongest economic response to Western sanctions for his invasion of Ukraine.
The ultimatum from Putin for Friday was rejected by European governments. Germany, the largest recipient of Russian gas on the continent, called it “blackmail”. Moscow did offer buyers a way to get roubles through a Russian bank.
The energy war has enormous ramifications.
Europe would like to reduce its dependence on Russian energy, but this could lead to higher fuel prices. Russia is in dire need of a large revenue source, even though it is under severe sanctions.
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Putin’s invasion of Ukraine over five weeks has left thousands dead, destroyed residential buildings and left terrified people hiding in basements. It also displaced about 25% of Ukraine’s 44 million inhabitants.
Putin played a major role in the European demand for energy buyers despite stiff resistance from the Ukrainian military and militant Western stance.
They must open rouble accounts at Russian banks. These accounts will pay for gas delivery starting tomorrow,” he stated on Thursday. He also said that Europe has been receiving gas free of charge for the past few years because it paid in euros and then frozen them.
“If these payments are not made in roubles, we will consider it a default by buyers and all the consequences that follow… existing contracts will also be stopped.”
Is there an energy crisis?
While governments and western companies claim that this would constitute a breach in contracts in dollars or euros, they were still preparing for an eventual full-blown energy crisis.
Putin’s order allows them to send foreign currencies to the “K” account at Russia’s Gazprombank. The buyer would then receive roubles to pay for the gas.
To force the issue Russia would need to physically stop gas flow to EU 27 member states. This is a significant escalation that was not possible during the Cold War. Analysts at Fitch Solutions said that it would be a major financial blow to Russia.
Putin sent troops to Ukraine on February 24th for what he called a “special military operations” to demilitarize and “denazify”.
Moscow stated this week that it would reduce offensives in the vicinity of Kyiv and the north to show goodwill and instead focus on “liberating the southeastern Donbass region.”
According to Kyiv and its allies, Moscow is trying to rebuild after losses from a Ukrainian counter-offensive. The offensive has retaken suburbs of Kiev and strategic towns and villages in northeast and southwest.
U.S. officials and European officials claim that Putin was misled by generals regarding his military’s poor performance.