[Global Issue+] Why Russia Insists on Receiving Energy Export Payments in Rubles

Aiming to Secure Military Supplies Alongside Defending the Ruble's Value
Serious Corruption in Russian Military... Logistics Shortages a Major Cause

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The Russian government’s declaration to accept its national currency, the ruble, as payment for oil exports continues to cause confusion in the international oil market. Amid serious concerns over foreign currency and national wealth outflows due to Western sanctions on Russia, there are reactions that find it difficult to understand the decision to receive oil payments in the national currency.

Analysts suggest that Russia is employing a desperate measure to defend the ruble’s exchange rate and to secure payment funds for domestic defense contractors producing military supplies. Considering that most military supplies are produced domestically and orders and payments are made in rubles for Russian defense companies, it is believed that rubles are more urgently needed than foreign currency.

Russia Desperate to Gather Rubles...Most Defense Companies Are Domestic

[Image source=EPA Yonhap News]

According to Russian news agency TASS on the 26th (local time), the Russian government has ordered nationwide schools to conduct fundraising campaigns for soldiers participating in the Ukraine war. Accordingly, schools at all levels are required to raise the allocated amount in rubles. It is reported that the Russian government has already invested 3.5 trillion rubles (approximately 41 trillion won) in this war, leading to budget shortages.

The Russian government previously instructed the state-owned gas company Gazprom to receive all export payments in rubles. Although over 97% of Gazprom’s annual export payments were received in dollars or foreign currencies, a decision was made to receive all payments in rubles. This is also known as a strategy to compensate for the shortage of rubles. With inflation already severe and the Russian central bank having raised the benchmark interest rate to 20%, issuing more rubles is not an option, so this is interpreted as a strategy to gather rubles by any means.

The reason Russia is trying so hard to gather rubles is presumed to be due to the unique structure of its defense industry. Several large defense companies in Russia produce most military supplies domestically and supply them to the government, using rubles for payment.

According to the British BBC, Russia produces most personal firearms and military supplies domestically, except for some stealth fighters and advanced weapons that use cutting-edge semiconductors. More than 95% of all small arms, including those from Russia’s largest arms manufacturer Kalashnikov, are produced only in Russia.

Since the Soviet era, Russia has emphasized self-sufficiency in defense industry in its confrontation with the West, resulting in this closed system. Therefore, it is estimated that a massive amount of rubles is needed rather than foreign currency to support military supplies to be sent to the front lines immediately. Through this, Russia aims to solve the logistics shortage problem, which is known as a major factor in the current difficulties faced by the Russian military.

Chronic Corruption in Russian Military...Logistics Shortage Difficult to Resolve

[Image source=Yonhap News]

Despite these self-help measures, the logistics shortage problem in the Russian military is reported to be very serious. Reports indicate not only shortages of weapons and ammunition but also a lack of cold-weather gear, causing many soldiers to suffer from frostbite. This is presumed to be due to the severe corruption pervasive within the Russian military.

According to the U.S. political media outlet Politico, recent data from Transparency International (TI) shows that the transparency of military procurement, weapons acquisition, and defense contract execution in the Russian military scored only 36 out of 100, receiving the lowest grade of F. It is judged that corruption has become routine, preventing procured supplies from being properly delivered to the front lines.

Analyses also suggest that corruption played a significant role in the deaths of six generals in this war. According to CNN, since the start of the conflict, 15 generals, including six at the general officer level, have died. It is reported that most of these deaths occurred because Ukrainian spies were able to identify the movements of key commanders through the corrupt Russian military leadership and carry out assassinations.

The main cause of such severe corruption is presumed to be the low salaries of soldiers. The average monthly salary of ordinary Russian soldiers is about $480 (approximately 580,000 won), which is only about one-third of the Ukrainian military’s salary. It is also known that not only commanders but also ordinary soldiers frequently sell weapons or supplies they receive at their own discretion.