Banks withdraw letters of credit for Russian oil, tighter sanctions feared

Quantum Commodity Intelligence – Some banks have stopped issuing letters of credit (LC) to cover the purchase of Russian oil, as financial lenders seek to clarify likely further international sanctions after Russian launched a full-scale invasion of Ukraine.

French president Emanuel Macron said Thursday that the Russian energy sector could be targeted with sanctions, although spiralling global energy costs have so far acted as a deterrent against targeting oil and gas.

A letter of credit is a guarantee of payment, typically within 30 days of loading and underpins most of the global physical oil trade.

According to a number of reports Thursday, several traders were unable to obtain LCs for lifting Russian crude from certain banks, although the suspension may be temporary, pending the next tranche of sanctions. 

Oil trade can still take place without an LC guarantee, but this is typically between major oil companies that have large open credit lines with each other.

In the current environment, it would be considered risky to sell Russian oil without the payment guarantee, as financial sanctions could lead to an effective default on the payment.

Financial sanctions could potentially cut  Russia off from the SWIFT financial transaction system, which would almost certainly hit exports of Russian oil to the west if there is no effective mechanism to pay.

Key buyers of Russian crude include majors such as BP and Shell, TotalEnergies, along with most refinery operators in the Mediterranean, plus trading houses such as Vitol, Glencore, Trafigura, Gunvor and Mercuria.