Japanese Buyers Eye LNG Cargo Swaps Amid New Sanctions

Moves to block some Russian banks from the global payment network system Swift by the US and its Western allies are creating uncertainty among Asian LNG players who are shunning Russian LNG with Japanese buyers rumored to be talking with Chinese buyers over cargo swaps, as a way to circumvent sanctions.

Japanese Prime Minister Fumio Kishida said Sunday that Tokyo would impose new sanctions on Russia’s President Vladimir Putin and key officials, including asset freezes. These are tougher than earlier sanctions, following Russian recognition of rebel-held areas of Donetsk and Luhansk in eastern Ukraine.

Japan's earlier sanctions avoided the energy sector and focused on preventing individuals from the two regions entering Japan; a ban on imports and exports to those regions; and prohibited dealings in new Russian sovereign debt in the primary and secondary markets.

The new sanctions are expected to come into force within days. "We will show that a reckless act of violence comes with a huge price," Kishida told reporters. "The international community's relationship with Russia can no longer be the same as before," he said.

Kishida did not release details and it remains unclear whether Russian oil and LNG flows will be hit. Singapore, the financial hub for Asia’s oil and gas sector, and South Korea both said Monday that they would impose sanctions and block certain Russian banks and financial transactions connected to Russia.

Market Impact Assessment

Traders note the impact of sanctions is unknown and companies are still at risk on a compliance level. “[The] clear-cut stuff is do not trade with related [sanctioned companies]. Then how about Yamal, Sakhalin and existing cargoes/source, this is not clear to me,” a trader says.

Companies are expected to overcomply, which “makes sense as companies want to protect themselves from being embroiled in the sanctions,” says a buyer.

The latest sanctions have led to a lack of direction in the spot market where bids and offers are held wide apart. “No one is willing to trade. So I guess that’s the impact so far?” a trader says, adding that some Japanese buyers include “no Russian LNG” in their term sheets.

A seller noted many players are waiting to see what happens next.

Another market source said that only cargoes which will be settled through affected banks are expected to face issues. “Most Russian-linked trading houses have multiple bank accounts with different banks so there may be limited impact on cargoes,” he said.

For shipping, players which are more cautious would look for alternatives to ships which are owned and operated by Russian-linked entities. “But no one has come out to say no to chartering such ships.”

Dan Perera, a Singapore-based partner with law firm HFW, notes not all Russian banks are subject to these measures, and many which are more closely involved in the energy sector are not.

"Unless the measures specifically sanction Russian energy exports, there will most likely remain ways in which Russian energy will continue to be exported — most likely very deliberately so — as much of the world relies heavily upon it," he told Energy Intelligence.

Role of Russian LNG in Japan

Japan imported 6.6 million tons of LNG from Russia in 2021, making it Russia's largest market.

Russia currently exports LNG from Gazprom's 9.6 million ton per year Sakhalin-2 project and Novatek's 16.5 million ton/yr Yamal project.

Significant volumes from Sakhalin-2 are contracted to Asian buyers including Korea Gas (1.5 million tons/yr), Taiwan's CPC (0.75 million tons/yr) and Japanese end-users Jera, Tokyo Gas, Kyushu Electric, Tohoku Electric, Toho Gas, Saibu Gas, Hiroshima Gas and Osaka Gas which have contracted a total of 5 million tons/yr.

Among the individuals targeted with sanctions by the US, EU and UK is Putin's close ally Gennady Timchenko who is a member of the board of Novatek. Gazprom is faced with US sanctions.

A source with one of the term buyers said, “We do not pay to Russian banks directly.” But he declined to elaborate. “It does not affect our procurement but we have to watch the situation.”

Traders said Japanese buyers are talking with Chinese buyers to swap cargoes and seeking alternative shipments from other suppliers. “There’s no real requirement just yet but people believe that it could happen,” said one of them.

Japan said last week that its power and gas companies have enough LNG to meet two or three weeks of demand.

A local observer reckons Japanese buyers could try to make payments to Russia through smaller banks which still remain in the Swift network. “If they could establish the new payment route with the smaller banks, I think it will not cause a serious problem to the payment."