Putin's plan

russian oil

May 09, 2022

A few weeks ago, we looked at the effect of the Russia-Ukraine war (and other factors) on interest rates and market volatility. As the war continues, sanctions have been imposed and governments now have to decide how to move forward. Since then, actions have been taken by various governments to protect their economies and the value of their currencies. The Russian government recently announced its new requirement that the sale of gas to “unfriendly” countries be settled in Russia’s official currency- the ruble or rouble. 

But how will this help Russia’s ruble and affect other currencies?

Russia currently produces gas which they then export to countries across the globe. Currently nearly all payments for gas contracts are made in US dollars or in Euros. Making it mandatory to settle these contracts in rubles will cause a shift in exchange rate risk. Russian President Vladimir Putin’s plan is that the exchange rate risk would shift from Russia as the supplier, to their counterparties who import gas. Importers of Russian gas would now have to convert their local currencies to rubles to make payments. The supply and demand effect would increase demand for the ruble and therefore increase its price against other currencies. Effectively this plan should make the ruble a stronger currency.

A stronger ruble could result in gas being more expensive for the importing countries as they may now be forced to convert more US dollars or Euros to make payments for their imports. As the ruble gets stronger, the greater the effect. This effect would be passed all the way down from the importer to the consumers of Russian gas.   Countries would now be forced to convert more US dollars or Euros to make payments in ruble for their oil imports. As the ruble gets stronger, the greater the effect. This effect may be passed all the way down from the importers to the consumers of Russian gas.   

The plan by the Russian government will also have other effects. If fully implemented, importers may look to other gas producing countries to make their purchases. This would lessen the demand for Russian gas and therefore thwart the plan for increased demand of the ruble. The other gas producing countries would benefit from the increased demand and see an increase in their sales. Also, countries could look to gas substitutes in green technologies. These would use substantially less or no oil/gas but would take a much longer time for countries to make the transition.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management.  Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor.  Visit our website at www.sterling.com.jm  Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at [email protected]

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