Putin's Inevitable Escalation

Anyone who thought Putin would passively endure US and EU sanctions has not been paying close attention.

Still, demanding payment in rubles from “unfriendly” countries for Russian natural gas is an impressive bit of chutzpah.

Putin told Russian government officials that a number of Western countries made "illegitimate decisions on the so-called freezing of the Russian assets," which he claims has resulted in a line being crossed "over reliability of their currencies" and has undermined the trust for those currencies, The Associated Press reported. 

The move is an effort to support the ruble by forcing Russia’s energy customers to buy rubles to pay for Russian natural gas. It may also be a means to gain foreign currency, which is needed to buy essential imports.

“It makes no sense whatsoever,” Putin added, “to supply our goods to the European Union, the United States and receive payment in dollars, euros and a number of other currencies.”

As a result, he said he was announcing “measures” to switch to payments for “our natural gas, supplied to so-called unfriendly countries” in Russian rubles.

The Russian president didn’t say when exactly the new policy will take effect. He instructed the country’s central bank to work out a procedure for natural gas buyers to acquire rubles in Russia.

Acquiring rubles in Russia means foreign buyers of Russian energy have to exchange other currencies to rubles. By basing those transactions in Moscow, Putin may be finding a creative way to keep Russia supplied with foreign currency reserves.

However, this move is being described by some as a breach of contract, and is likely to be used as further reason to not do business with Russia. If Russia cannot Russia cannot sell her oil the method of payment is moot.

Another way this could boomerang on Putin: by having to in effect buy dollars and euros he risks making both currencies stronger against the ruble. The end result could be the opposite of what is intended.

Mistake or master stroke? Only time will tell.