War on Ukraine Russian oil trade in Switzerland: a fake farewell?
Agathe Duparc, Robert Bachmann and Manuel Abebe, 20. March 2023
A long list of ships appears on the screen. Some are tagged with ‘critical status’ in red letters and catch the eye. In February 2023, in the trading room of a Geneva-based commodity trader, operators are required to locate so-called ‘nasty vessels’, regardless of what they do. In most cases, these are oil tankers that have changed flag to conceal their Russian origin or that have been loaded in Russian ports over recent months and could be linked to Russian individuals or companies subject to sanctions. An example of this is the Minerva Nounou, which sails under a Maltese flag. Since Russia’s invasion of Ukraine on 24 February 2022, the 17-year-old tanker has docked in Russian ports ten times, including at Ust-Luga and Primorsk.
Another software makes it possible to complete the picture by identifying suspicious events, the number of which has skyrocketed. These include for example a ship that disconnects its transponder (the Automatic Identification System AIS, which allows to track its location) in open seas or that stops next to another in international waters, undoubtedly to unload its cargo to it. This technique of ship-to-ship transfer (STS) is one of the simplest means to hide the origin of a product under sanctions.
‘Tracking ships is not a new practice. Before it was more a case of understanding what competitors were doing or learning about the supply chain. Today, it primarily serves to avoid making a purchase within a chain involving a ship under sanctions’, explains someone who spends his days with his eyes glued to the screen. However, ‘the task is becoming increasingly complicated’, they add, because tankers regularly change name and flag. Moscow is building a ‘‘ghost’ fleet by secretly purchasing old oil tankers whose links to Russia are very hard to identify.
‘Welcome to a global oil market that is becoming increasingly fragmented and opaque with, on the one hand, those who respect the sanctions and, on the other, those who follow a different path. It’s a very fine line between the two!’ summarises a trader. For over a year, in Geneva, the whole industry is frenetically devoted to something that resembles a video game. And they closely watch the latest sanctions handed down by the West, with the help of an army of lawyers and legal experts who dissect the texts to the nth degree.
Switzerland is at the forefront of the upheaval on energy markets. Before the war, 50-60% of Russian barrels destined for export were sold by Swiss traders, mostly based in Geneva. Geneva banks distributed billions in credit lines, practically with their eyes closed. The largest traders – Trafigura, Vitol and Glencore – were crucial partners of Vladimir Putin’s increasingly openly authoritarian regime. This made Switzerland, the small ‘neutral’ country, the main dealer to a Europe addicted to Russian oil. According to the US Energy Information Agency, in 2021 the Old Continent imported every day 2.3 million barrels of crude and petroleum products (primarily diesel) of a total of 4.7 million barrels exported by Russia.
A ‘slow burn’ boycott
This long honeymoon came to an end on 3 June 2022, when a future European embargo on Russian oil was announced in the wake of the embargo adopted by the United States in March. The sanctions were picked up and introduced a week later by Switzerland. In the city of Geneva, where the main traders are based, the sector was thrown into disarray. A trader recalls that ‘there was real panic. Everyone was trying to understand how the market and flows would be reorganised and what the new opportunities would be.’ All the more so as Brussels opted for a ‘slow burn’ embargo with a staged entry into force – it applied to Russian crude from 5 December 2022 and to refined products from 5 February 2023. The time lapse led traders to speculate as to what was and was not allowed, and to adapt.
The challenge is significant because foreign sales of crude oil and refined petroleum products represent over 35% of all Russian exports and contributes over a third of Russia’s budget. European countries took out the big guns to deprive Putin’s war machine of its main sources of revenues. The sixth package of sanctions seeks to ban the import of seaborne Russian black gold to their countries, but also to ban European companies from transporting, insuring or financing Russian shipments, including when the cargo is destined for a third country that has not adopted the sanctions. The package seeks to significantly disrupt the exports of the 3rd largest producer of oil in the world. Before the war in Ukraine, 60% of Russian crude was transported by European ships, mostly Greek. In 75% of cases, they were insured by British or Norwegian companies.
