Russia faces major disruptions to oil and commodity flows without SWIFT

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Ukrainian soldiers march at the central train station in Kiev, Ukraine, February 25, 2022. REUTERS/Umit Bektas

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  • West Blocks Some Russian Banks’ Access to SWIFT
  • Traders and analysts see huge export problems
  • Putin continues his military assault on Ukraine
  • Western inflation is already climbing on high energy prices

LONDON, Feb 27 (Reuters) – Russian exports of everything from oil and metals to grain will be severely disrupted by new Western sanctions, dealing a blow to the Russian economy and hurting the West with a spike in prices and inflation, traders and analysts said. .

The United States and its allies decided on Saturday to block certain Russian banks’ access to the international payment system SWIFT in order to further punish Moscow as it continues its military assault on Ukraine. Read more

While some Russian banks – including Gazprombank, which handles large oil and gas payments – have escaped full blocking sanctions, traders and analysts have said the time it takes to switch to new systems will still mean major upheaval for flows.

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The measures, which will include restrictions on the Russian central bank’s international reserves, will be implemented in the coming days, with officials saying some exemptions for energy were being worked out.

“While trying to exempt energy transactions, SWIFT can still significantly disrupt energy trade flows in the short term, at least until buyers switch to alternatives such as Telex or other systems,” said said Amrita Sen, co-founder of Energy Aspects think-Char.

“On other products – I don’t see how trade will continue without the exemptions,” she said.

SWIFT, or Society for Worldwide Interbank Financial Telecommunication, is a secure messaging system that facilitates fast cross-border payments, moving trillions of dollars a year in what has become the primary mechanism for financing international trade.

Russia produces 10% of the world’s oil and supplies 40% of European gas. It is the world’s leading exporter of cereals and fertilizers, the leading producer of palladium and nickel, the third largest exporter of coal and steel and the fifth largest exporter of wood.

The attempt to exclude swaths of the world’s 11th largest economy – and supplier of one-sixth of all commodities – from the trading system is unprecedented in the age of globalization.

It comes as the West grapples with record high energy prices amid runaway inflation. Read more

DESIRED CLARITY

At least 10 oil and commodities traders, who spoke to Reuters on condition of anonymity, said Russian commodity flows to the West would be severely disrupted or completely halted for days or even weeks until ‘until some clarity is established on the exemptions.

“You can still use the internal systems of international banks with branches in Russia, but it will be quite a mess,” said a banker at a major Western bank with exposure to Russia, asking not to be named because of the sensitivity of the issue.

Some traders said that while Russian banks that were still not on the sanctions list, such as Surgutneftegasbank, could probably clear dollars, that didn’t necessarily solve the problem.

“Many companies will treat Russian oil as sanctioned and won’t touch it even if it’s allowed,” said a senior executive at a major Western oil trading desk, also asking not to be named due to the sensitivity of the issue.

“So it looks like peak pain for the next two to three days while people work out which pathways are open,” he added.

Russian flows of energy and raw materials to Asia, particularly to China, are likely to continue.

China and Russia have developed alternatives to SWIFT. Beijing has encouraged the use of its local alternative, known as the CIPS Clearing and Settlement Services System, while Moscow has implemented its own banking messaging system, known as SPFS.

Russian officials have said the country can reroute exports to China in case flows to the West are disrupted. But analysts have said the gas cannot be rerouted at all, while Beijing’s ability to take in more oil is limited.

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Reporting by Dmitry Zhdannikov; Editing by Jan Harvey

Our standards: The Thomson Reuters Trust Principles.

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