The EU proposed options to pay for Russian gas without violating sanctions

The European Commission has confirmed that the scheme of payment for Russian gas in rubles contradicts the EU sanctions regime. One of the options proposed by the EU is to consider only the transfer of currency to Gazprombank as fulfillment of payment obligations.

The European Commission confirmed that the new scheme of payment in rubles for Russian gas by companies from countries recognized as unfriendly by Moscow would potentially contradict the European sanctions regime. A document dated April 21, which contains the European Commission’s explanations on the issue of payment for Russian gas, was acquainted with RBC.

Why the EU found the decree on gas payments to be in violation of sanctions
EU companies can legally comply with the requirements of Russian Presidential Decree No. 172 on the payment procedure for gas supplies only if it does not run counter to the norms of the EU sanctions regulations against Russia, first approved in 2014, the European Commission stresses. In mid-April, Bloomberg and Politico reported, citing a nonpublic preliminary EU legal assessment, that the scheme insisted upon by Russia would amount to a circumvention of existing sanctions.

According to the regulator, the procedure of obligatory conversion of euros or dollars transferred by European importers to a special currency account in Gazprombank into rubles, followed by a transfer to a special ruble account and transfer of this payment to Gazprom’s account in Gazprombank may qualify as a foreign currency loan to this bank from a European company. The 2014 sectoral sanctions prohibit Europeans from providing Gazprombank and a number of other Russian banks with new loans for more than 30 days.
“The conversion process could take an indefinitely long time, during which time the foreign currency would be entirely in the hands of the Russian authorities,” the European Commission said.

In addition, Brussels fears that the payment scheme would also involve the Bank of Russia “through a number of transactions related to the management of assets and reserves of the Central Bank of Russia, which is prohibited by European sanctions.”

The decree on payment for gas supplies states that Gazprombank will sell the currency received from a foreign buyer in organized trading at the Mosbirzha. However, the Board of Directors of the Bank of Russia has the authority to determine a different procedure for the sale of foreign currency. The Central Bank also determined the regime of special bank accounts for settlements for gas with foreign importers as of April 1. RBC sent an inquiry to the Central Bank press service.

President Vladimir Putin, explaining the need to transfer payments into rubles, said that in the event of further gas supplies and their payment according to the traditional scheme, new financial receipts in euros or dollars may be blocked. According to him, “this development of the situation is quite expected. Recalling the freezing of the Central Bank’s currency reserves, Putin said: “In fact – what is happening, what has already happened: we have supplied European consumers with our resources, in this case – gas. They received it and paid us in euros, which they themselves then froze. In this regard, there is every reason to believe that we supplied some of the gas to Europe virtually free of charge.” Presidential spokesman Dmitry Peskov explained that the scheme to pay for gas in rubles was adopted so that Western countries could not seize the dollars and euros received by Russia for gas.

What compromises does the EU offer
The European Commission says that even after the Russian decree on paying for gas in rubles is approved, there are still options on how to pay for Russian gas supplies without violating European sanctions.

First, the decree itself provides for exceptions: the government commission for the control of foreign investments can issue separate permits to continue payments in foreign currencies.

European companies can ask the Russian side to fulfill its obligations to pay for gas in the same manner as it was done before the decree, the EU regulator notes. “The decree does not prohibit payment in accordance with EU restrictive measures. However, the procedure for granting exceptions to the decree’s requirements is not yet clear,” the document says.

Second, European companies can transfer euros or dollars to a special account at Gazprombank and make a “clear statement” that their payment obligation is thereby considered fulfilled, “in accordance with existing contracts.

But this will require a confirmation from the Russian side that this procedure is allowed under Decree No. 172, Brussels points out. Currently, the text of the decree implies that the obligation to pay a foreign buyer for gas supplies is considered to be fulfilled from the moment the funds received from the sale of foreign currency are credited to Gazprom’s ruble account in Gazprombank. President Vladimir Putin asked the government to instruct Gazprom to amend the existing contracts with regard to the currency of payment.

RBC sent inquiries to Gazprom, Gazprombank, and the government, where the request was forwarded to the Finance Ministry.

“Indeed, Decree No. 172 establishes a different payment procedure, but Decree No. 295 states that all applications to the subcommission [for issuing permits for transactions with non-residents] are submitted by the body responsible for such decisions, in this case such body is the Russian Ministry of Energy. To date, no such applications have been received. The Sub-Commission will ensure prompt consideration of the recommendations of the Ministry of Energy as part of its work,” the press service of the Ministry of Finance told RBC. RBC sent an inquiry to the Ministry of Energy. The office of Deputy Prime Minister Alexander Novak, who is in charge of the fuel and energy complex, declined to comment.

To date there has been no report on any company from the European Union that has started to pay for Russian gas in rubles. The only EU country that declared its willingness to pay for gas in Russian currency was Hungary.

How much Russian gas does Europe buy.
In 2021, the European Union imported from Russia 155 billion cubic meters of natural gas (pipeline and LNG) worth € 17.8 billion, according to the European Commission.

The Federal Customs Service and the Bank of Russia have suspended the monthly publication of data on Russian exports, so it is impossible to say exactly how much natural gas Russia has supplied since February. At the same time, Gazprom itself timely publishes data on gas deliveries to the EU in three directions (Nord Stream 1, Belarus and Ukraine), says Alexei Kokin, analyst at Otkritie Investments. According to him, in January 2022 the decrease of supplies to the EU to January 2021 was close to 40%, at the end of February the volume increased, in March the year-to-year decrease was only 17%. “In April, the drop accelerated, probably because of the warm weather in Europe, in recent days is again approaching 40%,” adds Kokin.