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There seem to be various stories of Russia cutting off various neighbouring and other Euro states from its oil over failing to pay for the oil in Roubles (this is independent of the Ukranian war and so on, I'd like to focus on the economic issue here rather than the paramilitary issue, if at all possible). The way this is painted in the media is that it is abnormal for Russia to require this, and it is an unreasonable endeavour for these countries to acquire Roubles to pay for the oil; consequently, Russia should accept other countries' currencies for its oil, and it should not be the other countries' responsibilities to acquire Roubles.

It is my understanding, from a rudimentary macroeconomic perspective, that it is more normal/common than otherwise, in international trade, for the importer to pay for goods in the exporter's currency. The reason being that the exporting company needs to pay their wages/labour/materials/R&D/shareholders/etc in local currency, not in the import country's currency. For example, if Google does business in the UK, Google needs to pay its SF employees in USD; paying them in British pounds doesn't help them, and Google's employees would be right to be mad if they were paid in Pounds. This, from my understanding, is the norm.

Now, given that the export country (Russia) uses Roubles as the currency, it should be normal and not newsworthy that the exporting company requires payments in Roubles.

  1. Why is this newsworthy?

  2. Is the only reason why this is onerous for the importing country the fact that the Russian economy has been locked down and Roubles aren't commonly available on the common forex markets, or is there something else here that I'm not aware of?

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    It is not possible to answer this question for a 5 year old.
    – gerrit
    Aug 3 at 8:19
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    @gerrit: I don't think it's that far-fetched to explain to a child that if you used to give them [favorite treat] when they do chores, they won't be happy if you single-handedly decide to pay them with [treat they don't like] instead. Maybe it's not a perfect analogy, but it is essentially what is happening here. A deal was made and one party is trying to single-handedly change the deal in their favor. Most children understand an exchange rate intuitively (e.g. preferring 5 treats they like over 6 treats they don't like)
    – Flater
    Aug 3 at 15:51
  • @gerrit My intent was to ask to explain in layman's terms, from first principles, rather than using complicated economic jargon that I wouldn't understand.
    – Ertai87
    Aug 3 at 16:54
  • I thought by international law, all payments for oil had to be made in USD? It shows what a grip America has on the world market. Aug 3 at 22:18
  • The Russian demand was for gas, not for oil by the way. The legal situation is somewhat different because pipeline contracts are typically long term. Ultimately this was a waffle. "The system, which involves the creation of two accounts at Gazprombank, enables Europe to say it is technically paying for natural gas in euros, while Russia can say it is receiving payment in rubles — a requirement Putin imposed on “unfriendly” nations." Most EU companies agreed to the twin accounts, although some did not washingtonpost.com/world/2022/05/24/eu-russian-gas-putin-rubles
    – Fizz
    Aug 4 at 7:05

5 Answers 5

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Because the contracts stipulated payments in other currencies (euros, dollars), not roubles.

i.e. all your other arguments are superseded by the fact that these were not the contractual commitments Russia signed up to.

Here's one recent example of Germany's position:

Germany Rejects Putin Demand for Ruble Payments for Russian Gas - Bloomberg

“Contracts are contracts,” Lindner (German Finance Minister) said Wednesday in an interview with Bloomberg Television in Washington. “Contracts are based on dollars and euros and so private-sector companies should pay in dollars or euros.”

And...Explainer: Russia wants countries to pay for gas in roubles. Will buyers comply? | Reuters

Currently, nearly all Russian gas purchase contracts are denominated in euros or U.S. dollars, according to consultancy Rystad Energy. Payments in roubles would benefit the Russian economy and shore up its currency. .