The traders do not know which way to turn, because at the same time the United States is pushing for the implementation of an unprecedented mechanism – a ‘price cap’. Concerned that the European approach will simply drive up energy prices, the US Treasury wants to oblige Moscow to sell its oil below market rates, at a price set by the West. Its Secretary, Janet Yellen, has bet that the Russians are so dependent on European shipowners and insurers to transport their oil that they will cave in. The idea is that operators will be able to continue to provide services as long as the barrels have been purchased at a price below the price cap and are delivered to countries that do not apply the sanctions. An analyst sums up the approach: ‘The aim is to enable the rest of the world to continue to receive a supply of Russian oil without enriching Russia’.
Business deals galore
The price cap was only ultimately implemented by the West in December 2022. In the interim, Russian oil was still flowing. At the end of August, the country was producing 10 million barrels per day. ‘During this pre-embargo period, all kinds of guys were walking around Geneva proposing more or less dodgy and more or less legal deals’, recalls a trader who spent a long time working on the Russian market. ‘The margins could be phenomenal – up to 25%’, added the source.
A barrel of Brent (extracted in the North Sea and which acts as a reference price) reached USD 120 in March, while Urals (the most common Russian grade), which struggled to find buyers, was offered with huge discounts by Russia. It was selling at USD 30 and 40 less than the price of Brent, compared to USD 2 to 3 less before the war. A full reorganisation of the supply chain was underway. China, India and Turkey, all of whom Putin calls ‘friendly countries’, have seen their imports skyrocket. They were rubbing their hands in glee at receiving such cheap oil that they could refine and resell to the Old Continent at a high price. As the import of Russian barrels to Europe was not yet banned, independent traders receive messages on their smartphones with alluring offers that they were not afraid to take up.
A Maltese trader based in Geneva explains how he was contacted in October by a branch of the Russian state giant Rosneft, which has been under US and European sanctions since March 2022. The proposal – which we were able to see – was to purchase 100,000 tonnes of diesel at a significant discount at the port of Novorossiysk (the main oil port in southern Russia) and make a payment for the product to a bank based in Oman, using the account of a shell company registered in the UK. Our interlocutor explains that ‘business is continuing, but the main difficulty is to find channels through which to pay the Russians. Very few banks want to do so.’ Numerous schemes are available, like clearing operations that have proven themselves extensively. ‘It’s enough to use false invoices to pay a Russian company that is not sanctioned in Europe. That company will then transfer the funds to the relevant party in Russia, in this case to Rosneft, taking a percentage on the way’, he clarifies.
Large banks stop dead in their tracks
While the wheeler-dealers sprang to life, the most prominent players had to close the Russian chapter as quickly as possible to avoid ruining their reputations. The trading hub’s main banks opted for extreme caution, ‘they are still traumatised by the memory of the huge USD 9 billion fine imposed [in 2014] by the United States on BNP Paribas for the violation of the sanctions [against Sudan, Iran and Cuba]’ explains a former banker. Credit Suisse, already facing several scandals, announced that it will no longer finance Russian oil. Other establishments like ING and Rabobank who themselves also cut off lines of credit accepted at most to liberate as much cash as possible to ‘facilitate the remaining flows’.
Placed under sanctions in late May 2022 and barred from accessing the international SWIFT payment system, the Swiss branch of Russian giant Sberbank disappeared from the landscape in autumn. Sberbank had awarded USD 18 billion in financing to traders in 2021. The establishment was bought by the Geneva-based businessman Abdallah Chatila and renamed TradeXbank.
Trading giants backpedal
Since the invasion of Ukraine, the trading giants Trafigura, Vitol, Glencore and Gunvor have launched themselves into a race against time. Anything goes when it comes to showing contrition: statements condemning the violence of the war, promises to no longer touch Russian oil – even before the sanctions enter into force – and promises to renounce investments in Russia.
