Energy ministers from the G7 group of nations have rejected Vladimir Putin’s demand that Russian natural gas be purchased exclusively in rubles. German Energy Minister Robert Habeck stressed that purchases will be settled in the currency indicated by original contracts.

“Putin’s effort to drive a wedge between us is obvious but you can see that we won’t allow ourselves to be divided and the answer from the G7 is clear: the contracts will be honoured,” said Habeck.

On March 23, Putin baffled markets by ordering all gas export deals to be settled in rubles. It is assumed that the move, which forces western countries to buy rubles in exchange for their own currencies, was designed to help strengthen the ruble. However, it would also effectively cut Russia off from one of its main supplies of hard currency, damaging Russia’s own buying power.

Following Russia’s invasion of Ukraine on February 24, western countries imposed the harshest sanctions ever seen. This included freezing Russia’s foreign currency reserves held abroad, which total over $300bn. With the Central Bank of Russia (CBR) now limited in its ability to prop up the ruble through large-scale currency intervention, it has turned to other measures.

A shock-and-awe interest rate hike of 20% was followed by an order forcing Russian companies to buy rubles with 80% of their foreign currency reserves. Then a new law limited the withdrawal of foreign currency inside Russia. While these measures appear to have reversed the ruble’s tailspin, the currency is still highly volatile, and is currently worth over 25% more than it was before the start of the war with Ukraine.

In this context, Putin’s order to make “hostile states” pay for Russian gas appears to be motivated chiefly by an attempt to prop up the ruble. It may also be a ploy to remind European governments of their energy dependence on Russia as new sanctions loom.

Russia is Europe’s top supplier of gas. Europe currently buys over 40% of its gas from Russia, but has pledged to reduce gas imports by two-thirds. Meanwhile, Europe accounts for nearly 70% of Russian gas exports, from which the petrostate earns $30-40bn a year. According to the IEA, the EU imported 155bn cubic metres of Russian gas in 2021 (including LNG).

Putin ordered the CBR and state-owned gas company Gazprom to switch to ruble payments by March 31. It remains unclear how this will be implemented, with any attempts to change the currency of payments bound to expose Gazprom to accusations of breaching its contract.

Italian Prime Minister Mario Draghi told reporters in Brussels that the announcement could backfire, saying “it’s a contract violation, and contracts will be considered violated if Russia implements this condition.”

German Chancellor Olaf Scholz also emphasised that any switch would be a breach of contract. “As I have already said, the contracts that we are aware of are overwhelmingly in euros and the companies will pay them accordingly,” he told reporters after discussions with his Swedish counterpart in Berlin.

The G7 comprises the seven largest developed economies in the world. Germany is currently President of the G7. After energy ministers from all seven countries met, German Energy Minister Robert Habeck announced that they had unanimously decided to reject Moscow’s demand. He also urged relevant gas companies not to comply with the order.

Former US Ambassador to Russia Michael McFaul has suggested that payment for Russian energy imports should be held in special escrow accounts, which Russia’s authorities can access only to pay for food, medicines and other essentials.