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    I've looked around for more specifics but all I have seen is that the European position is that the contracts are in not in roubles. Let's look at it from a different PoV: if the contract currency was specified as rubles, then payments would also already be in roubles and this wouldn't be a point of dispute. I'd hazard the guess that in normal times Russia welcomes hard currency payments. Aug 2 at 19:34
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    That said, if it is the case that Russia is trying to reneg on the contracts by changing the terms as claimed, that would absolutely be newsworthy and important to know about or publish, and would be an acceptable answer to this question. I have a policy of not accepting an answer for 24 hours so I'm not going to accept this answer in case someone else posts something more enlightening.
    – Ertai87
    Aug 2 at 19:42
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    I agree that coverage is, more than a bit, one-sided. But the notion of providing "fair and balanced coverage" is not always the right approach. For example, allowing scientific skeptics on climate to present their views 1-to-1 doesn't really make the news balanced when 97% of scientists attribute warming to human CO2 emissions. Maybe the best defense is to remember our media swallowing claims like the WMD Iraq. And take Western pronouncements with a grain of salt. While keeping in mind Putin's Russia is just probably the bad guys in actual facts. Aug 2 at 19:44
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    @ItalianPhilosophers4Monica You are implicitly assuming that an argument is more valid if more people agree with it. This is a strong philosophical assumption, which does not belong with the scientific method as such. It's just a cultural habit. Aug 3 at 20:35
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    @usumdelphini In science as in life, argument and evidence screens off authority: once you have the models and the evidence, you can see which model fits the evidence best. However, in the absence of becoming a domain expert in everything, trusting the authority of people knowledgeable in the field is useful; that's why we have peer review, after all.
    – wizzwizz4
    Aug 5 at 10:26
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it is more normal/common than otherwise, in international trade, for the importer to pay for goods in the exporter's currency

Not for oil in general (see "petrodollar") and also not for imports in the euro area in general, see e.g. for the latter.

We use a unique data set covering Belgian trade with all countries—unique in that it comprises information on the currency of invoicing as well as firm characteristics. The data show that while the U.S. dollar accounts for a disproportionate share of international trade, a small subset of other currencies is also actively used in international trade alongside the U.S. dollar—most notably the euro but also to a lesser extent the Japanese yen, the British pound, the Swiss franc, and the Chinese yuan. These patterns are shown in the chart below, which plots the dollar and the euro share of trade for Belgian exports in the left panel and Belgian imports in the right panel. Each circle corresponds to a separate country outside the EU, and the size of the circle depicts the country’s share of total Belgian trade. The fact that most circles lie on the negative diagonal reflects the dominance of the combined use of the dollar and the euro in trade invoicing with virtually every trade partner.

https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2022/06/LSE_2022_dollar-dominate-world-trade_amiti_ch1.jpg

Notes: Each dot represents the share of trade invoiced in dollars (vertical axis) and the share in euros (horizontal axis).

A distinctive feature of dominant currencies is that the same currency is equally prevalent in both imports and exports; this feature is common to both the dollar and the euro. These patterns are at odds with standard international macro models that assume countries adopt either the destination currency or the source currency, with the role of many currencies roughly proportional to their country’s role in world trade.

Dominant currency (i.e. dollar) pricing is also typical for many exports from developing countries.

The US dollar dominates in trade invoicing, especially across emerging market economies. While data on trade invoicing currencies are scant and scattered, available information indicates that the US dollar plays a dominant role. A significant share of bilateral trade between countries other than the United States is invoiced in US dollars (Figure 1). This pattern is particularly marked in emerging market and developing economies, although it is also relevant for some advanced economies (for example, Australia, Japan, Korea). The euro is used widely, but primarily in trade that includes euro area economies on one or both sides of the transaction.5 Similarly, partial data indicate that invoicing in other major currencies (for example, British pounds, yen, Swiss francs) is significant, although mainly in cross-border transactions involving the economies that issue those currencies.