Nevertheless, two months before the war, relations with Russia were still in fine fettle. In 2022, the three largest traders had won tender processes to become the main buyers of petroleum products (naphtha and diesel) from Rosneft at the country’s largest ports. Our investigation The Kremlin’s ‘crude’ friendships outlined how, for decades, these traders – favoured by the Kremlin – provided pre-financing (loans) to the Russian oil sector in exchange for phenomenal quantities of barrels or took stakes in various projects or companies. Before the war, they alone traded a million barrels of Russian oil a day. It is estimated that they also contributed to making Geneva Russia’s favoured rear base. From 2011, the main state oil company in Russia, Rosneft, set up its trading branch in Switzerland, spinning its web surrounded by partner companies with opaque shareholders and advised by Swiss lawyers who catered for their every need.
In March 2022, the Russian giant, led by Igor Sechin who is known as the Kremlin’s Darth Vader and was previously a frequent visitor to Geneva, was put under US and European sanctions. Sanctions were also imposed on Gazprom Neft and Transneft, which holds the monopoly on operating pipelines. Providing financing or services to these companies was banned as of 15 May 2022.
Stakes divested and sleights of hand
Trafigura announced that it no longer wanted to buy a single drop of oil from Rosneft as of that date. The trader was also obliged to divest its 10% stake in Vostok Oil, Rosneft’s mega project that planned to develop numerous oil and gas deposits in the Taymyr Peninsula, a region of the Arctic already heavily impacted by climate change. The stake was bought for an unknown sum in July 2022 by a small company called Nord Axis Limited. It was registered in Hong Kong a week before the invasion of Ukraine. As the Financial Times revealed at the time, no one knows who is hiding behind this newcomer among the buyers of Russian oil. Questioned by Public Eye, Trafigura responded that Nord Axis had been subject to ‘rigorous checks’, that it had ‘no link to Trafigura’ and that ‘its owner is not Russian’. Nowadays, Nord Axis is a major buyer of Russian oil.
In January 2023, the trader also sold its indirect 24.5% stake in the Indian group Nayara Energy. Nayara Energy owns a refinery that is currently operating at full pelt, receiving on a ‘just-in-time’ basis oil sold by Moscow. Rosneft still owns a 49% stake.
Six months before the Russian invasion, Vitol had reached a long-term agreement with Rosneft that provided for the delivery of 9 million tonnes of Russian crude per year. The deal has been broken off. In December 2022, the trading giant divested its 5% stake in Vostok Oil, held jointly with the small trader Mercantile & Maritime, also present in Geneva. The purchaser was Fossil Trading FZCO, a company registered in Dubai in April 2022. This company owns 100% of the shares of the Geneva-based company Energopole, according to its website. In early 2022, Energopole was still a branch of Rosneft.
As can be seen in its 2022 preliminary financial report, Glencore wrote its 0.57% stake in Rosneft off. As for Gunvor, it took all the trouble in the world to separate itself from its 26% stake in the oil terminal at the Ust-Luga port. When contacted, the trader responded that the divestiture had ‘not been so far practical or legally feasible’.
Shipments for the road
However, before officially burning their bridges with Russia, Swiss traders continued for several months to buy Russian shipments – something that was morally reprehensible but not prohibited during the pre-embargo period. As we demonstrated in February and March 2022, Trafigura and Vitol were the largest buyers of Russian crude, just behind Litasco, the trading division of the private oil company Lukoil, based in Geneva. They blame futures contracts that had been signed before 24 February for this.
Public Eye had access to detailed information that shows how the situation at the port of Kozmino evolved from March to October 2022. This oil terminal, located near Vladivostok in the far east of Russia, is where ‘ESPO Blend crude’ is exported to Asia. ESPO is the blend of crude oil that is transported via the pipeline that runs from eastern Siberia to the Pacific Ocean, estimated at 35 million tons per year.
