The exclusion of selected Russian banks from the SWIFT would create obstacles but not an absolute stop to commodity trades with Russia, said MUFG Bank, a member of global financial group MUFG, in its latest Commodities Flash.

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 Central Bank of Russia’s (CBR) access to its foreign reserves.

The communication of the latest set of sanctions on Russia is that they would preserve SWIFT access for some Russian banks, permitting for a redirection of energy and commodity export transactions.

Moreover, there could likely be a carveout for energy and food transactions, albeit with the risk that disconnecting banks from SWIFT may nullify prior issued energy trade work-outs.

Critically, not accessing SWIFT does not signal commodity trade payments are unviable as SWIFT represents an interbank messaging rather than a complete financial transfer instrument. The absence of SWIFT intermediation would for instance leave for slower payments and the rise in account receivables for Russian commodity exporters (instead of an absolute stop in financial transfers).

Russia has in parallel accelerated the use of its own SWIFT-like System for Transfer of Financial Messages (SPFS) messaging service, however it only operates domestically, leaving vulnerability to frictions around cross-border transactions in other currencies.

Historically, when SWIFT expelled Iranian banks in 2012, they were still able to conduct transactions through the European Central Bank’s Target II system. It was in turn the sanctioning of purchases of Iranian crude and condensates that reduced its energy exports in 2018. No such sanctions are reportedly being contemplated in the current Russia-Ukraine crisis.

However, even agricultural trade with Iran was initially disrupted in 2012 when Iran was removed from SWIFT, as international banks were reluctant to process payments. Circumventing commodity export disruptions from Russia now would thus require authorities to ensure banks are confident enough to continue with commodity trades.

All told, the core potential impact of removing some Russian banks’ access from SWIFT would be if the resultant discords creates a decline in Russian exports over the coming weeks.

Beyond the SWIFT restrictions, limiting access to foreign reserves for the CBR could will have a larger influence, given it could restrict trade to be conducted through the Russian Rouble (RUB) or gold. As 65% of CBR’s foreign reserves are held at correspondent banks abroad, sanctions that would prevent their access could force an acute contraction in Russia’s foreign trade to a level that matches its current account debit, as the accumulation G10 FX currencies becomes unappealing, or would likely require exporters to sell other currencies, notably, in the Chinese Yuan (CNY).

While commodity exports would be prioritised as a source of foreign credits, such a measure could lead to possible energy export suspensions from Russia, though at the injudicious cost of having to shut-in gas and oil production given the lack of export outlook.

Overall, the blizzard of new sanctions, particularly on SWIFT – however unprecedented – will not put an absolute stop to Russian commodity exports. Though, the market is clearly nervous and there is a growing risk of sanctions reducing the appetite of many in the industry to commit to Russian commodities – reflective for instance, in the Russian crude Urals differential falling to the lowest level in 11 years last week as buyers hit pause on Russian crude (skittish over the sanctions).

In addition, the risk appetite from banks to finance the trade in Russian commodities appears to be significantly reduced, with a number of banks already suspending financing for this business. This action is not isolated to US and European banks.

Tellingly, there were reports at the end of last week that some state-owned Chinese banks have also restricted financing Russian commodities. Clearly, given the ongoing uncertainty, commodity prices are likely to behave in a volatile manner at these elevated levels.

At the minimum, international financial institutions will be exceedingly cautious in handling Russian commodity exports so long as such severe sanctions remain in place. This in-turn will limit Russian commodity producers’ access to payments and funding, which could in-turn inadvertently stymie the export of Russian commodities. – TradeArabia News Service