Start preparing for ‘unprecedented sanctions’

Shipping companies must take seriously the threat of a Russian attack on the Ukraine

By Carly Fields

With Western nations warning of "unprecedented sanctions" against a Russian incursion into Ukraine, the trade and the shipping community are being advised to start preparing for restrictions.

The US has put 8,500 of its troops on high alert for deployment to Europe, while Nato has reinforced its eastern borders and the UK has started withdrawing foreign embassy staff from Ukraine. Tensions are running high, with reports of 100,000 Russian troops now amassed at the border.

In a briefing note, HFW's Daniel Martin, Isabel Phillips and James Neale - partner and associates respectively - have examined existing sanctions to predict how new sanctions might be shaped.

Current sanctions imposed by the UK, EU, US, Switzerland and others include extensive asset freezing measures, sectoral sanctions restricting access to debt and capital markets, restrictions on oil and gas equipment and restrictions on activities with Crimea.

HFW expects new sanctions will include further asset freezing measures, targeting individuals and entities (including commercial organisations) not currently subject to asset freezing measures.

"It seems likely that new sanctions would also include further restrictions on the Russian financial sector," said HFW. "These could include the extension of sectoral sanctions to prohibit dealing in new loans and new debt issued by a wider range of Russian entities. They could also include more general restrictions on dealing with Russian financial institutions and possibly restrictions on the provision of insurance."

Further, they warn that possible future sanctions might include measures that target trade of particular commodities.

HFW expects new sanctions will include further asset freezing measures, targeting individuals and entities (including commercial organisations) not currently subject to asset freezing measures

Price impact

Warren Patterson, head of commodities strategy at ING, warned that commodity prices could soar if the Russia-Ukraine crisis escalates. "Russia is a commodities powerhouse, with it being a key supplier of energy, metals and agri," he said. "A conflict against the two nations and/or tough sanctions against Russia has the potential to significantly tighten commodity markets." Some commodity markets are already starting to price in some geopolitical risk around the escalating issue, he added.

In a scenario where the West reacts strongly with sanctions that target key Russian industries, this could have a far-reaching impact on commodities. "It would affect more than commodity flows that go through or originate from Ukraine. It could potentially lead to a significant tightening in energy, metal, and agri markets, which would provide only a further boost to an asset class which already has an abundance of positive sentiment in it," said Patterson.

Even without sanctions on industry, financial sanctions could still be applied meaning that making payments for commodities would be more difficult.

Patterson highlighted natural gas as a commodity that will attract the most attention. "The region is already dealing with an extremely tight gas balance. Therefore, any further reduction in Russian gas flows to the region would leave the European market vulnerable," Patterson said. Russia is the dominant supplier of natural gas to Europe, usually making up anywhere between 40%-50% of European gas imports. Sanctions would also impact the crude oil and refined product markets as Russia is the second-largest oil producer and exporter in the world. There are already restrictions on the supply of some oil and gas equipment and related services to Russia, and this list of equipment could be extended, notes HFW.

It could potentially lead to a significant tightening in energy, metal, and agri markets, which would provide only a further boost to an asset class which already has an abundance of positive sentiment in it

Metals hit

Metals trade could also feel the heat of imposed sanctions against Russia. "We don't have to go back too far to see the impact that sanctions on Russian aluminium producer, Rusal had on the global aluminium market," noted Patterson. US sanctions against Rusal upset the aluminium market in 2018, with Russia the largest aluminium producer, after China.

Outputs from European aluminium smelters might also be curtailed; smelting capacity in Europe is already down because of high power prices. "In a scenario, where sanctions impact Russian gas flows, this would only drive European energy prices higher, risking even further capacity restrictions in the region," said Patterson. Russia is also the world's largest palladium producer, and an important nickel producer. Any sanctions-related disruptions here would have a ripple effect on global trade.

One bright spot for shipping is that Western sanctions could push more oil exports to China, already a large importer of Russian oil. Another is that Ukraine's export markets have become "remarkably diversified" in recent years, notes Anders Åslund, a senior fellow at the Atlantic Council in Washington. Export figures demonstrate that no one market is now dominant and that reliance on Russia for imports has waned.

To prepare, HFW advises shipping businesses take the following steps:

• Identify all activities which relate to Russia and/or Russian counterparties and/or Russian origin goods

• Review (and expand if necessary) existing know your customer to identify all Russian counterparties and their beneficial owners

• Analyse contract terms to identify the provisions which will be relevant in the event that sanctions are imposed which impact on the trade

• Determine whether there is already scope to put counterparties on notice and/or seek additional information

• Understand which sanctions regimes are potentially applicable (eg because of the use of US Dollars and/or the nationality of key individuals)

• Consider the extent to which non-Russian counterparties (eg onward buyers, banks and insurers) may take a more restrictive view if sanctions are imposed

• Explore alternative means of performance in the event that contractual performance is not possible because of sanctions (eg alternative suppliers or destinations).