In this ‘line up’ (the jargon used for the ranking of buyers), one can see that from March to May 2022, Trafigura and Vitol obtained 645,986 and 610,000 tonnes of crude oil respectively, or some six shipments each. In May, Reuters also reported on what appeared to be another Vitol cargo, also loaded in Kozmino and sold to the United Arab Emirates. Gunvor, for its part, obtained two shipments of crude, one in March and another in July.
When contacted, Vitol confirmed that ‘during a short period after the invasion’ it had fulfilled ‘legal obligations with Russian producers until it was able to address the contractual issues.’ Gunvor did not wish to comment and Trafigura said that it had ‘terminated all long-term offtake contracts with state-owned Russian producers in advance of European sanctions [editor’s note: in relation to Russian state oil companies] coming into effect in May 2022.’
Intermediaries and ‘pop-ups’ have a ball
Since August 2022, the big names of the trading business have disappeared from the Kozmino list. Russian and Chinese state companies have taken up the baton, supported by a slew of small companies with unknown shareholders. There are ten or so names that emerge from among these new players – Sunrise, Everest, Bellatrix, Petkim, Covart Energy, Serene Resources, Livna Shipping or Tejarinaft, set up in Dubai last year. The latter essentially receives volumes from Rosneft and is suspected of serving as a façade for the Russian state giant. These structures have been nicknamed ‘pop-ups’ because they crop up without there being any means of establishing who their shareholders are.
Many in the sector are trying to unlock their mysteries. ‘Who do these small companies sell on to? Everyone is focused on the first sales, but no one is looking at what happens next. It’s very challenging to find information on that. You could speculate that these are ‘sock puppets’ and that a larger company is hidden behind the one making the first sale.’ considers an analyst based in Switzerland. She comments that ‘what is surprising is that having come out of nothing, it only took several months for some of them to learn how to channel shipments and get them insured, as well as to find funding. They must be getting help from companies that are larger than themselves.’
These entities now operate primarily out of Dubai (see box below) or Hong Kong, two jurisdictions that have not adopted the sanctions against Russia. Since the start of the war in Ukraine, they have seen companies that want to continue doing business with Russia without being hassled flock to them.
However, this list includes two companies that are still registered in Switzerland. Starting with Paramount Energy & Commodities, which features at the top of the ranking in Kozmino.
A banquet of crude for the discreet trader from Geneva and a doppelganger in Dubai
From March to October 2022, the small Geneva-based company obtained nearly 6.2 million tonnes of Russian crude, or an average of seven shipments per month (on the basis of Aframax tankers, with an average capacity of 100,000 tonnes), resold in China, according to our information. From November, the pace accelerated. According to complementary figures up to late February 2023, Paramount, which gets its supplies from small Russian producers (often via its partner Concept Oil Services), obtained 9-10 shipments a month, even after the sanctions on crude oil entered into force on 5 December 2022. During this period, Paramount chartered numerous tankers including – interestingly – the Yasa Golden Bosphorus, an Aframax that was administered by Mansel, Vitol’s shipping branch, until 23 April 2022.
The total makes your head spin – 99 shipments of crude carried by Paramount to Kozmino since the Russian invasion, equalling over 9.9 million tonnes or 72 million barrels.
In June 2022 however, things changed. As Global Witness and the Financial Times just revealed, Paramount Enery’s Kozmino business was taken up by an entity based in Dubai – Paramount Energy and Commodities DMCC. This company now handles the Russian crude oil trade. On paper, the two entities are independent of each other. Intriguingly, a Swiss citizen is a director of the company.
Public Eye investigated the discreet rise of Paramount. Two months after the war broke out, it was already in 4th place among buyers of Russian crude behind the giants Litasco, Trafigura and Vitol. We wrote a portrait of this company that had been well introduced to Russia thanks to its past links with the oligarch Gennady Timchenko, founder of Gunvor and close associate of Putin. He has long been the darling of the trading circles in Geneva. Paramount seems to also benefit from favourable treatment from Transneft – the Russian state giant that owns all the pipelines in Russia and that controls the oil terminal at Kozmino.
