Vladimir Putin has set up a game of chicken between himself and Western buyers of Russian gas.

The Russian president announced on Wednesday last week that, before long, “unfriendly” countries would be required to pay for their Russian gas imports in roubles.

Now he has doubled down on that threat by issuing a presidential decree, effective immediately, in which he has threatened to stop supplying gas to those “unfriendly” countries unless they comply with his terms.

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What does Putin’s decree mean in practice?

Under the terms of his decree, foreign buyers of Russian gas will be required to open bank accounts both in their own currency and in roubles with Gazprombank, Russia’s third-largest lender.

That is meant to signal some kind of compromise because the EU, unlike the UK and the US, has yet to sanction Gazprombank. It is just as likely, though, that it might be an attempt by Mr Putin to drive a wedge between the EU and the US and UK.

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At the moment, the EU appears to be in no mood to dance to Mr Putin’s tune. The French and German finance ministers again insisted today that, as existing contracts entitle their companies to pay Russia in euros, that is what they will carry on doing.

They said today that they were now instead preparing for Russia to cut off gas supplies. Some other EU countries who like Germany are heavily reliant on Russian gas, such as Bulgaria and Poland, have gone further and already said they plan to stop buying from the Kremlin by the end of the year.

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Will Europe bow to Putin’s demands?

Accordingly, at the moment, there is little sign of EU members bowing to Mr Putin’s demands.

Germany has triggered the first part of a three-stage process under which it would have to ration energy in the event of Russia cutting off supplies. So too has Austria which, as it takes 80% of its gas from Russia, is even more heavily dependent on the country than Germany,

The question is whether Mr Putin will go ahead with his threat if the likes of France and Germany do call his bluff.

The Kremlin has already shown its willingness to throttle supplies to the west. One reason why the UK’s household energy price cap rises tomorrow is because, in the year to February 2022, wholesale gas prices more than quadrupled after Russia throttled gas supplies to Western Europe at various points in the year.

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Heightened risk of a recession in several EU countries

Having to ration the use of gas, potentially by introducing a shorter working week, would severely hit western European economies, particularly Germany, where heavy industry accounts for a bigger proportion of GDP than elsewhere.

It heightens the risk of a recession in several EU countries.

But Mr Putin also has much to lose. His war on Ukraine has already brought heavy sanctions on his country from the west that guarantee Russia will suffer a brutal recession this year, in which its economy is expected to contract by at least 8%.

Moscow receives up to €800m from EU customers each day for its gas. Wave goodbye to that, and Mr Putin’s war effort is even more severely hobbled.

So this is a game of chicken in which the stakes for both sides are exceptionally high.

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