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The US and Europe imposed sanctions on Russia in late February, hoping to destroy Russia’s economy and thus bring about regime change. They also stole Russia’s central bank reserves in Europe—about $400 billion. The Russian ruble immediately dropped in value against the US dollar from 80:1 to 150:1.
But Russia fought back and won. The ruble rose in value to 65:1 and is stronger than it was before the sanctions. How did this happen? Mainly, when payments to Russia in euros and dollars were banned, Russia simply began to demand payment for oil in rubles. The 1973 agreement whereby all oil purchases worldwide were to be denominated in US dollars ended with the sanctions. Suddenly, the petro-dollar was replaced by the petro-ruble.
But the oil and gas contracts between Europe and Russia had specified that Russian oil and gas had to be paid in euros. The sanctions made that impossible. So what happened?
Western allies agreed months ago, while planning how to respond to any Russian invasion of Ukraine, to spare Gazprombank from any sanctions as part of a decision to shield energy transactions from the restrictive measures.
Several nations, including Germany, have continued to resist efforts to broaden the scope of sanctions to Russia’s energy sector.
Russia’s ruble plan may be a way to ensure that stance holds. Last week, the U.K. announced an asset freeze on Gazprombank as it ramped up Russian sanctions, but Britain only gets about 4% of its gas from Russia, compared to about half for Germany.
The West could not sanction Gazprombank without completely stopping all oil and gas from Russia. This would have immediately devastated Europe’s economy. When Russia demanded payment in rubles, this action also threatened to end all shipments. The Europeans cried foul, because the contracts demanded payment in euros—which the sanctions made impossible.
What did they do? First they brought in middlemen. Russian oil was put on ships, and somewhere in the ocean, they transferred the oil to other ships, so that they could ship the oil into Europe under a new name—and still claim that they had stopped purchasing Russian oil. This, of course, added to the cost of oil.
Secondly, as far as the pipelines were concerned, oil and gas continued to flow. How? The European companies set up accounts at Gazprombank. Then payment for oil and gas was made in euros. Gazprombank immediately exchanged euros for rubles and sent to Russia to pay for the oil and gas.
Everyone was happy. The Europeans were able to say that the sanctions were working, because they were not paying (directly) in rubles; and the oil tankers were not carrying Russian oil, because it was now oil that belonged to other countries. Russia was happy because it had created (in effect) a petro-ruble, and its currency was strengthening. Furthermore, Russia controls the exchange rate between the ruble and the euro, because it is based on Russian oil.
The only real loser was the European consumers, who ended up paying much higher costs for oil and gas in order to accommodate the political machinations and the added cost of middlemen.
That is why the sanctions have succeeded on the surface but failed in reality. The sanctions have failed to destroy the Russian economy, but Europe shot itself in the foot.