Energy traders, banks scramble to assess impact of Russian SWIFT ban

Commodity traders and banks are scrambling to assess the impact of swinging financial sanctions on Russia's key exports but most assume the curbs will continue to allow trading of oil and gas with Moscow, albeit with additional transactional costs.

US, Canada, and European allies announced sanctions on the Central Bank of Russia and the removal of some of the country's biggest financial institutions from the SWIFT global messaging system on Feb. 26, to hit Russia's ability to finance its military operation in Ukraine.

Related Factbox: As SWIFT ban hits banks, spotlight turns on how Russia sells its oil

But the details of the SWIFT restrictions remain unclear as to whether the curbs will carve out certain energy-focused banks or use product definitions in the SWIFT system to permit energy-related transactions. The loss of access to SWIFT does not mean commodity trade payments are unviable, as SWIFT represents an interbank messaging rather than a complete financial transfer instrument, Japan's MUFG bank said.

"At face value, the exclusion of selected Russian banks from the SWIFT would create obstacles but not an absolute stop to commodity trades with Russia, in our view," MUFG bank said in a statement. "Central to this premise will be the reaction function of international banks in continuing banking transfers with non-sanctioned banks, as well as the restriction on the CBR's access to its foreign reserves."

As the market remains nervous about the growing risk of the scope of the new sanctions, the uncertainty has already tempered the appetite for financial commitments to buy Russian commodities.

Before the SWIFT sanction, Urals crude was assessed at its lowest level ever relative to Dated Brent on Feb. 24, but edged 7.5 cents/b higher on Feb. 25, amid a lack of indications during the Platts Market on Close assessment process.

"I would assume that they will have to look into ensuring that SWIFT still works for Russian oil and gas trades. Or at least this is something they will have to consider. Otherwise, it will be difficult to keep oil and gas flows out of the sanctions and flows will be disrupted even without direct sanctions on that sector," an Asian source, with previous experience in Russia oil and gas trades, told S&P Global Platts.

Slower payments

While uncertainty continues over the impact of the SWIFT access on potential disruptions to supplies of Russian oil and other commodities, the costs of sidestepping some Russian banks or other financial institutions will likely drive transactional costs much higher.

"Including SWIFT in the sanctions will make life more difficult -- not impossible though -- for those doing business with Russia. Transaction costs will be much higher and the process itself is complicated, but large commercial companies can find a way around it," said Carole Nakhle, CEO of Crystol Energy.

Traders may also use "sleeving" through a third party if necessary, although that involves a "sleeving" fee and additional financial risk. Russia has also trialed payments in alternative currencies and developed an alternative system to SWIFT.

The absence of SWIFT intermediation in commodity trades could mean slower payments and the rise in account receivables for Russian commodity exporters rather than major disruption to flows, MUFG said.

In recent years, Russia has also accelerated the use of its own SWIFT-like system for Transfer of Financial Messages (SPFS) messaging service, although it only operates domestically, leaving "vulnerability to frictions around cross-border transactions in other currencies," the bank said.

Commodity traders Glencore and Gunvor both declined to comment on the impact of the new sanctions on their transactional costs or trading operations. Rival independent traders Trafigura and Vitol did not immediately respond to requests for comment.

"It will likely make many buyers more hesitant to purchase Russian oil. That will tend to drive down the price of Russian crude oil even more until it ultimately clears outside of its traditional markets in Europe," said Rick Joswick, head of Global Oil Analytics at S&P Global Platts Analytics.