Its revenues now total USD 8-9 billion per year. Its competitors question its capacity to find funding to buy such large volumes. ‘It’s one of the best kept secrets: either it gets the oil from Russia on an open account (editor’s note: by paying only when it resells the oil) or Chinese or Russian banks are financing it’, reckons a trader that knows the Russian market like the back of his hand.
Paramount is now playing in the big league. According to our information, the trader recently applied to buy the Sicilian ISAB refinery from Litasco. In early 2023, the trading branch of the Russian giant Lukoil was forced to sell the refinery, which received 80% of its supplies from Russian oil before the war. Vitol and Trafigura also put themselves forward. Ultimately G.O.I Energy, a private investment fund that partners with Trafigura, was the successful bidder in January 2023. Today, Paramount is trying to acquire another of Lukoil’s assets in Europe: the company Petrotel Lukoil, which owns one of the largest refineries in Romania.
Having been exposed in the media last spring, Paramount removed nearly all references to Russia from its website. In an interview given to a Ghanaian media outlet, its director and founder, Dutchman Niels Troost, presented himself as ’one of the finest and most reliable investors in Africa’.
Contacted by email, Paramount writes ‘we cannot respond to your questions based on premises and allegations with completely incorrect or at times biased factual information. As we have already reminded you, our company respects and has always scrupulously respected all its legal obligations, including those arising from Swiss and international sanctions.’
Small shells and big mysteries
Another name intrigues the trading circles: Sunrise. Our information indicates that, in September 2022, this company collected nearly 400,000 tonnes of crude oil from Kozmino – the equivalent of four shipments. In June, it had already obtained a cargo of crude from Rosneft at the port of Ust-Luga. The destination was the Azores in Portugal, on board a tanker known as Heidi A. The specialised media outlet Energy Intelligence, which regularly updates the list of ‘new players’, indicates that an entity called Sunrise X Trading was registered in Hong Kong, also in June. There is no way of establishing whether this is the same company.
In the Swiss commercial register there is a company called Sunrise Trade SA, registered in Geneva in 2020 at a trustee. Its website features a map of Geneva partly written in Russian. On it, Sunrise explains that it ‘carries out transactions at a global level’ in Russia, in ex-USSR countries, in the Middle East and in Asia. A Geneva-based trader assured us that it is the same entity.
We are yet to receive a response to our questions addressed to the company’s Swiss administrator.
Communicating vessels between Geneva and Dubai
All those who have been there are unanimous. Dubai now seems to have been taken siege by hordes of wealthy Russians while its status within the oil trade, previously modest, is developing spectacularly. Since the start of the war in Ukraine, numerous small companies chose to base themselves there, mainly to enter the very profitable niche of the trade in Russian oil. Numerous Geneva-based traders also moved to this flashy paradise, where restaurants are now providing menus in Cyrillic – and where the authorities have not adopted sanctions against Russia. Some traders have moved part of their staff there ‘for six months while their family stays in Geneva’, says a source who describes the situation ‘communicating vessels’.
‘Setting up in Dubai offers clear tax benefits because nearly no taxes are levied on companies. However, it’s above all a good destination for those who do not want to be caught buying or selling products under sanction’, comments a former Swiss banker who is a specialist in trade finance. Still, he predicts that ‘most traders will retain a strong presence in Geneva to conserve their credit lines to fund their global activities. In Dubai, banks do not yet have a culture of trade finance. They are bad at it, even when it comes to very simple activities’.
The Swiss Trading and Shipping Association (STSA), the umbrella organisation for Swiss traders, replies that it does not have statistics on the number of companies that have moved their business activities. ‘Before the war, the traders already had branches in foreign countries, like Singapore or Dubai’, comments its Secretary General Florence Schurch, adding that ‘having a commercial entity in Dubai is not illegal and does not automatically mean it is being used to get around sanctions’.
