The Impact of Putin’s War on the Value of Russian Gas

Apparently, Russia is insisting that Western European countries pay for Russian gas with rubles rather than euros. Putin wants to force the use of rubles as a tool for circumventing Western sanctions. To date the Western European countries are refusing to use rubles, as they should. In fact, it would be best if these countries simply refused to take Russia’s gas exports, but that is a different issue.

Russian Gas Must be Viewed as Interruptible

What I think is missed in this discussion is the damage that Putin’s war against Ukraine has done to the long-term value of Russian gas. Russian gas exports must be viewed as interruptible as long as Putin remains in power. As a consequence, one of the costs of using Russian gas is maintaining excess capacity to switch to LNG imports or oil fired power plants.

This interruptibility also creates an incentive to use nuclear power, which permanently reduces the demand for Russian gas. Maintaining excess capacity in the form of nuclear power is simply not economically justified. Nuclear facilities are capital intensive. Once constructed, nuclear facilities should be used at capacity to the extent possible.

Russian Gas Is Far Less Valuable Than It Was Two Months Ago

Maintaining excess capacity for LNG and oil fired facilities is expensive. The only way for Russian exporters to induce Western firms to bear this cost will be to reduce the price of Russian gas.

The combined effects of the reduced demand for Russian gas because of increased nuclear power and the added cost of Russian gas because it must be viewed as interruptible, make Russian gas much less valuable. Even after this war is over, and even if sanctions are eventually lifted, Russian gas is simply worth a great deal less than it was worth a couple of months ago. This will remain the case as long as Putin remains in power.

Russia Abrogating Its Contracts Creates an Opportunity for the West

To the extent that Russia’s insistence on payment in rubles constitutes an abrogation of existing contracts, Western countries and firms should seize the opportunity to declare the existing contracts void. After the war is over, they should be able to renegotiate these contracts at much more favorable terms.