In response to sanctions, Russia is demanding that oil purchases be conducted in rubles to prop up the value of the ruble. Why is this advantageous for Russia to have foreign buyers convert dollars to rubles before purchasing oil? Could they not just take payment in dollars and then buy rubles on the domestic market? Oil companies and the banks that service them are currently not under sanctions, to my knowledge.
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$\begingroup$ Of course the Russian energy companies can convert foreign currency to RUB. As for the energy buyer paying RUB, this wouldn't be possible under contracts written previous to Putin's demand that they pay RUB. The value of the RUB would not have been a term in the contract so there isn't a way to determine how many RUB to pay. $\endgroup$– H2ONaClMar 27, 2022 at 2:04
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2$\begingroup$ This comment is true (AFAIK) but it does not answer the question at all? $\endgroup$– GiskardMar 27, 2022 at 16:49
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1$\begingroup$ I thought this article might be useful: voxeu.org/article/… $\endgroup$– EB3112Mar 29, 2022 at 9:34
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2 Answers
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- If we talk about private companies they would not necessarily have incentive to always buy the Rubble because Rubble is not as stable as dollar. In fact the whole reason why oil and many other commodities are traded in dollar is that many companies do not need to hold the local currency and have little incentive to do so. As Fed explains:
For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets. This note reviews the use of the dollar in international reserves, as a currency anchor, and in transactions.
I believe this is response to US unprecedented freezing the USD holdings of Russian central bank (see this being reported by NY Times).
Previously Russia was actually accumulating dollars from the oil & gas sales so they have hard currency to use exactly in times of crisis like this (this was part of the 'Fortress Russia' strategy - see The Economist here). Considerable share of the Russian central bank reserves were in dollars, because prior to 2022 Russian invasion that resumed hostilities in Russo-Ukrainian war of 2014, this was considered more or less unthinkable.
This demonstrated that US is willing to declare USD invalid for political/geopolitical reasons. This means that if you are an autocratic country you have to think twice before using dollars, since at any moment they could become worthless. Dollars are ultimately just worthless pieces of paper if you are not allowed to use them. As a result you now see not just Russia, but also some OPEC countries and China trying to move away from using dollars to using different currencies such as yuan (see WSJ reporting on that).
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$\begingroup$ Regarding point 1: a) Oil companies in Russia are tightly controlled by Kremlin associates and/or have part state ownership, so their activities are tightly coordinated by the Kremlin and b) Russia has already required that all companies convert 90% of their foreign currency reserves to rubles. So why could this requirement just not continue? $\endgroup$ Mar 26, 2022 at 19:23
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EB3112's comment above is very informative. To summarize the article (s)he posted, possible reasons for the move may be:
- Political theater and not a serious economic proposal.
- To force the west to relent on sanctions on the Russian central bank, to allow forex transactions.
- To shift exchange rate risk to the West. (Me editorializing: the downside risk to a depreciating ruble may be seen as worse than the upside risk of an appreciating ruble.)
- A mechanism of market segmentation (though I don't particularly understand this point.)