Litasco, the trading branch of the Russian giant Lukoil that has 450 employees, had already planned to leave Switzerland at the beginning of the war. However, according to an investigation of Swiss broadcaster RTS, the trader renegued, even giving an assurance to the Geneva authorities that it would keep its headquarters in Switzerland. The solution was to split into two. According to our information, the Director General of Litasco, Nazim Suleymanov, who lived in Collonges-Bellerive, in a chic suburb of Geneva, went to Dubai with half of his team. The Geneva headquarters on rue Kazem-Radjavi 3 was tasked with dealing in oil bought on non-Russian markets, in particular in Iraq.
Some companies have long since mastered the art of working with one foot in the United Arab Emirates and the other in Switzerland. One of these is Dubai-based company Coral Energy, which piques curiosity. During the first months of the war, its refined products and Russian crude skyrocketed in volume due to its excellent relations with Rosneft. In late February, Coral confirmed nonetheless that it had stopped buying Russian crude six months earlier, and refined products in late 2022. In Geneva, Coral Energy has a representative office, Polar Energy. Nevertheless, a source indicates that ‘numerous important business decisions’ were taken there while ‘the contracts were signed in Dubai’.
An epidemic of STS and of dubious certificates of origin
Since the embargo on crude oil entered into force on 5 December, it has been challenging to compile a list of these ‘new players’. In summer 2022, Energy Intelligence reported the enlightening words of a trader, who predicted that ‘you will see more obscure players chartering ships who no one has ever heard of. It will be like Iran and Venezuela, only a much bigger scale’.
The people we spoke to describe an oil market that is fragmented and that is becoming increasingly opaque every day. Even the most seasoned analysts recognise that information is starting to dry up. ‘Western traders who could collect information from local agents at Russian ports are no longer operating there, and the tankers often change name and owner’, one of them explains.
Data on crude oil do exist, for example those compiled by Finnish organisation CREA, which publishes a regular bulletin on exports of Russian fossil products. Public Eye had access to its database that documents all the tankers still loading barrels in Russian ports, including quantities and final destinations. However, unless you have human sources at each port, it is increasingly difficult to find out buyers’ and sellers’ identities.
As a result, the industry has been confronted with the rising power of a shadow fleet, put together by Russia ahead of the oil embargo. According to estimates, the fleet now comprises 400 tankers aged from 12 to 17 years old. Some of the ships were about to be scrapped. As a result, the oceans are now under threat from potential oil spills. What’s more, they were acquired by unknown buyers via front companies based in Dubai or Asia that even specialists are struggling to understand. They seem to transport only Russian oil and have their own habits: they often change name and flag; they regularly disappear from screens and switch off their transponders; and they make excessive use of ship-to-ship transfers (STS).
The number of trans-shipments has significantly increased near the coast of Kalamata (in Greece), of Ceuta (a Spanish enclave in Morocco), and of Lomé (in Togo). They enable Moscow to unload its oil channelled through small tankers to larger vessels, in order to minimise the costs of the much longer trips to China and India.
However, the ship-to-ship transfers can also serve to blend petroleum products from Russia into other products in order to conceal their origin. Numerous sources reported that this laundering of Russian black gold is also taking place at an almost industrial scale at the large oil warehouses in the United Arab Emirates, in Singapore or in Turkey, rented by the Kremlin’s new favoured traders.
In Geneva, certain traders claimed to dread the notion of buying a Russian shipment that could have been laundered in this way. ‘There is no international standard on what a certificate of origin should look like. For the moment, everyone has been able to produce this document, which is a fundamental issue in the context of sanctions’, explains a person in charge of a compliance department.
On the Platts commodity information platform, more and more companies are offering to sell refined products accompanied by convoluted wording such as: ‘The product delivered by the seller should shall nor be neither fully nor partlyin all or in parts of Russian Federation origin’; ‘to the best of our knowledge, the merchandise does not come from Russia’.
Using a ‘price cap’ to relaunch Geneva
Over the course of 2022, the industry were captivated by Putin’s shadow vessels and ‘pop-ups’ that have sprung up from nowhere. However, discussion now revolves around the price cap and the acrobatics of its implementation.
