by Martin Odoni

The German Chancellor, Olaf Scholz, yesterday made noises designed to sound like he was defiant of Russian President, Vladimir Putin.

Scholz was responding to a clever policy Putin has announced that could offset much of the economic damage that international sanctions are already having on his country, in response to the war with Ukraine. What Putin announced was that he was, in effect, planning to turn the Russian rouble into a petro-currency. This is to say, anyone wanting to purchase Russian oil or gas on international markets would be forced to pay for it in roubles.

This is clever, because the rouble’s value has plummeted, albeit rebounding quite well recently from strong export performance. It fell about one-half in value against the US dollar just since the year began, as sanctions have bitten hard. This reduced Russian export power and thus made the rouble a less useful currency. But a demand for Russian-currency-in-exchange-for-Russian-oil could change the picture somewhat. In practice, every country in Europe needs at least some Russian oil and gas, and if they are going to have to pay for it in roubles, that means demand for the rouble is going to increase, and that new demand should offset at least some of the lost value caused by sanctions, stabilising its price.

The USA and Britain will probably ignore this, as they can afford to cope without Russian fuel for the most part. Britain imports less than 10% of its fuel from Russia, and the USA only about 6%-7%.

But the further east in Europe we look, the more the shadow of Russia looms over the fuel needs of nations. Germany in particular has a big problem. It purchased nearly 20% of Russia’s gas exports last year, over 10% of its oil exports, and even 9% of its coal. The gas imports in particular accounted for an eye-watering 55% of Germany’s total gas consumption last year.

Leader clash?
Clash of leaders?

Scholz’s response sounded defiant, and confident that he could stick with buying with euros, but did not commit firmly; he stated only that he “expects” Germany to continue purchasing Russian fuel in euros. However, expectation is never a promise, and Scholz must be well aware of the substantial trade deficit Germany had with Russia last year

So while Scholz is using a good ‘Poker face’ as he confronts his first big international test since succeeding Angela Merkel as Chancellor, and he is making the right noises about being allowed to use euros and letting the banks convert to roubles, it is very much Putin who has the better hand if the politics should turn ugly. Putin can shut off Germany’s supply-line of fuel faster than Germany can switch to other sources, a process that cannot be completed until mid-2024.

Who blinks first will probably be decided by how bad the pressure on Russia’s economy gets. Putin might be able to ease that by increasing exports to China, which has a fuel-hunger that can never be satisfied. Given Sino-Russian relations are cold at the best of times, Putin may need to consider whether he wants to risk bolstering the strength of an unfriendly economic superpower at his back, while in confrontation with an unfriendly European Union.

But Scholz must worry that if the pressure on Putin turns severe, he might just shut off fuel exports out of desperation.

When times are unstable, only time will tell how unstable it really is.