How Commodity Traders Help Fund Russia’s War

Despite sweeping sanctions and import bans, Russia’s vast energy sector continues to thrive, with the country managing to export nearly $1 billion worth of fossil fuels a day in the first 100 days since its invasion of Russia. ‘Ukraine. Indeed, rising crude oil and fuel prices allowed Russian oil and gas revenues to soar even after sanctions forced export volumes to fall.

Ultimately, there is no shortage of willing buyers lining up for cheap Russian Urals, or middlemen linking them to Russian energy companies.

Behind the scenes are hiding The giant trading houses of Switzerland Vitol, Glencore, and Gunvor as well as Singapore Trafiguraall of which continued to transport large volumes of Russian crude and products, including diesel, under far-reaching Western sanctions against Russia.

Vitol has pledged to stop buying Russian crude by the end of this year, but that’s still a long way off today. Trafigura promised he would stop buying crude from the Russian state company Rosneft before May 15, but is free to buy shipments of Russian crude from other suppliers. Glencore has promised not to enter into “new” business deals with Russia, but appears willing to maintain previous agreements.

Meanwhile, India and China have made up much of the lost market for Russian fuels.

Source: Visual Capitalist

Increase in imports from Russia

India has never been a big buyer of Russian crude when it had to import 80% of its needs. In a typical year, India imports just 2-5% of its crude from Russia, roughly the same proportion as the US before announcing a 100% ban on Russian energy products . Indeed, India only imported 12 million barrels of Russian crude in 2021, with the majority of its oil coming from Iraq, Saudi Arabia, the United Arab Emirates and Nigeria.

But in May there were reports of a “significant increase” in Russian oil deliveries to India.

According to a Bloomberg report, India spent $5.1 billion on Russian oil, gas and coal in the first three months after the invasion, more than five times the value a year ago. However, China remains the biggest buyer of Russian energy commodities, spending $18.9 billion in the three months to the end of May, nearly double the amount a year earlier.

And it’s all about the money.

According to the International Energy Agency (IEA), Urals crude from Russia has been offered at record prices. Ellen Wald, president of Transversal Consulting, told CNBC that a few commodity trading firms, such as glencore and Vitol–offered discounts of $30 and $25 per barrel, respectively, for the Urals blend. Ural is the main blend exported by Russia.

Experts say simple economics is the main reason the White House push to limit crude oil purchases from Russia has fallen on deaf ears in Delhi.

“Today the motives of the Indian government are economic, not political. India will always seek agreement in its oil import strategy. It is hard not to accept a 20% discount on crude when you import 80-85% of your oil, especially in the wake of the pandemic and slowing global growth,Samir N. Kapadia, head of commerce at government relations consultancy Vogel Group, told CNBC via email.

Yet, many readers will not lose sight that India has enjoyed a warm relationship with Russia over the years, with Russia supplying the Asian nation with up to 60% of its military and defense equipment. Russia has also been a key ally on crucial issues such as India’s dispute with China and Pakistan over the territory of Kashmir.

RussiaSource: Bloomberg

Small business enterprises

The energy trade between India and Russia is booming, so much so that dozens of intermediaries are flocking there, hoping to profit from this growing sector.

However, it is not the Trafiguras, Glencores and Gunvors of this world who do the work; this time around, it’s smaller, lesser-known trading houses striking supply deals with Indian refineries.

Bloomberg reported that many mid-tier commodity and energy trading firms, including Dubai’s Well-mannered and Coral Energy, as well as Singapore Montfort and U.S’ Everest Energy, entered the race to market Russian oil to Indian buyers.

And Indian oil buyers love it.

Bloomberg says public refiners such as Indian oil company. are in favor of the idea of ​​buying from lesser-known traders, while refinery officials say it is easier to work with them due to reduced bureaucracy which slows down negotiations with energy companies such as Rosneft PJSC. Trading houses generally perform the function of intermediaries by bridging the differences between sellers and buyers, and even offer different payment terms to facilitate the movement of funds.

Switzerland’s golden calf

That said, many of the companies helping finance Putin’s war are based in Switzerland, with the lion’s share of Russian commodities traded through Switzerland and its nearly 1,000 commodity companies.

Switzerland is an important global financial hub with a thriving commodities sector, despite being far from all global trade routes and having no access to the sea, no former colonial territories and no significant raw materials of its own.

Oliver Classen, media manager at the Swiss NGO Public Eye, says that “This sector represents a much larger share of GDP in Switzerland than tourism or the mechanical industry”. According to a 2018 Swiss government report, the volume of commodity trade reaches nearly $1 trillion ($903.8 billion).

Related: Saudi Arabia’s Actual Production Capacity: Is 15 Million Barrels Per Day Possible?

Deutsche Welle reported that 80% of Russian raw materials are traded through Switzerland, according to a report from the Swiss Embassy in Moscow. About one-third of these materials are oil and gas, while two-thirds are base metals such as zinc, copper and aluminum. In other words, the agreements signed on the Swiss offices directly facilitate Russian oil and gas to continue to flow freely.

With gas and oil exports As Russia’s main source of income, accounting for 30-40% of the Russian budget, Switzerland’s role cannot be ignored in this war equation. In 2021, Russian state companies earned around $180 billion (€163 billion) from oil exports alone.

Once again, unfortunately, Switzerland has managed its commodity trade with kid gloves.

According to DW, commodities are often traded directly between governments and through commodity exchanges. However, they can also be traded freely, and Swiss companies have specialized in direct selling thanks to an abundance of capital.

In commodity transactions, Swiss commodity traders have adopted letters of credit or L/C as their instruments of choice. A bank will grant a loan to a merchant and, as collateral, will receive a document making it the owner of the goods. As soon as the buyer pays the bank, the document (and ownership of the goods) is transferred to the merchant. The system gives traders more lines of credit without the need to check their creditworthiness, and the bank has the value of the merchandise as collateral.

This is a great example of transit trade, where only money passes through Switzerland, but the actual commodities do not usually touch Swiss soil. Thus, no detail on the magnitude of the transaction lands on the Swiss customs office leading to very inaccurate information on raw material flow volumes.

Commodity trading as a whole is under-recorded and under-regulated. You have to dig to collect data and not all information is available,Elisabeth Bürgi Bonanomi, lecturer in law and sustainability at the University of Bern, told DW.

Clearly, the lack of regulation is very attractive to commodity traders – especially those dealing in commodities mined in undemocratic countries such as the DRC.

“Unlike the financial market, where there are rules against money laundering and illegal or illegitimate financial flows, and a financial market supervisory authority, there is currently nothing like this for commodity trading. ,“David Mühlemann, financial and legal expert at Public Eye, told German broadcaster ARD.

But don’t expect things to change anytime soon.

Calls for a commodity watchdog modeled after the financial market by the Swiss NGO Public Eye and the Swiss Green Party’s proposal have so far failed to bear fruit. Thomas Mattern of the SVP spoke out against such a decision, insisting that Switzerland maintain its neutrality, “We don’t need even more regulation, and not in the commodities sector either.”

By Alex Kimani for Oilprice.com

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