Russia Sanctions: What the Iran Precedent Tells Us

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ss2083145605-Vladimir Putin

Western sanctions in response to the invasion of Ukraine have stopped short of hitting Russia where it really hurts: its exports of oil and gas.

And so far at least, the US and its European allies have also opted not to block Russia from using Swift, the world's largest financial messaging system.

In assessing the impact of the sanctions imposed on Russia, it's worth remembering just how long it took the West to inflict serious economic pain on Iran, which did face direct sanctions on its oil sector and was also blocked from Swift.

In 2012 Washington and the European Union agreed a new set of sanctions against Iran, aimed at curbing its uranium enrichment program.

The measures taken included blacklisting National Iranian Oil Co., an embargo on Iranian oil imports and exclusion of Iranian banks from the Swift system.

But the US had to push its EU allies hard to block Iran from Swift, which facilitated the exchange of more than 15 billion messages between banks last year and plays a crucial role in international commerce.

Even before the sanctions came into force, the US had strong-armed most commercial banks into cutting ties with Iran, making it clear that they could be shut out of the global banking system if they failed to comply.

Even banks in Asia, including Malaysia and Japan, were brought into line.

China Keeps Buying

Before 2012, Iran was exporting around 2.5 million barrels per day of oil to Europe and Asia.

But even after the tough new sanctions came into pace, Iran was still able to sell its oil because of China's willingness to keep buying.

Even now, with US and Israeli satellites monitoring tanker movements around its export terminals, Iran continues to ship oil to China.

Because of the Iran precedent, President Vladimir Putin is probably not worried about the prospect of additional sanctions, confident that a consensus to block Russia from Swift — the one thing that could really hurt it — is highly unlikely.

"Exclusion from Swift would cause all kinds of problems," says a source at a major Russian bank. "But the EU needs a lot of Russian gas and the US wants to keep motorists happy, so their hands are tied."

Since the invasion started, there have been reports that buyers of Russian oil have experienced problems securing letters of credit, and traders in the Far East have turned away cargoes. But sources say such glitches are likely to be temporary.

"It would be chaos if you had an embargo on Russian oil and gas imports, but it won't happen," a senior European trader says. "The oil will keep on flowing one way or another."

Majors and Traders

Some of the big Russian producers like Rosneft and Surgutneftegas sell most of their oil by tender to a combination of Western majors including Shell and TotalEnergies and trading companies such as Vitol, Gunvor and Trafigura.

"If the majors get cold feet, the traders will just step in and take the risk," says another European trading source.

But traders will need to keep a close eye on how sanctions evolve in the weeks and months ahead to make sure they remain in full compliance with the rules.

"They will need to check not only their counterparties, but also the banks involved in the payment chain, to ensure that they are not breaching an asset freeze or other restrictions," says a Western lawyer who specializes in sanctions issues.

And in a worst-case scenario for Moscow — a Western embargo on Russian oil and gas imports — it could still take a leaf out of the Iranian playbook and ask its ally China to step up its purchases.

Sanctions, Oil Supply, Gas Supply, Ukraine Crisis
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