ANALYSIS: Commodity trading, shipping hubs anxious on proposed Russia sanctions

Commodity trading and shipping activity is likely to see initial disruptions from the proposed financial sanctions on Russia even before trade flows deteriorate in the event of a Russian invasion of Ukraine, traders and market participants said.

Concerns have mounted in commodity trading hubs, such as Singapore, since Washington signaled this week that it was preparing "a range of severe economic measures to impose on Russia if it further invades Ukraine" and would "implement sanctions with massive consequences that were not considered in 2014."

Business had to reassess their dealings with Tehran when the US imposed sanctions on Iran. Sanction on Russia could prove more arduous for trading houses and financial institutions, because Russia occupies a larger share of global commodity trading.

Several market participants said risk and compliance teams had started assessing large companies' exposure to Russia, while law firms and consultants were fielding enquiries about legal uncertainties.

The introduction of the Defending Ukraine Sovereignty Act of 2022 in the US senate Jan. 21 that comprises several measures against Russian entities had created a lot of anxiety in the trading community, according to sources.

Oil, gas and resources companies, and trading desks, are fretting about the provisions around sanctions on Russian extractive industries, financial institutions and banks, Russian leaders and businessmen, and the use of global services, such as wire transfers.

US government departments, such as the Treasury, would still have to enforce the bill if the act is enacted, but the exact restrictions may not be clear for weeks.

Trade impact

The uncertainties, at the least, could mean a high level of caution in trading with Russian entities, and the severity would depend on the toughness of sanctions.

A Japanese buyer of Russian LNG said they do not see a direct impact from the proposed sanctions because they do not have direct dealings with Russian state-owned companies, but they were concerned about trade with companies subject to sanctions.

"Even in the event of facing a ban on dollar transactions, our trade should be fine because we trade with these joint ventures," the buyer said, adding that it could be troublesome to pay in euros if the dollar-denominated trade gets affected.

A second Japanese LNG buyer said they may prefer to buy from suppliers, such as Qatar, the US and Australia, with less political risk.

"The current sanctions bill does not [appear to] target Russia's crude oil and LNG exports," Daisuke Harada, a project director at the Japan Oil, Gas and Metals National Corp told S&P Global Platts, voicing his personal views.

The bill designates foreign companies, which extract and produce oil and gas in Russia. The companies could be subject to an asset freeze in the US and face travel restrictions if sanctions are invoked, Harada said.

The sanctions may not have a direct effect on the companies' crude oil and LNG exports, although it would create confusion in the market, according to Harada.

Financial flows

Singapore-based traders said Section 305 of the act that covers the "imposition of sanctions with respect to provision of specialized financial messaging services to sanctioned Russian financial institutions" could disrupt trading activity.

Services, such as wire transfers to Russian financial institutions through intermediary financial institutions, could be terminated under the provision, effectively cutting off global payments to Russian businesses.

There was an extremely low probability that the US would move to delist Russia from the SWIFT clearance system, given the sheer size of those transactions and the number of G-10 economies with high levels of bilateral trade with Russia, especially for energy and energy-intensive goods, Citi Research said Jan. 20, highlighting some wildcards for global commodities in 2022.

"Yet financial measures, including issuing and trading Russian and corporate debt, and restrictions on their access to capital markets, as well as blocking of property owned by a wide list of potentially sanctioned individuals, would be economically punitive," Citi said.

Russia has been taking measures in preparation of further deterioration of its relationship with the West, including amassing a record currency reserve and building its own alternative for the SWIFT system, Citi said. Moscow's retaliation to unprecedented sanctions could include creating more tensions along its western border and weaponizing energy supply to Europe, according to Citi.

US sanctions would likely target Russian financial institutions and dollar transfers will be possible using other financial institutions, Harada said. "Even in the event of facing difficulty to transfer dollar for Russian crude oil and LNG trade, Japanese companies would still be able to settle in the Yen or alternative currency, such as euro."

The US Office of Foreign Assets Control's ability to ramp up sanctions quickly was likely to keep the trading community on its toes for weeks and months to come.