Russia’s financial system increasingly backed by commodity collateral as default looms

Strong points

US waiver expires May 25 on sanctioned Russian bank debt payments

Financial sanctions cause major problems for Russian energy producers

Russia increases non-dollar-denominated energy supplies after Ukraine invasion

Russia will increasingly use barter and specific currency transactions for energy supply, an analyst at S&P Global Commodity Insights said on May 24, as a default looms for billions of dollars in reserves of foreign currencies if the United States allows a key waiver to expire on May 25.

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“Ultimately, Russia will likely see its financial system backed by commodity guarantees,” said Alan Struth, director, macroeconomics and oil demand, global oil at Platts Analytics. “Its currency will be formally supported by exports and commodity transactions.”

The US Treasury Department granted the waiver for Russian bond payments to US investors at the end of February. It allows payments related to the debt or equity of Russian banks VEB, Otkritie, Sovcombank, Sberbank and VTB, which were sanctioned in response to the Russian invasion of Ukraine.

A White House spokeswoman did not respond on May 24 to a request for comment on the waiver deadline.

Analysts consider sanctions to have a greater impact on energy trading than a government default, with the availability of financing and insurance dependent on the credit rating of the buyer rather than the seller.

“The credit ratings of major Russian exporters of oil, gas, metals, fertilizers, etc. have already been very negatively affected by the war and sanctions in Ukraine,” said George Voloshin of Aperio Intelligence. “The problems with buying Russian raw materials have more to do with the sanctions and the resulting financial and logistical problems than with the credit ratings of specific entities.”

Russia is already grappling with sanctions that have resulted in the seizure of Russian assets abroad, complications in paying for Russian energy supplies and traditional buyers turning away from Russian exports.

This had a major impact on the prices of major Russian Ural crudes. Ural Platts’ valuation on May 23 was $79.065, versus Brent dated at $115.525/bbl. On February 23, the day before the invasion, Platts priced Urals at $90.72/bbl and dated Brent at $100.48/bbl.

The Russian Ministry of Economy predicts an average Ural price of $80.10/b in 2022.


Analysts expect the war to prove costly in the long run for Russia’s finances. Despite recent high oil and gas prices since the start of the February 24 invasion, the conflict is expected to cause Russia to lose market share for its hydrocarbon exports.

Financial sanctions and production cuts, which S&P Global predicts will reach 2.8 million bpd in August, could also diminish Russia’s influence in OPEC+.

Non-dollar trade

Sanctions introduced this year are accelerating Russia’s attempt to increase energy trade in currencies other than the US dollar.

Maria Shagina, visiting senior fellow at the Finnish Institute of International Affairs, said the sanctions raise questions about whether central banks’ foreign exchange reserves can be considered sanctions-proof and whether the U.S. dollar is a safe asset.

“Excessive use of sanctions will further motivate countries to build a parallel financial system and rally their trading partners around currencies other than the dollar,” Shagina said.

Russian President Vladimir Putin signed a decree on March 31 requiring European buyers of Russian natural gas to transfer funds in euros or dollars to a new Russian account at Gazprombank, from which payments would be made to Gazprom in rubles after conversion .

Countries that refused to comply with the new mechanism, including Poland, Bulgaria and Finland, were cut off from Russian supplies. Fears remain that other countries will be cut off as more payment delays will arise in the coming days.

However, some of the EU’s biggest buyers of Russian gas, including Germany’s Uniper, Italy’s Eni and France’s Engie, said they had made arrangements so they could continue to pay for Russian gas.

Nevertheless, concerns about the impact of new payment terms on Russian gas deliveries to Europe have kept prices at high levels since late March.

The month-ahead TTF price jumped 8% to 105.50 euros/MWh ($111/MWh) on April 27, the day Russia suspended deliveries to Poland and Bulgaria, the data shows. from S&P Global Commodity Insights.

Prices remain high, with the month-ahead TTF contract valued by S&P Global on May 23 at €84.38/MWh, still up 240% year-on-year.


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Don F. Davis