Russian gas payments open a loophole in EU sanctions

For the European Comission there is no doubt. The system devised by the president of Russia, Vladimir Putinwhich obliges European companies that want to continue buying the gas in Russian to channel payments through a double account in Gazprombank from Russia -a first in euros and a second in rubles- goes against the economic sanctions of the European Union because it allows to involve in the payments the Central Bank of Russia with whom it is forbidden to do financial transactions. “If you have a contract denominated in euros either Dollars it is the currency in which you have to continue paying. You don’t have to pay in rubles. This is not in line with our sanctions package. Complying with the (Russian presidential) decree is a violation of the sanctions”, settled the spokesman for the president of the European Commission, Ursula von der Leyen.

The new warning from Brussels comes after the doubts raised between Member States and gas distributors about the legal interpretation of the Russian presidential decree and Moscow’s decision to cut directly, from this Wednesday, the supply to Poland and Bulgaria for not applying the new payment procedure demanded from the Kremlin. Several gas supply companies, such as the Italian ENI, the German Uniper or the Austrian group OMV AG, have indicated that they are studying ways to comply with the next payment in mid-May. From Finland or Greece have made it clear that they will continue to pay in euros while Poland insists that if any Member State gives in to Moscow’s demands, as the Hungarian Government plans to do in Viktor Orbanshould be penalized.

Although the contracts between the European distributors and Gazprom are confidential, 97% of them stipulate that payments must be made in dollars or euros. Of the remaining 3%, according to sources from the Community Executive, most are in pounds sterling and only a few are in rubles. The Kremlin decided to unilaterally change the rules of the game on March 31, one month after launching the war in Ukraine, through a presidential decree which introduces a new two-stage payment procedure and according to which the payment is only completed when the money is converted into rubles.

Euro and ruble accounts

According to it, companies that buy gas from Russia are obliged to open a bank account at Gazprombank in Russia (now they do it in an account of the entity in Luxembourg) in which to pay the gas in euros or dollars. The payment, however, is not completed until the euros or dollars are converted into rubles in a second account, after a currency conversion process in which the companies, according to sources from the Community Executive, lose control of the money, which remains in the hands of the Russian authorities and the Central Bank of Russia.

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“The point is that the Russian authorities have put in place a sophisticated system that involves a certain number of steps that make companies pay in a currency, but they are not considered to have complied with the payment until that amount is converted into rubles for someone else at an exchange rate and terms that they do not control,” explained the president’s spokesman, Eric Mamer. This system, according to Brussels, de facto allows the Central Bank of Russia to finance itself through European gas companies, which could even be considered as loans. “You could speculate or do whatever you wanted with the payments before deciding to convert it to rubles in the second account, so the system is not compatible with sanctions,” Executive sources insist on a mechanism that they understand seeks to avoid European sanctions, strengthen the ruble.

The new explanations from Brussels seek to clarify the new playing field and what European gas importers can and cannot do. According to Brussels, the published guidelines are clear. “If a contract stipulates that a payment is scheduled in euros or dollars, the company’s obligation ends when it makes the payment in euros or dollars. This is what companies must do,” stressed Mamer, who also recalled that although Member States are responsible for ensuring that companies respect European sanctions, as guardian of the treaties that the European Commission can open infringement procedure against those who break the rules.