As Russian pipeline gas supplies – the bulk of Europe’s pre-war gas imports from Ukraine – dwindle to a trickle, Europe has eagerly scooped up Russian LNG Europe has worked hard to wean itself off Russian energy raw materials since the latter invaded Ukraine. The European Union has banned Russian coal and plans to block most Russian oil imports by the end of 2022 in a bid to deprive Moscow of an important source of revenue to wage its war in Ukraine.
But giving up Russian gas is proving more expensive than Europe would have hoped. As Russian pipeline gas supplies – the bulk of Europe’s pre-war gas imports from Ukraine – dwindle to a trickle, Europe has greedily grappled with Russian LNG. The Wall Street Journal reported that imports from the Russian liquefied natural gas bloc jumped 41% year-on-year in the year to August.
“Russian LNG has been the dark horse of the sanctions regime,Maria Shagina, a researcher at the London-based International Institute for Strategic Studies, told the WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current European sanctions and that the he purchase of LNG from Russia and other suppliers has helped control European energy prices.
Perhaps European LNG imports from Russia can be justified on a purely economic basis.
Natural gas prices in Europe have plunged in recent weeks, with CNBC reporting that a “A wave of LNG tankers engulfs Europe in an energy crisis and hits natural gas prices.“According to MarineTraffic via CNBC, 60 LNG carriers, or about 10% of LNG carriers worldwide, are currently sailing or anchored around northwest Europe, the Mediterranean and the Iberian Peninsula. These vessels are considered storage floating LNG since they cannot unload, which has an impact on the price of natural gas and freight rates.
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It’s a safe bet that a good part of these ships came from the United States.
European demand for natural gas has skyrocketed as the EU tries to reduce its dependence on Russian natural gas following its invasion of Ukraine. Europe has supplanted Asia as the top destination for US LNG, and now receives 65% of total exports. The EU has pledged to cut its consumption of Russian natural gas by almost two-thirds before the end of the year, while Lithuania, Latvia and Estonia have pledged to eliminate imports of Russian gas altogether. Unlike the pipeline, supercooled LNG is much more flexible and can be shipped from remote areas including the United States and Qatar.
Europe is not alone here. Shipping data revealed that China imported nearly 30% more gas from Russia so far this year, usually at a great price.
Fortunately, Russian LNG imports to Europe have a distinct advantage: the continent managed to fill its gas reservoirs well ahead of schedule, with Reuters gas meter revealing that 93.8% of EU gas storage is currently full.
Funding Putin’s War Machine
Yet it is difficult to argue that the purchase of Russian LNG, even in relatively small quantities, does not play a role in financing Putin’s war machine. Although Russian LNG has accounted for just 8% of EU and UK gas imports since early March, this trade runs counter to EU efforts to deprive Russia of fossil fuel revenues .
Switzerland is largely responsible, with 80% of Russian commodities traded through the central European nation and its nearly 1,000 commodity companies. Switzerland is an important global financial hub with a thriving commodities sector despite being far from all global trade routes and landlocked; no former colonial territories and no important raw materials of its own. Indeed, Oliver Classen, media manager at the Swiss NGO Public Eye, says that “This sector represents a much larger share of GDP in Switzerland than tourism or the mechanical industry.” According to a 2018 Swiss government report, the volume of commodity trade reaches nearly $1 trillion ($903.8 billion).
Deutsche Welle reported that 80% of Russian raw materials are traded through Switzerland, according to a report from the Swiss Embassy in Moscow. About a third of them are oil and gas while two thirds are base metals such as zinc, copper and aluminum. In other words, the agreements signed on the Swiss offices directly facilitate Russian oil and gas to continue to flow freely.
This is certainly a big problem given that gas and oil exports are Russia’s main source of income, accounting for 30-40% of the Russian budget. In 2021, Russian state companies earned around $180 billion (€163 billion) from oil exports alone.
Once again, unfortunately, Switzerland has managed its commodity trade with kid gloves.
According to DW, commodities are often traded directly between governments and through commodity exchanges. However, they can also be traded freely, and Swiss companies have specialized in direct selling thanks to an abundance of capital.
In commodity transactions, Swiss commodity traders have adopted letters of credit or L/C as their instruments of choice. A bank will grant a loan to a merchant and will receive as collateral a document making him the owner of the goods. As soon as the buyer pays the bank, the document and therefore the ownership of the goods are transferred to him. What this does, in effect, is extend more credit to merchants without checking their creditworthiness, while banks get the value of the merchandise as collateral.
This is a great example of a transit trade, where only the money passes through Switzerland, but the actual commodities don’t usually touch Swiss soil. Thus, no detail on the magnitude of the transaction lands on the Swiss customs office leading to very inaccurate information on raw material flow volumes.
“Commodity trading as a whole is under-recorded and under-regulated. You have to dig to collect data and not all information is available,Elisabeth Bürgi Bonanomi, lecturer in law and sustainability at the University of Bern, told DW.
Clearly, the lack of regulation is very attractive to commodity traders, especially those dealing with commodities mined in undemocratic countries such as the DRC.
“Unlike the financial market, where there are rules against money laundering and illegal or illegitimate financial flows, and a financial market supervisory authority, there is currently nothing like this for commodity trading. ,“David Mühlemann, financial and legal expert at Public Eye, told German broadcaster ARD.
But don’t expect things to change anytime soon.
Calls for a commodity watchdog modeled after the financial market by the Swiss NGO Public Eye and the Swiss Green Party’s proposal have so far failed to bear fruit. Thomas Mattern of the SVP spoke out against such a decision, insisting that Switzerland maintain its neutrality, “We don’t need even more regulation, and not in the commodities sector either.”
By Alex Kimani for Oilprice.com
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