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Alex Kimani

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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Russia’s SWIFT Ban Could Send Shockwaves Through Oil And Commodity Markets

  • Russia’s decision to invade Ukraine was originally met with a relatively tepid response from world leaders, but now sanctions are intensifying key Russian banks are banned from SWIFT.
  • The increasingly aggressive stance being taken by Western leaders against Russia’s invasion of Ukraine suggests Russia’s energy exports could yet be sanctioned.
  • It isn’t only oil and gas that will be affected by the SWIFT ban, with supply disruptions likely to occur for aluminum, copper, nickel, and cobalt among others.

After months of frantic diplomacy, the West's worst fears finally came true on Thursday after Russian forces launched their long-feared attack on Ukraine. Russian forces have repeatedly fired missiles at military control centers in Kyiv and other regions, though they have failed to decisively take any key city amid stiff resistance from Ukrainian forces. On the same day, Western leaders slapped a raft of fresh sanctions on Russia, including the exclusion of Russia's largest financial institutions from global financial systems; imposing an asset freeze against all major Russian banks, canceling all export permits with Russia, and prohibiting all major Russian companies from raising financing within their territories, among other measures.

President Biden talked about blocking select Russian banks from the global financial systems and also announced export restrictions that would "include restrictions on Semiconductors (NASDAQ:SOXX), Telecommunication (NYSEARCA:XTL), encryption security, lasers, sensors, navigation, Avionics (BATS:ITA), and maritime technology."

Prime Minister Johnson announced plans to "exclude Russian banks from the UK financial system." However, no plans were made to force UK businesses to divest from Russian holdings. Despite that, BP (NYSE:BP) announced that it would sell its ~20 percent share in Rosneft (OTCPK:RNFTF). BP saw its shares fall by more than 5 percent on the news.

Understandably, Ukraine feels that the West has not been doing nearly enough to deter Russia. Ukraine's foreign Minister Dmytro Kuleba has been calling on the West to block Russia from the SWIFT payments system, a move opposed by Germany due to its heavy reliance on Russian gas supplies. SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a secure messaging system that facilitates rapid cross-border payments, making international trade flow smoothly.

Now, Ukraine may finally get its wish: Western allies, including Germany, have finally agreed to unleash the ultimate 'financial nuclear weapon' on Russia by excluding key Russian banks from the SWIFT payment system.

On Saturday, a spokesperson for the German told Reuters that Germany and its Western allies have agreed to cut Russia out of the SWIFT global payment system in what would mark a third sanctions package aimed at halting Russia's invasion of Ukraine. The sanctions agreed with the United States, France, Canada, Italy, Great Britain, and the European Commission also include limiting the ability of Russia's central bank to support the rouble.

And now, some analysts are saying that a SWIFT ban on Russian banks is likely to lift oil prices well above $100 a barrel.

Amrita Sen, a consultant at Energy Aspects, has told Reuters that Brent crude prices will definitely go back above $100 and probably return to the highs of $105 if the ban takes effect. "But I wouldn't rule out a quick move to $110 a barrel," she added.

And, she seems to be right on the money.

Late last week, crude oil prices began paring their war-driven rally as sanctions on Russia have so far avoided impacting the country's oil and gas exports, and have also not blocked Russia's access to the SWIFT financial system. However, the oil price rally appears to be back in full force, with Brent up 5.06% to trade at $102.89 per barrel in Monday's intraday trading while WTI climbed 5.24% to change hands at $96.39 per barrel.

Oil prices last jumped above $100 a barrel when Russian forces invaded Ukraine on Feb. 24, with Brent breaching $105 a barrel for the first time since mid-2014.

Commodity Rally

But oil is not the only commodity whose supply would be severely disrupted if Russian banks are banned from SWIFT.

At least 10 oil and commodities traders have told Reuters that flows of Russian commodities to the West will be severely disrupted or halted for days, if not weeks, until clarity is established on exemptions.

Russia produces 10% of the world's oil and 40% of European natural gas but is also a major exporter of aluminum, copper, nickel, and cobalt, among other key commodities, all of which could see price spikes either due to direct bans or through Russia's exclusion from SWIFT.

Related: Goldman: Only Demand Destruction Can Keep Oil Prices From Rising

Previously, European leaders were rumored to be mulling sanctions on the Russian energy sector; however, the European Commission President has cleared the air, announcing that Europe would instead "make it impossible for Russia to upgrade its oil refineries." Ironically, Europe has been buying more gas from Gazprom (OTCPK:OGZPY)  than before Russia's invasion of Ukraine.  

In a previous article, we reported that the markets remain deeply concerned about the risk of a full energy supply disruption to the EU--which receives roughly 40% of its gas via Russian pipelines, several of which run through Ukraine. According to David Frum of The Atlantic and author of Trumpocalypse: Restoring American Democracy (2020), Russia's Ukraine invasion has been greatly aided by high energy prices, especially natural gas, in the ongoing energy boom. Frum notes that the price of Russian gas on spot markets surpassed $10 per million metric BTUs in June 2021 before tripling to the current $30 per million metric BTUs. The sharp rise in energy prices has helped Russia's foreign exchange reserves hit $630 billion, or 42% of the country's $1.5 trillion GDP.

With those massive financial resources, Russia could inflict real havoc on world energy markets if it chooses to, with the natural gas markets likely to be the hardest hit because gas is harder to substitute. In theory, Russian pipeline gas could be partly replaced by liquid natural gas from the United States, Qatar, or other suppliers; unfortunately, ramping up LNG production and shipment is very difficult to do in a hurry.

However, Russia has so far not shown any intentions of stopping oil and gas exports to Europe and the rest of the world as part of the tit-for-tat measures Putin has warned about, preferring to ratchet up rhetoric about nuclear warfare. President Vladimir Putin has ordered Russian nuclear deterrent forces put on high alert in a dramatic escalation of tensions with the West over Moscow's invasion of Ukraine.

By Alex Kimani for Oilprice.com

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Leave a comment
  • RAMI S on March 01 2022 said:
  • Occams Williamof on March 01 2022 said:
    All except gold and silver. When alchemists were able to finally 'create' gold and silver - from paper........
  • Bob Dobbs on March 01 2022 said:
    Looking forward, the US will have to attenuate sanctions against Russia as a contingency for China's invasion of Taiwan. If the US isolated Russia, then had to isolate China, it will only isolate itself.

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