Notes

The currency choice matters since it determines whether the buyer or the seller bears the exchange-rate risk. Such uncertainty may either harm or benefit ex post the bearer of the exchange-rate risk ex ante, which is not always easy to predict – hence the importance of stipulating the currency of payment in trade contracts. Under producer’s currency pricing, the exchange-rate risk is borne by the buyer or importer (i.e. the West in the case of gas considered here), while under local currency pricing, the exchange-rate risk is borne by the seller or exporter (i.e. Russia).

In addition to producer’s currency pricing and local currency pricing, vehicle currency pricing and dollar currency pricing are also widely used

Under the proposed change in the pricing rule, long-run demand for – and hence, upward market pressure on the value of – the Russian rouble in international currency markets would appear ‘guaranteed’ by an underlying long-run demand for Russian gas and oil by the West.

This will be true as long as substitution towards other exporters of these core raw materials for every importing economy is not easy; and the same applies to substitution toward greener technologies that do not use gas or oil, or at least use significantly less. If such substitution options remain limited, the announced change to payment arrangements will presumably have long-run supportive effects on the value of the Russian rouble in international markets.

Moreover, what Putin’s economic advisers may have envisaged is that such a measure, if implemented, is likely to pave the way for the Russian rouble to eventually gain a more prominent position as a reserve or international currency. The ‘exorbitant privilege’ pertaining to the US dollar due to its central and nearly century-old role as the world’s major reserve and payment currency is a well-known concept among economists.