How Europe’s commodities traders took a gamble too far on Putin’s regime

IN RUSSIA’S FROZEN north is a megaproject that has long been seen as an answer to President Vladimir Putin’s prayers. By the mid-2020s the Vostok oilfield is expected to supply about 15% of Russia’s crude exports. By that time Rosneft, the Russian oil giant leading the effort, plans to ship Vostok oil via the Northern…

IN RUSSIA’S FROZEN north is a megaproject that has long been seen as an answer to President Vladimir Putin’s prayers. By the mid-2020s the Vostok oilfield is expected to supply about 15% of Russia’s crude exports. Rosneft (Russia’s oil giant) will be shipping Vostok oil via Northern Sea Route, which is a route through the Arctic to Asia. Russia will be able to bypass the West both geopolitically and geographically by using the route. This will allow oil to travel through waters that are beyond the reach of the American navy, as well as out of Western sanctions. Its backers, Trafigura, a Trafigura, and Vitol, are mainly European oil and gas traders. They have been fiercely competing for the position of largest Russian crude buyers for years.

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These firms are part of a group of commodities traders, including Glencore and Gunvor, that often thrive amid geopolitical turmoil. These are open-eyed, pragmatic realists who have in the past made deals with autocrats to get cheap raw materials. In recent years some have doubled down on Russia, doing business with the figures who surround Mr Putin, such as Rosneft’s boss, Igor Sechin, and winning big oil and liquefied natural gas (LNG) contracts (piped gas is the domain of Gazprom, a state monopoly). Both sides were pleased with the arrangement. The arrangement was a win-win for both sides. Russia’s hard currency reserves were bolstered by higher energy prices.

But if they believed Mr Putin’s goal was a modern economy that he would not jeopardise by invading Ukraine, they were wrong. Oil revenues have funded an ever more dictatorial and belligerent regime. After the West moved to strengthen penalties on Russia’s financial system on February 26th, they faced the consequences of their bet. Two days later, a senior executive stated that everything in Russia’s oil business was “frozen”. This included banks, ports and ships, as well as suppliers. No buyers were found for Russian crude oil at auctions. Oil prices rose on international markets, but the prices of crude oil fell relative to international benchmarks. Russian cargoes were made a scourge by fear of sanctions.

Some traders initially said the paralysis would be short-lived. Oil and gas producers were not subject to sanctions to maintain Russian energy flow to the West. According to one executive, the greatest risk was “overzealous bank compliance officials” that caused more damage than the sanctions architects intended. The traders might have been lying to themselves. Two European supermajors, BP , and Shell, pledged their Russian assets to be disposed of at lightning speed. This suggests that social and political pressure was growing to pull out from Russia in the aftermath of the invasion. On March 1st Glencore said it was reassessing its equity stakes in EN+, an Anglo-Russian aluminium producer, and Rosneft. Trafigura stated the following day that it was reviewing its Vostok oil investment after it unconditionally condemned war. Trading houses usually thrive in conflict situations by not losing sight of the details and taking advantage of volatility. This time, not so. Russia’s war against Ukraine may suggest that their gamble on Putin may have been too risky.

In theory, excluding Russian oil and gas from sanctions should enable the trading houses to continue their day-to-day operations. It doesn’t work in practice because energy trading is more about money than molecules. Banks finance cargoes. These require letters of credit that guarantee payment. These transactions involve frequent messaging between buyers and sellers from banks. Until March 1st, when names were released of the seven Russian lenders potentially blocked from the SWIFT interbank-communications system, many energy-related transactions in Russia were halted, traders said, owing to the counterparty risk. There are also fears that sanctions could be reaffirmed as Russia’s aggression against Ukraine increases. Jean-Francois Lambert (a commodities consultant) says that the tit must be in line with the Tat.

The problem is exacerbated by the length of time cargoes of oil and LNG spend at sea. The possibility that sanctions against Russian energy are in place by the time they arrive at port may make matters worse. “The biggest grey area is that no one knows what comes next,” says Daniel Martin, who specialises in shipping rules at HFW, a law firm. The uncertainty is exacerbated by logistical chaos. As fighting intensifies, oil-tanker rates in the Black Sea near Russia and Ukraine have risen.

As well as business risks, the trading firms face reputational ones. This is exacerbated by long-standing li

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