Dubai turns into the new Switzerland for Russian commodity traders

[The SC]

Russian commodity traders are rushing to set up business in Dubai, amid increasing barriers to business with Moscow.

For decades, Switzerland has been home to middlemen who help match Russian producers with buyers around the world. Now, the escalation of sanctions has led to immigration to Dubai.

Recently, the 3 largest oil producers in Russia have begun to consider switching to Dubai as the headquarters of their commercial operations, while many other companies have already moved there. On the other hand, for Switzerland, mass immigration seems inevitable after the country followed through on the EU ban on exports from Russia.

“Trade will continue...Middle East and Middle Eastern jurisdictions will gain importance for things that are somewhat euro-focused for the commodity business so far,” said Water Jacobs, director of the Erasmus Center for Commodities and Trade at Erasmus University in Rotterdam.

Restrictive sanctions have made trade difficult for Russia's state-owned companies, including those that transport goods in the country. Informal self-punishment has also been a problem, as banks have withdrawn lines of credit necessary for financing deals, while shipping companies and insurance companies are also cutting their services.

This created an opportunity for Dubai, which has moved away from imposing sanctions on Russian individuals and entities, intensifying the competition already faced by Switzerland as a nerve center for global commodity trade.

Swiss sanctions

While Switzerland claims neutrality and does not allow its weapons to be transferred to the conflict zone, the European Union has pursued increasingly stringent restrictions on certain goods, banks and individuals close to the Kremlin.

By the end of 2022, the European Union will have restrictions in place prohibiting the insurance and financing of transporting Russian oil to countries outside the bloc, and Switzerland has said it will do the same.

If enacted in full, it would likely make Russian oil more difficult to deal with and add to the direct Swiss ban on brokerage, sales and financial services on Russian coal announced in April, but the regulations would also contribute to the relocation of some companies elsewhere.

Transport companies

Executives from Russia's oil producer Rosneft last month traveled to Dubai to explore a business idea. In the meantime, Gazprom Neft, the third largest oil producer in Russia, is looking to expand its presence in Dubai, according to what Bloomberg quoted sources as saying, and was seen by Al Arabiya.net.

Litasco SA, the sales and trading arm of Russian energy giant Lukoil PJSC, is also looking to move some Russian trade and operations staff to Dubai from Geneva in anticipation of making Dubai the company's new central headquarters. Lukoil is Russia's second largest oil producer.

Solaris Commodities, a Russian grain trader, opened another office in Geneva last week, according to a person familiar with the matter, who asked not to be named because the information is private. While the sanctions do not cover agricultural products, the trader has found it difficult to obtain financing because Swiss banks are shying away from Russian goods - whether they are sanctioned or not - the source said.

There, too, commodity traders' finances were hit as Russian banks stepped in to lend to businesses, and lenders including BNP Paribas and ABN Amro cut back on spending or pulled out of the sector altogether. Sberbank, which was recently added to the list of sanctioned entities, saw its commodity trade finance business double in Switzerland last year, with funds flowing mainly into the petrochemicals, metals, grains and fertilizer sectors. These streams will now not be available.

Other Swiss cities are facing displacement, such as Zug, which has long been a hub for the commodity trade due to its ultra-low taxes, and its reputation globally tarnished in the 1980s as a refuge from the American justice of legendary merchant Mark Rich, as commodity companies there also look to The Middle East.

Zug-based Suek AG, the exclusive marketer of coal from the largest producer in Russia, is planning to set up a trading company in Dubai. EuroChem Group AG, one of the world's largest fertilizer producers with the majority of its assets in Russia, is also setting up a project in Dubai. Both were owned by billionaire Andrei Melnichenko even after the start of the war in Ukraine.

Dubai strategy

The UAE has attracted wealthy Russians and their money since the invasion of Ukraine, and now state-run and private commodity companies are turning to it.

The UAE developed its financial infrastructure for this type of time. UAE banks have grown in recent years to become the mainstay in commodity trade finance, and a regular feature in the syndicated revolving credit facilities issued by the largest industrial houses.

Najla Al Qasimi, director of global affairs at B'huth Research Center in Dubai, which was previously based in Geneva said."Dubai has emerged as a truly global hub for commodities...there is the right infrastructure, transportation and services to support these companies. ", As reported by Bloomberg.


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