Giovanni Battista Ponzetto | April 3rd, 2022
This week has been dominated by the back and forth about Russia asking to be paid in Roubles for Energy imports by European Union clients.
I was told about the “Roubles” thing late in the previous week at lunch by a friend, who is one of those understandably forlorn Italians who thought Putin was much saner than our Italian political class. But when he told me that, I burst out laughing. He started out with the usual protestations of “It’s a way to end Dollar domination of commodity markets” etc., and I laughed even more. And then I told him why I was laughing with an example.
Fractional reserve currencies all have an issuing authority. If you are a European citizen in a place that mercifully still understands the safety value of having physical paper currency as the most important form of money in circulation, you might want to fish in your pockets for your wallet and check what that piece of paper says. As I am writing, Mario Draghi’s signature is staring back at me from the 5 EUR bill I put on my desk.
In the case of Roubles, the equivalent signature would be by Elvira Nabiullina, Governor of the Bank of Russia.
So imagine this scene that I described to my friend.
Imagine that each day, at 11 AM, an emissary from European Union countries visits Ms. Nabiullina’s office, with a heavy backpack containing the daily 500 million EUR in cash. The day April 1st being the day payment in Roubles became mandatory, the courteous Ms Nabiullina told the emissary, “I am afraid that while the payment amount is what was agreed upon, I can no longer set it off towards the contract dues if you pay me either USD or EUR”. The emissary goes white in the face, and asks “where the <CENSORED> am I supposed to find roubles for that amount??”
Smiling, Ms Nabiullina said “Say no more, dear friend, you came to the right office”, She grabs a sheet of paper from her printer, writes in long form “This represents in roubles an amount equivalent to 500 million USD in Cash” and signs it.
She then raises her head and says “Now you will give me your backpack and I will give you this piece of paper. Of course, you will have to write me a receipt. After that, you will give me BACK that piece of paper, I will call our mutual friends at the Energy providers to confirm that you duly deposited the amount due in Roubles, and they will send you the receipt of the payment through the customary channels. Or, if you so desire, I can have them send the receipts over for you here while we have tea.”
Puzzled, the emissary agrees but then asks “Ok, I think that will work for all concerned. But If I may be so bold, what exchange rate will be reported on the receipt?”
With a glowing smile, Ms. Nabiullina then tells him demurely, “does it matter?”
By the way, this is not far off from what Mr Draghi implied in his convoluted answer to the international press, linked here: call to Putin by Italian Premier Draghi. For the purpose of the Gas contract, and as long as the emissary shows up daily with his 500 million to drop on Nabiullina’s desk, any currency whose issuing authority she is part of would be equivalent. Having been April Fools’ day, If I had her ear I would suggest the Luigino di Seborga as a prank, but I do not, and I think she would not accept anyway.
Because you see, there are (obviously) other ways to obtain Roubles in the international markets. The easiest one is to sell goods into Russia and accept their currency as payment. Close second, it’s having subsidiaries there, and have them transfer Roubles to the headquarter company in the West, either through organic sales or by selling bonds in local currency into the local market.
THAT’s where the big issue is: it provides ammo to the political currents in Western Europe a born again Margaret Thatcher would call the “wets”. Remember, to name one, but I am not pointing finger at any particular country here, Renault initially said that they would go on operating their Russian subsidiary as normal , then they had to back off that under the pressure by public opinion. And THAT in the country that thanks to De Gaulle is more robust to the slings and arrows of outrageous Energy prices on the international markets. Imagine what that does for Germany, which closed three of its remaining six Nuclear power plants when the dogs of war were already baying loudly and is steadfastly refusing to restart them, with the ministry saying it would be pointless and the scientific world of Nuclear industry telling the opposite.
In fact, my devious mind went so far to think that the idea of getting paid in Roubles might not have been originated in Russia at all. Also, if you accept my strange scenario above as likely in effects, if not in the actual way it ran, the rise in the Rouble would seem to have nothing to do with that decision by Putin, but simply with the fact that Western Europe is continuing out of necessity to fund Russia heavily in order to keep its energy market running at all.
At last, at LONG last, Europe has found something that the ECB cannot print. That, of course, means “inflation”. The Italians, and notwithstanding the legends no one is more Italian than Mr Draghi, don’t believe in the primary function of prices for being a messaging system about what’s plentiful or scarce, and our Premier immediately proposed price caps and the like. Maybe they should have read Dune instead of famous economists of yore, since, and I quote, “Growth is limited by that necessity which is present in the least amount. And, naturally, the least favourable condition controls the growth rate.” [This is a tease to a friend who will get the quote immediately, it is from a book we both treasure].
In a free market economy, preferably with a Bagehotian Central Bank, price rises cause reduction in use of the good or service rising in price, then a combination of increased supply and substitution effects. But our leaders have bigger fish to fry than a simple inflationary episode, which will be the subject of a future piece on European diplomacy, or lack thereof.
So, is that the end of the reasons for Russia to demand “payment in Roubles”? Not remotely.
There is in fact another reason, linked to the fact that there is no backpack involved. Gazprom Bank, is NOT on the sanction list, and usually the payments went to the Luxembourg branch. From there, due to further sanctions and the plumbings of the international monetary system, I am not at all sure that those USD and EUR could be freely used by Russia. In fact, in the case of USD, I think that they would actually be represented by a USD deposit at the Federal Reserve Bank of New York in the name of the ECB as representative of the Luxembourg branch holding said USD in the name of Gazprom Bank. BUT, if the payment is, as I described, denominated in “Roubles”, then it might be a bit easier for Russia to actually use those USD.
Possession, as usual, is more than half the law, and that’s also the whole point about invading someone’s country.