After never-ending debates, a coalition comprised of the countries of the European Union, the G7 and Australia fixed in extremis – two days before the European embargo entered into force on 5 December 2022 – the threshold at USD 60 per barrel for crude oil. For refined products, banned from import in Europe since 5 February 2023, the cap is USD 100 for diesel and kerosene, and USD 45 for other fuels. The general objective is not to stop Russian flows, but to ensure that they generate less cash to feed the war in Ukraine.
Switzerland is not officially part of the international Price Cap Coalition, but it adopted the 8th package of sanctions on the price cap which, as a result, applies in Switzerland. There is a question as to whether the large Swiss traders will be able to get back into the game and write off their humanist statements from spring 2022. In Geneva, opinions are mixed. ‘In theory, trade is possible below a certain price. However, as we say in the jargon, it’ll have to add up, i.e. it’ll have to be profitable’, explains an analyst. ‘These transactions are possible, as long as the financing, logistics, transport and insurance do not cost more than the price paid by the final buyer. All the costs will go up because the petrol will be delivered to Asia, with distances that are twice as long’, he adds.
Public Eye addressed questions to the main trading houses. The responses were evasive, leaving all options open. Vitol responded to say ‘it conducts its business in full compliance with all applicable legislation and regulation, including that relating to sanctions.’ Last November, its CEO Russel Hardy commented that the introduction of a price cap could ’divert trade to smaller businesses’. Glencore refers to its press release of 30 March 2022, in which it states that the company “will not enter into any new trading business in respect of Russian origin commodities unless directed by the relevant government authorities’. Trafigura is more verbose, responding that ‘like the rest of the industry’ it is ‘carefully reviewing the implication of price cap regulations’ and it continues to ‘engage with governments to understand their requirements and provide the commodities and energy they need in disrupted commodities markets.’ Gunvor states that it ‘strictly complies with all applicable international economic sanctions and regulations relating to Russia’.
Observers evoke the challenges in picking up trade with Moscow, as long as the banks refuse to finance transactions and the European insurers are hesitant. The price cap is largely viewed as a labyrinth, a mechanism ‘invented by bureaucrats with finance degrees. None of them really understand oil markets’, an expert in the sector recently stated on CNBC.
Some predict the challenges that regulators will face in implementing controls and unpicking the schemes used to circumvent the rules. ‘You can always state in the contract that you bought the barrel of Ural for USD 56, show it to the shipowner and then, for example in Dubai or Turkey, add an addendum that provides for payment of an additional USD 12 to be paid to the Russians to make up the difference’, explains a trader based in the United Arab Emirates.
When questioned on the price cap, Paramount Energy remains silent. The Geneva-based company could be directly affected as it only operates from the Kozmino terminal, where a barrel of ESPO blend crude sold for about USD 79 on the Asian market until the embargo entered into force on 5 December 2022. Significantly above the price cap set by the West at USD 60.
In a recent investigation, British NGO Global Witness found up to 20 millions barrels of ESPO blend crude, valued at USD 1.5 billion, that should have been subject to the price cap, but were sold well above it. According to Global Witness, Paramount Energy, a key ESPO trader, could potentially be in breach of the price cap. Since June 2022 however, the Swiss trader manages its Russian oil business from a Dubai-registered company, Paramount Energy and Commodities DMCC.
A complex situation, which raises the question what authorities are doing to enforce the price cap.
Non-existent controls in Switzerland
The United States, the European Union and the United Kingdom have issued directives for market players who would like to trade with Russia while respecting the price cap. Each party has its own set of regulations. In the event of an audit or control, the traders – the only party to be in direct contact with Russian sellers – must be able to prove that they have indeed bought the barrels for a sum below the price cap. The banks that finance the transactions, charterers and maritime agents can rely on the traders, who should certify that the merchandise was bought in line with the price cap. The insurers and shipowners, for their part, only need a certificate provided by the previous party in the chain. Everyone should keep the documentation for five years. The UK authorities are by far the strictest. They require that traders notify them of every oil transaction carried out with Russia within 40 days and provide corresponding documentation (contract, bill of lading, freight bill, letter of credit, etc.)