enter image description here

Although the prevalence of US dollar invoicing varies across countries, it has been fairly stable over time (Figure 2). Invoicing data show that the US dollar has played a clearly dominant role in invoicing of both exports and imports in Asian and Latin American emerging market and developing economies, with very stable shares in total invoicing over the past two decades. With somewhat lower shares, the prevalence of the US dollar in some advanced economies (for example, Australia, Japan and New Zealand) has also been quite stable. The exceptions to this pattern are mainly in countries that trade heavily with the euro area such as non-euro European and Northern African countries or some countries in Sub-Saharan Africa who use the euro as a vehicle currency (West African Economic and Monetary Union) and where there was a visible increase in the use of this currency following its inception.

enter image description here

Even for (imports into) the EU, the petrodollar is a (sizeable) reality when it comes to oil imports from outside the EU area, much more so than for other products:

enter image description here

(Whereas only 9% of the EU oil imports came from the US that year.)

So, no, the simple macroecon 101 models that countries export in their own currency aren't true for the most part, when it comes to developing countries' exports. This also has implications that devaluing their currency (via the exchange rate) doesn't actually help a developing country boost exports as much as the simple theory predicts.


For what's worth it, such decision apparently can be subjected to strong political considerations, at least in some economies, e.g. if we judge by the sudden shift from dollars to euros in the Russia-China trade around 2019. (Alas I didn't find a similar graph for the 1st half of 2022.) According to Chinese sources, that move was agreed upon by China after Trump threatened them with "decoupling" the US economy from China's.

enter image description here

As far as I know, insofar Putin has only asked "unfriendly countries", i.e. the Western ones who imposed sanctions on Russia to switch payments to roubles.

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    Is Russia a "developing country" for the purposes of this explanation? My understanding is that Russia is a "first-world" nation (not literally according to that definition, but in the sense that it has a developed economy, industrial base, technology, and so on).
    – Ertai87
    Aug 2 at 19:23
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    @Ertai87: insofar it was; see how they fit perfectly on the diagonal in the 1st graph. That they wish they would rather be like Japan is another story. Russia generally exports raw materials, for the bulk of their trade income.
    – Fizz
    Aug 2 at 19:27
  • Some summary data here regarding kinds of Russian exports piie.com/blogs/trade-investment-policy-watch/…
    – Fizz
    Aug 2 at 19:34
  • Sorry, this answer has a lot of information to process. That a country is on the diagonal in that diagram means that its trade with Belgium is invoiced almost exclusively in US dollars or Euros and in no other currency (even its own), correct?
    – Ertai87
    Aug 2 at 19:35
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    @Fizz Right, the issue that Russia has much less use for dollars and euros after the sanctions was going to be part of my question, but I think the more important question is the one that Italian answered in their answer, being the contractual one, which does not include the utility as a consideration.
    – Ertai87
    Aug 2 at 20:52
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Of course it is normal to try tricks to evade economic sanctions during economic war. How it could be else?

You need to sell something for Russia first to get these roubles. With sanctions applied, there is not much you can sell, so the need to get roubles creates the pressure to remove at least some of the sanctions. Most you can do is to buy roubles from some neutral country that has them because it does not join the sanctions.

Looks like both sides fully understand the idea behind. This is why Russia is pushing for roubles and EU refuses. Formally EU has right to demand the payment in the currency that is written on the contract, however. But the suggestion to change USD into GBP or chunks of gold for instance probably would have not caused that much discussion.

Be the contracts in roubles, the gas supply would have been reduced anyway because of the EU having not enough roubles to pay so no difference after all.

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It is quite unusual (and risky) to trade a great deal of goods internationally in a rather volatile currency.

It is at least quite a hassle when a single payment on your contract can shift the currency value by a few percent.

It is worse when the currency is known to be politically controlled and such control is done in a rather rough manner.

These three considerations always override the minor advantage of the currency being a home currency for either (or both!) of the contract partners.

The "...or both" clause of the previous sentence is important. As late as few years ago it was pretty much normal in Russia to advertise and trade expensive items (real estate, vehicles, industrial equipment) in EUR (and some more years ago it was all in USD).

