Russian President Vladimir Putin declared in televised remarks that “unfriendly countries” must pay for the country’s exported petroleum reserves in Russian rubles.
“It doesn’t make sense to deliver our goods to the EU or U.S. and receive payments in dollars or euros,” Putin declared.
The Russian Central Bank previously doubled interest rates to 20% to protect the ruble, while the government asked Russian exporters to replace 80% of their export reserves with rubles.
The Bank also prohibited short sales in the Russian stock exchange and over-the-counter markets on February 24, 2022.
Finally, one month later, the Central Bank barred foreigners from selling stocks or ruble Treasury bonds on the country’s exchanges.
Financial sanctions by the U.S. and Europe froze Russian foreign reserves in U.S. dollars and euros. They also banned their use in currency transactions with the Russian government, its Central Bank, major businesses, and specific senior businesspeople.
Speaking on television on March 14, 2022, Russian Finance Minister Anton Siluanov said sanctions had frozen around $300 billion of $640 billion that Russia had in its gold and forex reserves.
Because the dollar and euro account for more than 80% of global transactions, the unprecedented financial sanctions complicate Russia’s ability to acquire foreign goods or meet international debt obligations.
On February 25, 2022, S&P lowered the country’s debt rating to “BBB-” (“junk” status), potentially signaling payment problems ahead.
Robert Kahn of political risk consulting firm Eurasia expects one consequence of the sanctions will be a “full default of Russian debt,” asking, “Why do they want to pay us back when we’re extraditing them from the [world’s] economic system?”
A significant exception to the sanctions is the sale of Russian carbon fuels to Europe, estimated to be over $1.1 billion each day. Additional exemptions are in place for agricultural exports (grain), and medical or humanitarian supplies.
Jason Tuvey of Capital Economics speculated Putin’s requirement that gas be purchased in rubles was likely intended to boost the ruble while reducing Russia’s reliance on Western financial infrastructure.
By simultaneously restricting the outflow of rubles from Russia and increasing the inflow of rubles from foreign customers, the Russian government hopes to stabilize and increase its value versus the U.S. dollar and euro. The outcome of the strategy is uncertain.
German economy minister Robert Habeck claims that the demand is a breach of contract, potentially allowing foreign buyers to renegotiate other aspects of the agreements (prices, terms).
Additionally, the European Commission published plans to reduce Russian gas purchases by two-thirds by the end of 2022.
In an interview with The Atlantic magazine on March 10, Cornell professor Nicholas Mulder notes that sanctions on Russia have been in place since 2014 and failed to stop the invasion.
Whatever the result, Tuvey suggests that Russia is likely to retreat from the world’s financial system dominated by the U.S. dollar.