Whereas supplies of Russian pipeline gas--the bulk of Europe’s gas imports before the Ukraine war--are down to a trickle, Europe has been hungrily scooping up Russian LNG Europe has been working hard to wean itself off Russian energy commodities ever 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 ditching Russian gas is proving to be more onerous than Europe would have hoped for. Whereas supplies of Russian pipeline gas--the bulk of Europe’s gas imports before the Ukraine war--are down to a trickle, Europe has been hungrily scooping up Russian LNG. The Wall Street Journal has reported that the bloc’s imports of Russian liquefied natural gas jumped by 41% Y/Y in the year through August.
“Russian LNG has been the dark horse of the sanctions regime,” Maria Shagina, research fellow at the London-based International Institute for Strategic Studies, has told WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current EU sanctions and that buying LNG from Russia and other suppliers has helped keep European energy prices in check.
Source: WSJ
LNG Deluge
Maybe Europe’s LNG imports from Russia can be justified on a purely economic basis.
Natural gas prices in Europe have plunged over the past few weeks with CNBC reporting that a “Wave of LNG tankers is overwhelming Europe in an energy crisis and hitting natural gas prices.” According to MarineTraffic via CNBC, 60 LNG tankers, or ~10% of the LNG vessels in the world, are currently sailing or anchored around Northwest Europe, the Mediterranean, and the Iberian Peninsula. Such vessels are considered floating LNG storage since they cannot unload, something that is impacting the price of natural gas and freight rates.
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It’s a fair bet that a good chunk of those vessels originated from the United States.
Europe’s natural gas demand has skyrocketed as the EU tries to lower its reliance on Russian natural gas following its invasion of Ukraine. Europe has displaced Asia as the top destination for the U.S. LNG, and now receives 65% of total exports. The EU has pledged to reduce its consumption of Russian natural gas by nearly two-thirds before the year’s end while Lithuania, Latvia and Estonia have vowed to eliminate Russian gas imports outright. Unlike pipeline gas, supercooled LNG is much more flexible and can be shipped from far-flung regions, including the U.S. and Qatar.
Europe is not alone here. Shipping data has revealed that China has imported nearly 30% more gas from Russia so far this year, typically at a steep discount.
Thankfully, there’s a clear upside to imports of Russian LNG to Europe: the continent has managed to fill its gas stores well ahead of schedule, with Reuter’s gas meter revealing that 93.8% of the EU gas storage is currently filled.
Financing Putin’s war machine
Still, it’s hard to argue that buying Russian LNG even in relatively small quantities is not playing a part in financing Putin’s war machine. Although Russian LNG has accounted for just 8% of the European Union and U.K.’s gas imports since the start of March, the trade runs counter to the EU’s efforts to deprive Russia of fossil-fuel revenue.
A lot of blame falls on Switzerland, with 80% of Russian raw materials traded via the Central European nation and its nearly 1,000 commodity firms. Switzerland is an important global financial hub with a thriving commodities sector despite the country being far from all the global trade routes and without access to the sea; no former colonial territories and without any significant raw materials of its own. In fact, Oliver Classen, media officer at the Swiss NGO Public Eye, says that "this sector accounts for a much larger part of the GDP in Switzerland than tourism or the machinery industry." According to a 2018 Swiss government report, commodity trading volume reaches almost $1 trillion ($903.8 billion).
Deutsche Welle has reported that 80% of Russian raw materials are traded via Switzerland, according to a report by the Swiss embassy in Moscow. About a third of it are oil and gas while two-thirds are base metals such as zinc, copper and aluminum. In other words, deals signed on Swiss desks are directly facilitating Russian oil and gas to continue flowing freely.
This definitely is a big deal considering that gas and oil exports are the main source of income for Russia, accounting for 30 to 40% of the Russian budget. In 2021, Russian state corporations earned around $180 billion (€163 billion) from oil exports alone.
Again, unfortunately, Switzerland has been handling its commodities trade with kid gloves.
According to DW, raw materials are often traded directly between governments and via commodities exchanges. However, they can also be traded freely, and Swiss companies have specialized in direct sales thanks to an abundance of capital.
In raw materials transactions, Swiss commodity traders have adopted letters of credits or L/Cs as their prefered instruments. A bank will give a loan to a trader and as collateral receive a document making it the owner of the commodity. As soon as the buyer pays the bank, the document and thus ownership of the commodity are transferred to him/her. What this does, in effect, is grant traders more credit without checking their creditworthiness, while the banks get the commodity value as security.
This is a prime example of transit trade, where only the money flows through Switzerland but actual raw materials usually do not touch Swiss soil. Thus, no details about the magnitude of the transaction land on the desk of the Swiss customs authorities leading to highly imprecise information about the flow volumes of raw materials.
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"The whole commodities trade is under-recorded and underregulated. You have to dig around to collect data and not all information is available," Elisabeth Bürgi Bonanomi, a senior lecturer in law and sustainability at Bern University, has told DW.
Obviously, the lack of regulation is very appealing to commodity traders--especially those that deal with raw materials mined in non-democratic countries such as the DRC.
"Unlike the financial market, where there are rules for tackling money laundering and illegal or illegitimate financial flows, and a financial market supervisory authority, there is currently no such thing for commodity trading," financial and legal expert at Public Eye David Mühlemann told the German broadcaster ARD.
But don’t expect things to change any time soon.
Calls for a supervisory body for the commodities sector based on the model of the one for the financial market by the likes of Swiss NGO Public Eye and Swiss Green Party proposal have so far failed to bear fruit. Thomas Mattern from the Swiss People's Party (SVP) has spoken out against such a move, insisting that Switzerland should retain its neutrality, "We do not need even more regulation, and not in the commodities sector either."
By Alex Kimani for Oilprice.com
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And despite its determination to reduce dependence on Russian gas, the EU’s purchases of Russian LNG jumped by 41% Y/Y in the first eight months of 2022 accounting for 8% of its needs. The justification the EU is using is a flimsy one, namely that Russian LNG isn’t covered by EU sanctions.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert