Russian President Vladimir Putin signed a decree on March 31st, according to which gas trade with enemy countries, including Bulgaria, will be paid in rubles.
On Friday, Russian gas giant Gazprom sent an official letter informing the Bulgarian government that supplies of natural gas would be suspended if payment for them was not made in Russian currency.
On this occasion, Manager News published the comment of Alexander Mihailov, associate professor of economics at the University of Reading and Director of the Group for Economic Analysis in Reading (GEAR), for the political and economic portal VoxEU. The Bulgarian-born economist and financier is a member of the Editorial Board of Econometrics and the Advisory Board of Sci.
There are at least three reasons, citing theoretical knowledge and empirical experience in the international monetary and financial system, that could explain Putin’s move.
The first is market segmentation, arising from obstacles to the formation of a unique global market with a single price for a product – in the case of gas. This allows monopolistically competitive companies, such as Gazprom, to implement pricing strategies by choosing the currency in international transactions.
The second reason is the shift of currency risk from Gazprom, as an exporter, to its importing counterparties in “enemy” countries. This could lead to higher energy costs if the ruble rises in the medium and long term.
Last but not least, Moscow’s move could boost demand for rubles in international foreign exchange markets.
The combination of these three factors, and especially the latter, may strengthen the international role of the ruble.
Segmentation and price discrimination
Global market segmentation allows price discrimination by monopolistically competitive companies. Buyer pricing is a form in which exporters
determine the price in the currency of the respective local export market. For example, a Japanese exporter to France will set its price in euros and for the United States in dollars. More specifically, market pricing is third-degree price discrimination, allowing different markets to charge different prices (or currencies of payment) for the same exported product.
In contrast, according to the “traditional” paradigm, export prices are set in the national currency of the exporter, seller, or producer. For example, an Italian exporter to Canada, as well as to the United Kingdom, the United States, or any other country, will always set its price in euros, no matter where it sells its products.
Currency choice and currency risk
The choice of currency is important because it determines whether the buyer or seller assumes currency risk. Such uncertainty can either harm or benefit the bearer of currency risk, which is not always easy to predict.
Therefore, Putin’s March 31 decree can be seen as a change in the condition of who bears the currency risk in gas trading. If the West pays for it in rubles, it will also bear the risk of transactions. If the Russian ruble falls in the medium to long term, imports from Russia will be cheaper for the West. But if we witness the opposite trend, and Putin’s logic is the same, then the West will take the risk of paying more and more, using the ruble as its currency.
According to Sky News estimates, Russia earns approximately $ 800 million a day from gas sales in Europe. About 58% of them are paid in euros, 39% in US dollars, and 3% in British pounds. Thus, European importers and consumers have so far been protected from fluctuations in the euro exchange rate against the ruble, as the payment is fixed in European currency. This will change if the trade turns entirely into rubles. But on the other hand, such a transition will force EU countries to reduce their dependence on Russian energy sources even more than has been discussed recently.
Why payment in rubles matters
The exchange rate of the ruble on international foreign exchange markets will be important because its appreciation will affect everyone – from the importing company, through industry and transport film to the household that uses Russian gas for heating. With this change, the long-term demand for rubles on international foreign exchange markets and the subsequent market pressure to increase the price of the ruble at first glance seem to be guaranteed by future demand for Russian natural gas and oil from the West. And that would only support the weakened Russian currency.
Of course, this will be true until Russian supplies are replaced by alternative sources, including more environmentally friendly technologies. If they are not found or their commissioning is limited, then the change in gas agreements will have a long-term supportive effect on the Russian currency. This scenario is possible unless Russia is completely isolated.
In addition, Putin’s economic advisers may have predicted that such a measure, if implemented, is likely to pave the way for the Russian ruble to become a reserve or international currency.
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