by Dmitry Zhdannikov
LONDON, Feb 27 (Reuters) – From oil to metals to grain, Russian commodity exports will be hit hard by new Western sanctions, which will hurt economic activity in Russia but also risk fueling inflation to the west, explain traders and analysts.
The United States, the European Union, the United Kingdom and Japan, among others, announced on Saturday that they were going to cut off the access of some Russian banks to the international payment system SWIFT as part of the sanctions linked to the invasion of Ukraine by the army of Moscow.
These sanctions, which also plan to deprive the Russian central bank of part of its large international currency reserves, must be implemented in the next few days, but certain exemptions could apply to energy.
“Even if we try to exempt energy transactions, SWIFT can still seriously disrupt energy trade flows in the short term, at least while buyers switch to alternative systems, such as Telex or others”, explains Amrita Sen from Energy Aspects.
“For other commodities, I don’t see how transactions can continue without exemptions,” she adds.
SWIFT, the acronym for “Society for Worldwide Interbank Financial Telecommunication”, is a secure messaging system that facilitates and accelerates cross-border payments in order to streamline international exchanges.
It is used for the transfer of several trillions of dollars each year and has become the main cog in the financing of international trade.
Russia produces 10% of the oil consumed in the world and supplies 40% of the gas used in Europe. It is also the world’s leading exporter of cereals and fertilizers, the leading producer of nickel and palladium, the third largest exporter of coal and steel and the fifth largest exporter of wood.
The exclusion from the SWIFT system of the world’s eleventh largest economy, which supplies one sixth of all raw materials on the planet, is therefore unprecedented since the start of the globalization of trade.
CHINA, A LIMITED ALTERNATIVE FOR MOSCOW
At least ten oil and commodities traders, who spoke to Reuters on condition of anonymity, said Russian commodity flows to the West would be severely disrupted or even completely halted for days, if not weeks , the time to clarify the possible exemptions.
“We can still use certain internal systems of international banks with a presence in Russia, but it will surely be a mess,” warns a banker from a large Western financial group exposed to the Russian market, who also requested anonymity in arguing about the sensitive nature of the file.
Some traders explain that Russian banks, such as Surgutneftegasbank, are currently not on the sanctions list and could therefore continue to process dollar transactions, but add that it will take time for these changes to take effect.
“It is clear that a lot of companies are going to consider Russian oil to be sanctioned and that they will not touch it, even if it is authorized,” said a senior official of a major Western oil trader who has requested anonymity.
“So it looks like the pain will be at its peak for the next two or three days as people take stock of what circuits remain open,” he added.
Flows of Russian energy and raw materials to Asia, and particularly China, should on the other hand continue.
China and Russia have indeed developed alternative circuits to SWIFT, Beijing encouraging the use of its own system, CIPS (cross-border interbank payment system) and Moscow having its own interbank messaging service, SPFS.
Russian officials have said their country could reroute its exports to China in the event that flows to Western countries are disrupted. But analysts say such a diversion might not work for gas and that Beijing’s ability to take delivery of additional volumes of oil is limited. (Report Dmitry Zhdannikov, French version Marc Angrand)