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Rouble Rumble Continues — NeilW

Summary:
The upshot of this widely misunderstood maneuver of demanding payment in RUB is that payment is made to a Russian bank (Gazprom's bank) that is exempt from sanctions, so that when the payment clears, payment has been made to a bank that Russia controls instead of to a bank that Russia doesn't control. If the payment were made it into a non-Russian bank, it would arguably fulfill the contract but prevent Russia from being able to access the funds owing to sanctions. Thus, Russia would be obliged to deliver under the contract. But Russia has made clear that it will not provide commodities "for free." This would be the case if the payments were made to entities that Russia doesn't not control while under sanctions and sanctions prevented the payments from being transferred to Russia, but

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The upshot of this widely misunderstood maneuver of demanding payment in RUB is that payment is made to a Russian bank (Gazprom's bank) that is exempt from sanctions, so that when the payment clears, payment has been made to a bank that Russia controls instead of to a bank that Russia doesn't control. If the payment were made it into a non-Russian bank, it would arguably fulfill the contract but prevent Russia from being able to access the funds owing to sanctions. Thus, Russia would be obliged to deliver under the contract. 

But Russia has made clear that it will not provide commodities "for free." This would be the case if the payments were made to entities that Russia doesn't not control while under sanctions and sanctions prevented the payments from being transferred to Russia, but where Russia would be required to deliver the gas or break the contract. (Recall that contracts are "sacred.")

Under this present arrangement, entities of "unfriendly" countries must open accounts at Gazprom's subsidiary bank, which is not sanctioned. In effect, they deposit their own currency (euros) in those accounts and the bank converts them to rubles for the company that owns the bank to use in its operations.

This means that the euro deposit into Gazprom Bank must clear through the system for the contract to be fulfilled. So the euros end up in a Russian bank, which then converts them into rubles for use by Gazprom in its operations.

Should this payment venue be sanctioned, Russia has made clear that deliveries would cease in that the contract was broken at the buyers' end for failure to clear.

What this means is that Germany continues to get the gas it needs, Russia gets paper in exchange, Russia looks strong, and the West looks weak. In real real terms of trade the West benefits from receiving real goods on the credit of its paper. Russia gets paid, which strengthens its balance sheet. Everyone is happy — sort of.

Germany doesn't have to obtain rubles for the transaction, either in the fx market or from the Central Bank of Russia (which is sanctioned). The transaction takes place in the usual way with some slight modification to avoid a sanctioning process that would prevent Europe from accessing Russian gas.

Neil explains the details of how this actually takes place in terms of ledger entries on the books for various banks, buyers, and sellers.

New Wayland
Rouble Rumble Continues
NeilW
https://new-wayland.com/blog/rouble-rumble-continues/
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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