Deals of more than e.g. $1000 were closed primarily in EUR or USD between pretty much Russian companies and citizens.

This is why neither Gasprom, nor their European contractual partners ever considered the Russian Rouble. Until recently.

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Of course it's not abnormal. While the majority of western media outlets portrayed it as "Russia holding the EU economic hostage", any person who thinks logically and rationally, as opposed to our leadership which clearly makes decisions solely based on emotions, could see it coming the second the EU imposed sanctions.

A lot of politicians called it a "breach of contracts and agreements", while at the same time failing to see that economic sanctions waged against Russia are also breaches of the very same contracts and agreements. Economic sanctions are not supported by international law and have no legal basis.

EU bureaucrats began seizing Russian assets and reserve funds in foreign currencies. Seizure of foreign state assets goes directly against "State Sovereignity" which is a principle of international law and actually has legal basis.

Once this happened, Russia began writing a list of non-friendly states and demanded payment in Roubles from these states. And why wouldn't they? The EU, UK & US seized Russian funds and assets, without legal grounds and without a single legal process.

Would you keep selling your goods and services to a person, knowing full well they'll steal the payments back within a week or two? No, nobody in their right mind would.

The fact that it became headlines, despite it being fully rational and logical, is because bureaucrats in the US and EU aren't used to repercussion's. They're not used to consequences or push-back. The mere thought of someone actually pushing back against economic sanctions, which have no legal basis, are indecipherable to these people.

These people act on emotion rather than justice, logic or rational, and have proved that western european states, along with the US, cannot be trusted. Becuase if they can seize another countries assets and funds, without legal basis, what's stopping them from seizing yours?

That being said, Russia is still supplying Europe, despite sanctions, with oil and gas. And have so far not done a single thing back, which they absolutely could and most likely will do eventually.

People also tend to forget that both Russia and China have agreed that they will begin phasing out the dollar as their national reserve currency for this very reason, and as Putin put it, "this is the beginning of the end of US hegemony into a more balanced world order".

The US, who do not abide by international law in the best of cases, should not be able to hold countries economic hostages for not agreeing with them. Neither should they be able to lie infront of the entire UN assembly and present false evidence in order to invade and demolish a country, resulting in the death of 500 thousand children, but they did, and they can. Which is just absurd. And I fully understand the reasoning behind wanting to move away from the US dollar.

This is the beginning of the end for the petrodollar, and the US themselves are speeding up the process.

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    This is economic war. Maybe the nuclear war would be more legal, still I probably would not prefer such an alternative.
    – Stančikas
    Aug 3 at 11:58
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    "Neither should they be able to lie infront of the entire UN assembly and present false evidence in order to invade and demolish a country, resulting in the death of 500 thousand children" - what is this about? Is it about Iraq?
    – Alexei
    Aug 3 at 12:19
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    That being said, Russia is still supplying Europe, despite sanctions, with oil and gas. And have so far not done a single thing back 😂😂😂 Russia cuts gas through Nord Stream 1 to 20% of capacity 😂😂😂 hostages for not agreeing with them => should do business as usual when Russia invades a sovereign country they've been bullying and threatening for the last 8 years. Aug 3 at 16:13
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    Economic sanctions are a standard tactic of the UN, so it is supported by international law. Most of it is purely internal regulation; nations have broad rights to make rules for their own citizens, businesses and territory. I don't know why you think state sovereignty applies in foreign nations. Sanctions are generally better than invasion, which both the US and Russia can and do when it suits their purposes, and many nations of the EU remember with great displeasure the 45 years under the Russian thumb.
    – prosfilaes
    Aug 3 at 20:20
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    "Seizure of foreign state assets goes directly against "State Sovereignity" which is a principle of international law and actually has legal basis" whereas invading Ukraine doesn't go against State Sovereignty? Do you know that the first item of the Budapest Memorandum is "Respect Ukrainian independence and sovereignty in the existing borders"? Aug 4 at 0:39

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