Demand for payment in rubles out of geopolitical considerations

Russian President Vladimir Putin announced during a video conference on March 23 that the Russian ruble would replace the US dollar and euro in natural gas trade with some countries.

Putin said since the United States and the European Union had defaulted on their obligations to Russia by freezing Russian assets, it makes no sense for Russia to supply goods to the EU and the US and get paid in dollars or euros. The market reacted to Putin's announcement, with the ruble becoming stronger and energy prices in the European market rising.

Russian Federation Council Speaker Valentina Matviyenko said the West's freezing of Russia's gold and foreign exchange reserves was "the biggest economic crime in human history".

Russian State Duma Speaker Vyacheslav Volodin said the rejection of settlement in dollars and euros was a historic decision to preserve Russia's financial and economic sovereignty, and an important step toward the "de-dollarization" of Russia's economy.

Judging that it is difficult for Europe to refuse Russian natural gas, Russia could shift the pressure onto European countries. Russia supplied about 45 percent of the EU's total natural gas imports in 2021. According to a Russian newspaper, Moscow has cleverly forced Europeans to choose between accepting the new rules or turning off the valves of natural gas from Russia.

In a recent video conference of energy ministers, the G7 rejected Russia's demand to pay for energy in rubles, saying the decision was "unilateral and a clear breach of existing agreements" and that the contracts are still in force and the companies have to fulfill their contractual obligations. Russia is taking a hard line in response, saying Europe's rejection of Russia's demands would "certainly lead to the cessation of gas supplies".

Russia's move may have geopolitical considerations. When all sides are moving toward some kind of compromise, it is logical for the parties involved to raise the stakes and strengthen their negotiating positions on the eve of reaching an agreement.

In so doing, Russia is trying to "reformat" not only the world's geopolitics but also its financial and economic systems. However, Russia's decision is also likely to accelerate Europe's efforts to wean off its energy dependence on Russia, with alternative energy sources likely to be developed more intensively and liquefied natural gas supplies from the US and elsewhere likely to grow.