Russia faces major disruptions to oil and goods movement without SWIFT

Ukrainian soldiers walk at the main railway station in Kiev, Ukraine, February 25, 2022. REUTERS/Umit Bektas

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  • West blocks access of certain Russian banks to SWIFT
  • Traders and analysts see enormous export problems
  • Putin continues military attack on Ukraine
  • Western inflation is already coming to a head due to high energy prices

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

The United States and its allies blocked certain Russian banks’ access to the SWIFT international payments system on Saturday, as a further punishment for Moscow as it continues its military attack on Ukraine. Continue reading

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

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The measures, which include restrictions on the Central Bank of Russia’s international reserves, will be implemented in the coming days, with officials saying some exemptions for energy are being worked out.

“While SWIFT seeks to liberate energy transactions, it can still cause significant disruption to energy trade flows in the short term, at least until buyers migrate to alternatives such as telex or other systems,” said Amrita Sen, co-founder of the Energy Aspects think-tank.

“For other commodities – I can’t see how trade goes on without the exemptions,” she said.

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

Russia produces 10% of global oil and supplies 40% of Europe’s gas. It is the world’s largest grain and fertilizer exporter, the leading producer of palladium and nickel, the third largest exporter of coal and steel, and the fifth largest exporter of timber.

The attempt to exclude entire parts of the world’s eleventh largest economy – and supplier of one sixth of all raw materials – from the trading system has no precedent in the globalized age.

It comes as the West grapples with record high energy prices amid runaway inflation. Continue reading

CLARITY WANTED

At least 10 oil and commodity traders, who spoke to Reuters on condition of anonymity, said the flow of Russian commodities to the West will be severely disrupted or halted entirely for days, if not weeks, pending clarity on exceptions.

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

Some traders said while Russian banks still off the sanctions list, such as Surgutneftegasbank, could likely release dollars, the issue is not necessarily resolved.

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

“So it feels like maximum pain for the next two to three days while people figure out what avenues are open,” he added.

Russian energy and commodity flows to Asia, particularly China, are likely to continue.

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

Russian officials said the country could redirect its exports to China if flows to the west were halted. But analysts have said gas cannot be diverted at all, while Beijing’s capacity to take in more oil is limited.

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Reporting by Dmitry Zhdannikov; Edited by Jan Harvey

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