Russia’s energy companies have switched currency of their contracts to euros from US dollars in a move to shield its transactions from US sanctions.

The country’s largest oil company Rosneft has fully switched the currency of its contracts to euros from US dollars, its Chief Executive Igor Sechin said.

Besides, Russia’s largest producer of liquefied natural gas Novatek also said it had switched to euros in most of its contracts in order to avoid the impact of US sanctions.

Rosneft’s switch to euro is seen as part of Russia’s wider-scale drive to reduce dependence on the dollar, but it is unlikely to quickly boost the euro’s role for Russia given the negative interest rates it carries.

“All our export contracts are already being implemented in euros and the potential for working with the European currency is very high,” Sechin told an economic forum in Italy’s Verona.

“For now, this is a forced measure in order to limit the company from the impact of the US sanctions.”

Reuters reported earlier this month that state-controlled Rosneft set the euro as the default currency for all its new export contracts.

Washington has threatened to impose sanctions on Rosneft over its operations in Venezuela, a move which Rosneft says would be illegal.

Moscow has been hit by a raft of other financial and economic sanctions from Washington over its role in the Ukrainian crisis and alleged meddling in the US elections. Russia denies any wrongdoing.

Last year, Rosneft exported oil and oil products worth 5.7 trillion roubles ($89 billion), according to its reports.

Rosneft’s switch to the euro comes amid attempts by Russian companies to work out ways to carry out international transactions without the US dollar.

Russian President Vladimir Putin has called for de-dollarisation that should help limit exposure to the lasting risk of more US sanctions, while the Russian central bank has lowered the amount of US Treasuries in its reserves in 2018.

The switch to the euro has its downside as, under the current policy of the European Central Bank, financial institutions are required to pay interest for parking excess reserves with the bank, known as negative interest rates. “There is no sense in storing money under negative interest rates,” said Alexander Losev, head of Sputnik Asset Management.

Given the negative rates, Rosneft’s switch to operations in euros is capable of increasing the amount of euro conversion as Rosneft will seek to ditch the currency for those that are of more use for its operations, market experts say.

The euro’s share in Russia’s exports has been on the rise since 2015 but Rosneft’s adoption of it is unlikely to have an impact on the Russian currency market, said a manager at one of Russia’s state-controlled banks.

Other experts agree, saying that Rosneft will still need to convert its euros for tax payments and other needs in Russia.

A senior forex dealer at a state-controlled bank also said the impact of Rosneft’s move on the rouble will be negligible.

The Moscow Exchange said Rosneft’s move will increase the euro share in its overall trade turnover.

Previously, the share of euro trade on the Moscow Exchange has been increasing only marginally. Over the past year, the euro/rouble share in overall FX turnover on Russia’s main bourse stood at 12%, up from 11% in 2017 and 9% in 2016. Meanwhile, the Russian central bank carried out its biggest interest rate cut in two years on Friday, trimming the key rate to 6.50% from 7%, and hinted it could slash the rate again in coming months because of slowing inflation.

The central bank’s move exceeded market expectations . In a Reuters poll earlier this month, most analysts predicted the central bank would trim the rate by 25 basis points instead of 50 basis points.

While delivering the unusually large cut, the central bank left unchanged its forward-looking guidance from last month’s board meeting, where it cut the rate by 25 basis points to 7%.

“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at one of the upcoming Board of Directors’ meetings,” the central bank said in a statement.

The central bank said it cut rates because consumer inflation, a key indicator it strives to keep under control, slowed to 3.8% as of Oct.21, below its 4% target.

“Inflation slowdown is overshooting the forecast,” the central bank said. “Disinflationary risks exceed pro-inflationary risks over the short-term horizon.”

Reuters