Putin’s roubles-for-gas demand is no serious threat to US dollar reserve status – here's why
- Written by Kim Kaivanto, Senior Lecturer in Economics, Lancaster University
President Vladimir Putin’s demand[1] that “unfriendly countries” henceforth pay for Russian gas in roubles has had several immediate effects. With the Europeans given one week to switch to paying in the Russian currency, it has driven up the price of natural gas, making it more expensive for them to maintain the sanctions regime.
The rouble has strengthened against the US dollar since the announcement from ₽107 to ₽99. And if European nations accede to Russia’s terms, the demand for roubles will increase and accordingly further strengthen the currency’s value in the foreign exchange market.
The moves put pressure on European countries to backslide on enforcing financial sanctions, since using roubles would presumably force them to buy the currency from sanctioned Russian banks. And it can be seen as a ploy to split Germany and Italy off from the sanctions alliance, since they are particularly dependent on Russian gas.
The early indications are that divide and rule may not be working: the Germans have announced they will reduce their dependency[2] on Russian gas to as little as 10% (compared to over 50% today) by summer 2024. But since Russia is implicitly threatening to cut off Europe’s gas supply immediately unless it starts paying in roubles, the more pressing question is what the ramifications look like today.
Natural gas price (UK spot, pence/therm)
Russia and China are both pushing de-dollarisation.
EPA
Russia’s de-dollarisation push has not been entirely unsuccessful. The share of its trade denominated in euros rose above 50%[12] for the first time in the first quarter of 2020. The Europeans themselves have not been against trading more with the Russians in euros: the fact that Gazprom’s European supply contract is majority-denominated in euros can be credited to Putin’s de-dollarisation drive. This has helped to achieve a modest increase[13] in Russia’s share of euro-denominated trade with the EU overall.
Meanwhile, the Saudis have been negotiating[14] with the Chinese about potentially pricing their oil trading in yuan instead of dollars. As Saudi’s largest oil customer, that would take another bite out of the dollar’s importance as the reserve currency.
Having said all that, the big picture[15] is that de-dollarisation by Russia and China has had only a modest effect on the US dollar’s dominant position. The dollar continues to be used in nearly nine in every ten forex transactions. It makes up the vast majority of all global export invoicing, and nearly three-fifths of all central bank reserves across the world.
So while Russia’s latest move is certainly part of a wider strategy that has had some success, we are nowhere near a tipping point. Even if the Europeans end up buying Russian gas in roubles for a while, that is not going to fundamentally change how the world economy works.
References^ President Vladimir Putin’s demand (www.reuters.com)^ reduce their dependency (www.ft.com)^ Trading Economics (tradingeconomics.com)^ currently Gazprom (www.reuters.com)^ breach of contract (www.reuters.com)^ 48 “unfriendly states” (government.ru)^ did nothing (www.economist.com)^ “de-dollarise” its economy (www.bnnbloomberg.ca)^ This has included (www.cnbctv18.com)^ meanwhile developed (theconversation.com)^ reserve-currency status (www.cfr.org)^ above 50% (www.russia-briefing.com)^ modest increase (www.bnnbloomberg.ca)^ been negotiating (www.bloomberg.com)^ the big picture (www.federalreserve.gov)
