Russian commodity traders move to Dubai as Switzerland toughens sanctions

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Russian commodity traders are rushing to set up businesses in Dubai as Switzerland makes it increasingly difficult for them to do business with Moscow.

For decades, Switzerland has been home to intermediaries who help connect Russian producers with buyers around the world. Today, the proliferation of sanctions is causing migration to the Persian Gulf emirate.

Russia’s three largest oil producers are evaluating Dubai for business operations, and several other companies have already moved there. For Switzerland, some sort of exodus seems inevitable after the country followed European Union bans targeting exports from Russia.

“The trade will continue,” said Wouter Jacobs, director of the Erasmus Commodity & Trade Center at Erasmus University Rotterdam. “Middle Eastern and Eastern jurisdictions will gain prominence from the rather Eurocentric situation in the commodities sector so far.”

The progressively restrictive sanctions have made trade difficult for Russian state-owned companies, including those that transport the country’s basic products. Unofficial self-sanctioning has also been a problem – banks have withdrawn crucial credit lines for finance deals, while shipping companies and insurers are also cutting their services.

This has created an opening for Dubai, which has avoided imposing sanctions on Russian individuals and entities – intensifying the competition Switzerland already faces as a global commodity trading hub.

Swiss sanctions

While Switzerland claims neutrality and will not allow its weapons to be brought into the conflict zone, it has followed the EU in imposing increasingly strict restrictions on certain products, banks and individuals deemed close to the Kremlin.

By the end of 2022, the EU will have put in place restrictions prohibiting the insurance and financing of the transport of Russian oil to countries outside the bloc and Switzerland has declared that it will do the same.

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“The Federal Council has announced that it will do the exact same thing and so this is part of it,” a spokesman for the Swiss State Secretariat for Economic Affairs – or SECO – said by telephone. “It’s really the same thing, we transpose all European Union ordinances into Swiss law.”

If fully enacted, it will likely make it more difficult to trade Russian oil and add to Switzerland’s outright ban on brokering, selling and providing financial services on Russian coal that has been announced in April. But the regulations will also contribute to some companies moving elsewhere.

“A trade between Russia and China for energy might normally have been done by a commodities house in Switzerland, with the financial backing of a banker in London – who wants to do that now?” said Jacobs. “It is likely that outfits that do so will necessarily move to a new jurisdiction.”

Moving Companies

Executives from Russian oil producer Rosneft PJSC visited Dubai last month to explore the idea of ​​a commercial venture. Meanwhile, Gazprom Neft PJSC, Russia’s third-largest oil producer, is also looking to expand its presence in the city, people familiar with the matter said.

Litasco SA, the sales and trading arm of Russian energy giant Lukoil PJSC, is seeking to relocate some of the Russian trading and operations staff to Dubai from Geneva in anticipation of making it the new central hub of the ‘business and expand already a small number of traders. the. Lukoil is Russia’s second largest oil producer.

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Another Geneva stalwart – Solaris Commodities, a Russian grain trader, opened an office in Dubai last week, according to a person familiar with the matter, who asked not to be named as the information is private.

Although the sanctions do not include agricultural products, the trader has found it more difficult to access funding as Swiss banks are turning away from Russian commodities – whether they face sanctions or not, the person said.

And there is also a blow to funding for commodity traders, as Russian banks have stepped in to lend to the company as lenders, including BNP Paribas and ABN Amro, have pulled out or pulled out altogether. sector. Sberbank, which was recently added to the list of sanctioned entities, saw its commodity trade finance business in Switzerland double in volume last year, with money going mainly to the petrochemicals, metals, cereals and fertilizers. These streams will no longer be possible.

Other Swiss cities are facing departures. Zug, long a commodity trading hub due to its ultra-low taxes, became infamous around the world in the 1980s as a haven from American justice for legendary trader Marc Rich. Commodity companies are also looking to the Middle East.

The Zug-based company Suek AG, the exclusive distributor of coal from the leading Russian producer, plans to set up a trading company in Dubai. EuroChem Group AG, one of the world’s largest fertilizer producers with the majority of its assets in Russia, is also in the process of setting up a Dubai-based company. Both were once owned by billionaire Andrey Melnichenko until the start of the war in Ukraine.

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Several smaller companies in Dubai with ties to some major trading houses have also explored deals with Russia, people familiar with the matter said.

The Dubai Strategy

The UAE has attracted wealthy Russians and their money since the invasion of Ukraine, and now state-owned and private commodity companies are following.

The UAE has developed its financial infrastructure for this kind of time. Emirates banks have become a mainstay of commodity trade finance in recent years and a regular feature of syndicated revolving credit facilities issued by the biggest houses in the sector.

Dubai’s plethora of free trade zones, proximity to Middle Eastern energy producers and low taxation have also proven attractive, although the city still has some ground to catch up on global hubs like Singapore, London, Geneva and Stamford. Last year, the Dubai Multi Commodities Center hosted an event with the Moscow Chamber of Commerce aimed at attracting Russian businesses to locate there.

“Dubai has become a true global hub for commodities,” said Najla Al Qassimi, director of global affairs at think tank B’huth, which was previously based in Geneva. “There is the right infrastructure, transport and services to support these businesses.

–With the help of Hugo Miller.

Photograph: An investor watches a TV report at the Dubai Financial Market PJSC (DFM) in Dubai, United Arab Emirates, Tuesday, March 10, 2020. Photo credit: Christopher Pike/Bloomberg

Copyright 2022 Bloomberg.

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