Some banks have stopped issuing letters of credit (LC) to cover purchases of Russian crude, according to three market sources.
One of the sources said that the restriction could be temporary while banks seek clarity over an impending set of fresh international sanctions due to be imposed against Russia in response to its military attack against Ukraine that began earlier today. French president Emanuel Macron said measures against Moscow's energy sector could be on the table.
The move by some banks to hold back on issuing LCs could restrict the number of counterparties who can conduct Russian crude trade. LCs sent on behalf of the buyer are standard practice within the oil industry. They guarantee complete and timely payment to the seller for the physical asset. Most crude sellers typically request payment within 30 days after the issuance of the cargo's bill of lading, while reimbursement for oil products is often expected within 5-10 days of the bill of lading. LCs must be presented to a seller ahead of the date of the cargo's physical loading — often seven days before that deadline for crude oil.
The most frequent alternative to a LC is a line of open credit — a pre-approved financial arrangement that allows the buyer to make purchases up to a specific sum without producing guarantees. The reputational blow to companies that fail to honour an open-credit transaction usually ensures payment under normal trade circumstances. Accepting payment on open credit could prove riskier for sellers at present — any sanctions that explicitly target the Russian energy sector would prevent buyers from making payment.
In the past, US financial sanctions against Iran have allowed for a grace period during which Tehran's crude buyers can finalise their business. Banks have previously taken a cautious approach and delayed or declined to emit LCs if they were unclear on how to interpret the text of US sanctions. Several trade sources expect that banks will stall emitting LCs if and when the US lifts sanctions against Iran, which will delay the full return of Tehran's crude exports to the market.
