Russia’s squeeze on European energy companies to pay for gas in rubles might be about to pay off as some of the continent’s largest suppliers appear to be working out sanctions-compliant solutions to secure gas flows.
On March 31, Russian President Vladimir Putin signed a decree to force companies “from unfriendly countries” to set up a designated account with Gazprombank, the Swiss-based trading arm of state-owned energy company Gazprom, whereby euro or U.S. dollar payments could be converted into rubles via a ruble-denominated second bank account.
The move is seen as both a way to prevent the currency’s collapse and to hit the European Union hard following the sanctions the bloc has imposed against key Russian individuals and companies.
Uniper, one of Germany’s biggest energy firms, told media outlets, including the BBC, at the end of April it was preparing to effectively bypass EU sanctions by meeting the Kremlin’s demand for all transactions to be made in rubles.
Other European energy firms—including Italy’s Eni and Austria’s OMV—are reportedly preparing to do the same following the Russian government’s decision to cut off gas supplies to Poland and Bulgaria. Russia warned other EU states could face similar measures if European firms fail to abide by the country’s demands to pay for goods and services in rubles.
The European Union is massively dependent on Russian natural gas. Last week, the European Commission put forward a six-month plan to phase out Russian crude oil—a process President Ursula von der Leyen said “will not be easy.”
“If energy companies intend to pay in rubles, they will need to secure legal opinions confirming they are in fact able to do so without breaching the sanctions regime.”
Michael Buckworth, Managing Partner, Buckworths
According to climate research group the Centre for Research on Energy and Clean Air, €63 billion (U.S. $66.6 billion) worth of fossil fuels were exported from Russia in the first two months since the country invaded Ukraine on Feb. 24, with the European Union accounting for 71 percent (about €44 billion, or U.S. $46.5 billion) of the total. Germany and Italy are the biggest importers, followed by China, the Netherlands, Turkey, and France.
Michael Buckworth, managing partner at law firm Buckworths, does not think any energy company would knowingly breach sanctions, despite reports to the contrary. He believes claims by EU electricity companies they are prepared to breach sanctions are “an attempt to sound out government and regulators on whether they would enforce the sanctions regime against power companies or not, as well as an attempt for the EU to change its sanctions regime.”
However, Buckworth said the differing strengths of sanctions laws might prove problematic.
For example, while EU guidance suggests it might not be a breach of sanctions to pay in euros but convert the funds into rubles via a second bank account, such a move would likely breach U.K. sanctions, he said.
In the United Kingdom, a conviction can lead to a maximum seven-year prison sentence and a fine of at least 1 million pounds (U.S. $1.2 million). Meanwhile, penalties across the European Union can vary depending on national laws.
“If energy companies intend to pay in rubles, they will need to secure legal opinions confirming they are in fact able to do so without breaching the sanctions regime,” said Buckworth. “Until such time as the EU explicitly sanctions Gazprombank, it seems to me that a smart sanctions expert could probably find a way to navigate the regime so that energy companies can in fact pay in rubles.”
The United States announced sanctions against 27 Gazprombank executives Sunday.
“It is worth noting the EU is perfectly capable of preventing energy companies from paying in rubles by either explicitly sanctioning Gazprombank (and any replacement bank nominated to take payment in rubles) or sanction gas in its entirety,” added Buckworth. “The problem is there appears to be little agreement within the EU on how to deal with the EU’s dependency on gas.”
While companies might be tempted to think flouting EU sanctions is worth the price of doing business, ignoring U.S. sanctions is a different ballgame, said Charlie Steele, partner at consultancy Forensic Risk Alliance.
“The Office of Foreign Assets Control (OFAC) would come down like a ton of bricks on a company that did that,” said Steele. “This is the U.S. government’s highest foreign policy priority, and OFAC would react very strongly to any deliberate attempt to flout U.S. sanctions.”
There’s more to worry about than just OFAC, warned Steele. The U.S. Department of Justice (DOJ) has become increasingly vocal and active regarding sanctions against Russian companies and individuals, setting up task forces and other measures to bring criminal prosecutions for intentional violations and evasion.
Last month, Deputy Attorney General Lisa Monaco said the DOJ considers sanctions to be “the new FCPA,” a reference to the anti-bribery law the Foreign Corrupt Practices Act. Monaco added any criminal case would be separate from and parallel to—not instead of—an OFAC monetary penalty.
“For OFAC and the DOJ to have jurisdiction, the company’s actions must have some link to the U.S., but that’s not hard,” said Steele. “Any direct or indirect link will do, even the use of U.S. dollars in transactions, which is very common in international commerce.”