The oil market is bullish at the start of the London session today, with both benchmarks posting gains as the market reacts to Russian President Vladimir Putin’s request for nations on its “unfriendly” list to pay for Russian gas in roubles.
Last week, the Russian government released a list of 48 countries it tagged as ‘unfriendly list’, which listed nations that the announcement described as nations who have done “unfriendly activity towards Russia, Russian companies and citizens.”
Also last week, the Russian government went on to ban exports of more than 200 products with the 48 countries on its ‘unfriendly’ list till December 2022, as a response to sanctions imposed over its war against Ukraine.
What you should know
- This news is the latest jolt to global energy markets after Russia’s invasion of Ukraine. This is because Europe gets about 40% of its gas from Russia, paying largely between 200 million to 800 million euros ($880 million) per day in euros and dollars.
- The requirement raised new hurdles for the mostly European gas purchasers that buy Russian gas, as Putin gave the Russian central bank and government officials one week to come up with a way to shift payment to the Russian currency. State gas company Gazprom also was ordered to revise its contracts to accommodate the move.
- This move by the Russian President comes just when the United States President, Joe Biden, is meeting with its NATO allies on Thursday, with many speculating that additional sanctions on Russia will be announced over its actions in Ukraine.
- Asides from European countries, Japan, South Korea and Taiwan are also on the list of countries deemed unfriendly. They all import liquefied natural gas (LNG) from the Sakhalin-2 and Yamal LNG projects in eastern Russia.
- Japan, the biggest importer of Russian LNG in Asia, had no idea how Russia would enforce that requirement. Finance Minister Shunichi Suzuki said in parliament that, “Currently, we’re looking into the situation with relevant ministries as we don’t quite understand what (Russia’s) intention is and how they would do this.”
- Japan imported 6.84 million tonnes of LNG from Russia in 2021, according to Refinitiv trade flow data, making up nearly 9% of its LNG imports.
- South Korea, Asia’s third-largest importer of Russian LNG, is expected to continue imports, with the country’s Financial Services Commission saying it would do whatever was necessary to facilitate trade.
Legal experts say it is unlikely Russia has the power to unilaterally change the terms of contracts already in existence. However, Tim Harcourt, chief economist at the Institute for Public Policy and Governance at the University of Technology Sydney, explained, “Contracts are made between two parties, and it is usually in U.S. dollars or euros. So, if one party unilaterally says ‘no, you’re going to pay in this’ Well, there’s no contract.”
The global benchmark, the Brent futures is currently trading $122 per barrel while the U.S. benchmark, the West Texas Intermediate is currently trading $115.12 per barrel as of the time of this writing.