Writing in OilPrice.com this week, Alex Kimani lays out the reasons why the Russian ruble is thriving under Western-imposed sanctions and how Switzerland may be to blame.

An oil derrick outside of Moscow is still pumping Russia’s black gold.

A couple of weeks ago, Putin went on record calling the war in Ukraine a “tragedy” and claiming that economic sanctions imposed on his country had “failed.”  Turns out he wasn’t exactly bluffing.

Three months into the most severe and coordinated sanctions by Western governments, Russia’s economy is proving to be a hard nut to crack. Continued oil and gas exports as well as a propped-up ruble, have allowed Moscow to weather the sanctions much better than expected.

In a note to clients dated last week and made public on Monday, JPMorgan Chase says business sentiment surveys from the country “are signaling a not very deep recession in Russia, and therefore imply upside risks to our growth forecasts. The data at hand therefore do not point to an abrupt plunge in activity, at least for now”.

JPM has also backtracked on its earlier forecasts of a 35% contraction in Russian GDP in the second quarter and 7% for all of 2022, now predicting that the recession will be far less severe.

The bank did, however, note that Russia will certainly feel the impact of current and potential sanctions, adding that the Russian economy would be in much better shape if the country had not invaded Ukraine.

Ruble recovers to pre-war levels

Perhaps an even more impressive demonstration of the resilience of Russia’s economy is how quickly the country’s currency has recovered from its early-year crash. Defying a plethora of energy and financial sanctions, the ruble, Russia’s national currency, has staged a surprising rebound and even managed to return to pre-war levels.

The ruble crashed spectacularly in the days immediately after President Vladimir Putin ordered a full-scale invasion of Ukraine, falling as much as 30% against the U.S. dollar. The currency appeared doomed as Western countries slapped Moscow with an increasingly harsh set of sanctions, including measures to restrict the Russian Central Bank’s ability to access its vast pool of foreign reserves. Indeed, a cross-section of analysts warned of an inevitable default as Russia ran out of dollars.

A cargo ship travel across the Black Sea carrying Russia’s biggest export.

What explains this recovery?

Putin’s demand for buyers of Russian gas to pay in rubles was a masterstroke. After initial resistance, western gas buyers are increasingly toeing the line, with one of Germany’s largest natural gas importers, VNG, recently opening an account with Gazprombank for payments for Russian gas under Moscow’s terms.

According to Maria Demertzis, deputy director at Bruegel, a Brussels-based economics think tank, EU payments for Russian pipeline gas have been playing a big role in propping up the currency.

For all the tough talk about abandoning Russian energy commodities, Russia is still managing to sell a good amount of its oil and gas, thanks to the fact that some of the world’s biggest commodity traders have little compunction against financing Putin’s war machine.

Indeed, Oleg Ustenko, economic adviser to Ukrainian president Volodymyr Zelensky, has written to the four companies demanding that they stop trading Russian hydrocarbons immediately since export revenues are funding Moscow’s purchase of weapons and missiles.

According to ship tracking and port data, Switzerland’s Vitol, Glencore, and Gunvor as well as Singapore’s Trafigura, have all continued to lift large volumes of Russian crude and products, including diesel.

Vitol has pledged to stop buying Russian crude by the end of this year, but that’s still a long way from today. Trafigura said it would stop buying crude from Russia’s state-run Rosneft by May 15th, but is free to buy cargoes of Russian crude from other suppliers. Glencore has said it wouldn’t enter any “new” trading business with Russia. But the reality is that while the G7 has committed to banning or phasing out Russian oil imports, and while the U.S., Canada, the UK, and Australia have imposed outright bans, the EU is still unable to move forward, with Hungary holding a ban hostage. Meanwhile, India and China are making up for much of the losses for Russia.

Russia’s primary oil refining capacity has more than doubled since March to 3.75 million tons, according to experts.

Switzerland’s golden calf

A lot of the blame falls on Switzerland. The lion’s share of Russian raw materials is traded via Switzerland and its nearly 1,000 commodity firms. Switzerland is an important global financial hub with a thriving commodities sector, despite the fact that it is far from all the global trade routes and has no access to the sea, no former colonial territories, and no significant raw materials of its own.

Oliver Classen, media officer at the Swiss NGO Public Eye, says that “this sector accounts for a much larger part of the GDP in Switzerland than tourism or the machinery industry.”

According to a 2018 Swiss government report, commodity trading volume reaches almost $1 trillion ($903.8 billion).

Deutsche Welle (DW) has reported that 80% of Russian raw materials are traded via Switzerland, according to a report by the Swiss embassy in Moscow. About one-third of the raw materials are oil and gas, while two-thirds are base metals such as zinc, copper, and aluminum. In other words, deals signed on Swiss desks are directly facilitating Russian oil and gas to continue flowing freely.

The Swiss Embassy in Moscow in 2021 — before Switzerland broke neutrality and sanctioned Russia.

With gas and oil exports coming in as the main source of income for Russia, accounting for 30 to 40% of the Russian budget, Switzerland’s role cannot be overlooked in this war-time equation.  In 2021, Russian state corporations earned around $180 billion (€163 billion) from oil exports alone. Again, unfortunately, Switzerland has been handling its commodities trade with kid gloves.

According to DW, raw materials are often traded directly between governments and via commodities exchanges. However, they can also be traded freely, and Swiss companies have specialized in direct sales thanks to an abundance of capital.

In raw materials transactions, Swiss commodity traders have adopted letters of credits or L/Cs as their preferred instruments. A bank will give a loan to a trader and, as collateral, receive a document making it the owner of the commodity. As soon as the buyer pays the bank, the document (and ownership of the commodity) is transferred to the trader. The system gives traders more credit lines without their creditworthiness having to be checked, and the bank has the value of the commodity as security.

This is a prime example of transit trade, where only the money flows through Switzerland, but actual raw materials usually do not touch Swiss soil. Thus, no details about the magnitude of the transaction land on the desk of the Swiss customs authorities leading to highly imprecise information about the flow volumes of raw materials.

“The whole commodities trade is under-recorded and under-regulated. You have to dig around to collect data and not all information is available,” Elisabeth Bürgi Bonanomi, a senior lecturer in law and sustainability at Bern University, has told DW.

Obviously, the lack of regulation is very appealing to commodity traders – especially those that deal with raw materials mined in non-democratic countries such as the DRC.

“Unlike the financial market, where there are rules for tackling money laundering and illegal or illegitimate financial flows, and a financial market supervisory authority, there is currently no such thing for commodity trading,” financial and legal expert at Public Eye David Mühlemann told the German broadcaster ARD.

But don’t expect things to change any time soon.

Calls for a supervisory body for the commodities sector based on the model of the one for the financial market by the likes of Swiss NGO Public Eye and Swiss Green Party proposal have so far failed to bear fruit. Thomas Mattern from the Swiss People’s Party (SVP) has spoken out against such a move, insisting that Switzerland should retain its neutrality, “We do not need even more regulation, and not in the commodities sector either.”