Vladimir Putin has created a chicken game between himself and Western buyers for Russian gas.
On Wednesday, the Russian president declared that “unfriendly” countries would soon be required to pay for Russian gas imports in roubles .
He has now doubled down on his threat and issued a presidential decree that is immediately effective. In it, he threatened to cease supplying gas to “unfriendly” nations unless they comply.
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What does Putin’s decree actually mean?
His decree requires foreign buyers of Russian gas to open bank accounts in both their currency and with Gazprombank (Russia’s third-largest lender).
This is meant to indicate some type of compromise since the EU has yet to sanction Gazprombank, unlike the UK or the US. However, it is possible that Mr Putin might try to create a divide between the EU, the US, and the UK.
The EU seems to not be in the mood to follow Mr Putin’s lead at the moment. Today, the German and French finance ministers insisted that they would continue to do what they did today, since existing contracts allow their companies to pay Russia with euros.
Today, they said that instead of preparing for Russia to cut gas supplies. Other EU countries that are heavily dependent on Russian gas, like Germany, Bulgaria or Poland have already stated they will stop buying from Russia by the end the year.
Will Europe submit to Putin’s demands
As such, the EU is not showing any signs of members bowing to Putin’s demands at the moment.
Germany has initiated the first stage of a three-stage process in which it would have energy rationing in the event that Russia cuts off supplies. Austria has also been activated. This is because it gets 80% of its energy from Russia and is therefore even more dependent on Russia than Germany.
It is unclear if Mr Putin will continue to threaten if France or Germany call his bluff.
Already, the Kremlin has shown that it is willing to cut off supplies to the west. The reason the UK’s household gas price cap will rise tomorrow is that wholesale gas prices have more than quadrupled in the past year after Russia cut off gas supplies to Western Europe at different points.
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Increased risk of recession in many EU countries
The west European economies would be severely affected if they had to reduce the consumption of gas. This could be done by cutting down on work hours.
This increases the likelihood of a recession in many EU countries.
However, Putin has much to gain. Russia’s war against Ukraine has already brought about heavy sanctions from the west. This will ensure that Russia experiences a severe recession in this year. Russia’s economy is likely to shrink by at least 8.
Each day, Moscow receives as much as EUR800m from EU customers to pay for its gas. This is a huge blow to Putin’s war effort.
This is a chicken game in which both the players and the losers are extremely high.