As for Switzerland, the answer is simple – no control mechanism advocated by Brussels, Washington and London has been adopted by the State Secretariat for Economic Affairs (SECO), the organisation in charge of overseeing the implementation of sanctions. A promising framework that seems far more favourable to relaunching business activities. In Switzerland then, traders are not required to notify any authority of their purchases of Russian oil or to keep any documentation. The Swiss authorities are banking on the sector’s good will and inviting it to regulate itself. Contacted, the SECO said that ’it did not want to create an over-compliance of the industry with the price cap’, nor ‘jeopardise the oil business with Russia’. On the latter point, il follows the approach of the international Price Cap Coalition. It is a response that aligns with the general policy conducted so far by Bern to maintain the attractiveness of Switzerland as a trading hub, at any cost, even though the risks linked to the sector have been apparent for at least a decade.
An analyst outlines another unique feature in Switzerland: ‘In the European Union and the United Kingdom, the sanctions apply to everyone with a passport from these jurisdictions. In Switzerland, they apply to people who have a Swiss passport and who live in Switzerland. Therefore, if you are Swiss and you live in Dubai, for example, you are not obliged to respect the Swiss sanctions.’ This risks offering some room for manoeuvre. SECO has confirmed this point, responding that ‘in contrast to the situation in the EU and the United States, Swiss citizen settled abroad are not subject to sanctions adopted on the basis of the Swiss Embargo Act.’ The same applies to legal entities.
A director at a small Geneva-based trading company explains that even though local regulation is lenient, traders always keep an eye on the regulations imposed by the United States. ‘The devil is in the detail and there is always a risk of being caught by OFAC (the US Office of Foreign Assets Control)’, he explains, adding ‘moreover, why put yourself at risk by working from Switzerland when you can easily work from Dubai’.
Putin and his 5 rouble Chevrolet
For the moment, Vladimir Putin and his associates can rub their hands in glee at having avoided the West’s catastrophic predictions. In 2022, despite the rock-bottom prices of Russian crude, Russia pocketed USD 218 billion in petrodollars, according to the International Energy Agency. Its exports of black gold increased by 7.6%. The global energy map has been redrawn over the course of a year of war. In 2023, the European Union’s imports of Russian crude were due to reach 500,000 barrels a day, in contrast to 2.3 million in 2021. Russian producers have found new markets. Approximately 80% of crude flows are now destined to countries friendly to Vladimir Putin, primarily India, China and Turkey.
In early February, the Finnish NGO CREA observed that ‘Russia was not responding to the price cap by restricting supply’ and it ‘could in contrast increase supply to counteract the reduction in price’. The head of the Kremlin has repeatedly called the price cap ‘stupid’ and boasted of his limitless ability to fund the ‘special military operation’ in Ukraine. Several weeks ago, he appeared all smiles in front of a group of Russian journalists to say: ‘Of course the aim of our geopolitical opponents and enemies is to limit the revenues of Russia’s budget. However, we’re not losing anything from the price cap […], because the price cap is set at the price we are currently selling [our crude]’ he said, in an ironic reflection on what he dubbed an ‘anti-market’ tool. ‘Imagine, you want to buy a Mercedes or a Chevrolet and you say: I want to buy this car for five roubles, no more!’, he said to laughs in the room.
Putin signed a presidential decree that has banned, as of 1 February, the sale of crude and petroleum products to all entities (‘foreign legal entities and other individuals’) that comply with this mechanism. However, the ambiguity persists because the president will be able to provide exemptions by ‘special decision’. Moreover, the text specifies that the ban applies to entities that, in their contracts, specifically mention the price cap. Will it be enough to simply remove this wording from contracts to continue to receive barrels of crude? For traders who closely follow these nuanced developments, the question remains open.