A few days ago, we saw that Russia’s central bank announced it was going to restart its gold purchases at a fixed rate of 5,000 rubles/gram. The Russian ruble took a beating when Russia invaded Ukraine and the West retaliated with continuous hits of sanctions. So, Russia is perhaps setting the stage to try and strengthen the ruble with a guaranteed backing — a de facto Russian gold standard.
Russia is also coupling this gold-backed ruble with an attempt to demand European gas contracts be settled in rubles. It seems Putin is trying to leverage Europe’s heavy dependence on Russian gas. Of course, he is only making these demands to “unfriendly” countries that have joined in on the sanction-train.
So how is Europe responding?
Germany Prepares for Rations
It seems that the German government is holding steady to avoid Putin’s demands. But will it result in strangling itself? The German Finance Minister, Christian Lindner, is appalled at Putin’s threats and implies a threat in return.
“We are completely against any kind of blackmailing. These treaties are based on euro and [U.S.] dollar and so we suggest that private sector companies to pay [Russia] in euro or dollar. If Putin is not willing to accept this, it’s open to him to think about consequences.”
Apparently, the German government didn’t realize that they were in the middle of an economic war. It turns out that economic warfare ain’t so fun when you’re on the receiving end. The German government is refusing to pay Russia for natural gas in rubles, so they are forced to tell the German people to suck it up.
German Energy Minister, Robert Habeck, is prepping the German people for hard times. He has has activated the first of three warning levels of Germany’s emergency gas law. This first warning level entails the creation of a crisis team to deal with stability of the country's gas supply. Habeck told the German people to try and reduce their energy consumption as much as possible …
“There are currently no supply shortages. Nevertheless, we must increase precautionary measures in order to be prepared in the event of an escalation on the part of Russia.”
German head of the Federal Network Agency, Klaus Müller, relays the alarm in such a “reassuring” manner (translating to English, my emphasis in bold):
“It is correct that [the Federal Ministry of Economics and Climate Protection] declared the early warning level. … The [Ministry] invites consumers & industry to contribute & prepares for all scenarios.”
Oh, an invitation, how wonderful. “Prepare for all scenarios” means prepare for rations. If Germany implements its highest of the 3 warning levels, the government would assume control over distribution and enact rations.
Can Europe Break its Russian Dependency?
How will Europe break its dependency in the near term? Well, the United States government is trying to help. The Biden administration announced a new deal to double-up export supply of LNG (liquefied natural gas) to the European Union (EU) this year. This, of course, comes at a cost to the American people who will see further rise in gas prices as a result of the reduced supply at home. But, is this enough to really help break Europe’s dependence on Russia? I doubt it.
The governments of Slovenia and Italy will likely hold the line along with other members of the EU. They will escalate tensions with Russia instead of taking the de-escalation route of diplomacy and trade, all at the expense of their citizens.
But, what about Hungary, which receives 95% of its gas from Russia? Well, in contrast with most of its EU allies, Hungary has refused to foment the war and opposes sanctions against Russian energy imports. Of course. Anything to the contrary would be economic suicide for Hungary.
But governments care little of the impact to their people. This is the primary argument against sanctions in the first place — sanctions are counterproductive and only hurt the people of the targeted government. Sanctions also give the targeted governments fuel for rallying support against the sanctioners. Think about it. Try and name one successful sanction campaign throughout history. But please note, don’t define “success” in the same way Madeleine Albright defined the word.
Now get this … Russia has indicated that it ain’t just oil and gas that will be subject to payment in rubles. All of Russia's energy and commodity exports could be priced in rubles, which would further turn the screw on the West. Unfortunately, the war escalates.
It doesn’t help that western Europe and the US are facing currency crises (as is most of the world). Prices of everything, including energy, are rising. Choking off supply of natural gas is only going to make the price problem worse for people. Looking on the bright side of life for citizens of the world, winter is over. So there’s that, I guess.