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Commodities Bulletin, October 2022

6 October 2022

Welcome to the October 2022 edition of the HFW Commodities bulletin.

In this extended edition, a number of our partners from across the globe have taken time to reflect on the profound impact of the Russian invasion of Ukraine on the commodities sector. It includes contributions from our offices in Australia, Geneva, London and Singapore, with articles on energy and food security, sanctions, insolvency, regulation, the energy transition and force majeure.

On the back page, you will find details of the latest news and where you can meet the team next.

Lastly, we are delighted to have maintained our Tier 1 ranking for Commodities disputes in this year’s Legal 500 and are grateful to the many clients who provided such positive feedback about the team.

The Russia – Ukraine conflict: Impact on energy security in Asia

It can be difficult to imagine how strongly events in Russia and Ukraine could impact on energy markets in Asia. The reality, however, is that the world’s energy markets are so globalised and regionally interlinked that even mildly significant changes in one region can have a huge effect in another.


A number of background factors come into play here. Many countries – including in Asia – have sought recently to move away from burning low net calorific value energy coal as the core of their national energy supply. This is for a number of reasons, including better air quality experienced during COVID lockdowns; the weight of nationally determined contributions for greenhouse gas emissions reductions under the Paris Agreement; and the challenges now associated with seeking regulatory approvals or financing for coal production projects.

Under its One Belt, One Road project, the PRC had been incredibly active in constructing coal-fired power stations along the land belt, in nations such as Pakistan and Bangladesh. However, some of those states began to turn their backs on the new power stations almost immediately. Pakistan and Bangladesh recently vowed to join other Asian nations such as Japan, Korea and Taiwan in moving away from coal as a core energy source and to increase their use of alternative energy sources such as liquefied natural gas (LNG). As a result, the PRC changed tack and indicated last year that it would not construct any further coal-fired power stations abroad, representing a significant departure from its previous long-term strategy.

Whilst also a hydrocarbon fossil fuel which is certainly responsible for the generation of greenhouse gases in its production, transportation, storage and consumption. LNG is nonetheless significantly less environmentally unfriendly than older generation fuels such as coal or oil. In addition, recent technological developments (particularly in respect of floating storage and regasification units, or FSRUs) have considerably reduced the cost of installing technically complex LNG receiving terminal infrastructure. These factors have led to LNG becoming the ‘interim’ fuel of choice for energy transition purposes in Asia, and beyond.

It is now widely anticipated that LNG will continue to bridge the gap between ‘dirty’ hydrocarbons and ‘clean’ energy sources that are not yet sufficiently advanced to meet global energy requirements. This transitional role looks likely to last – by design or by necessity – for many years to come, as borne out in practice by many Asian nations including Pakistan, Thailand, Sri Lanka and the Philippines looking to construct new complex and expensive LNG receiving facilities to alter their national energy mix going forward. This can only reasonably be viewed as a medium to long term investment strategy, given that such facilities cost hundreds of millions to billions of dollars to construct or assemble.

Impact of the Russia-Ukraine conflict

Against this backdrop, there are many ways in which the Russia-Ukraine conflict has had a significant impact on energy security challenges in Asia. We consider a few below.

  • Russia was widely anticipated to be one of the world’s largest future sources of production and supply of LNG. Global sanctions imposed on Russia have had a significant effect on its technical and financial ability to proceed with the construction and implementation of scheduled gas liquefaction projects.
  • While many Asian states have not necessarily implemented energy sanctions against Russia themselves, many other states, or blocks such as the EU, have. This has had a significant impact on parties’ ability to either produce or lift LNG cargoes in Russia, as well as on the construction of liquefaction facilities. Such processes are complex and may well require the involvement of third parties that are subject to sanctions, including international survey companies; vessel owners and operators; and banks necessary for the establishment of the high value security instruments commonly used in international LNG sale and purchase. As such, even where Asian parties are legally free and clear from applicable sanctions and want to lift Russian cargoes, doing so is not necessarily that simple.
  • Some Asian market participants are struggling with the potential reputational impact of continuing to purchase Russian LNG, or of participating in Russian upstream LNG projects. The impact on those projects of the Russia – Ukraine conflict is still playing out but as a minimum, intended purchasers from them, or parties retaining equity stakes in them, may be subject to significant scrutiny from the international community and risk a potential reputational impact or, worse, international counterparty boycotts, or sanctions breaches. It is still too early to assess the full effects of this situation; time will tell.
  • Europe is now diversifying its own energy mix and moving away from what has been shown to be a significant overdependence on Russian pipeline gas. This is likely to involve the construction of new LNG receiving terminals (including many FSRUs) across coastal Europe, capable of receiving LNG shipments from North Africa, the USA, the Middle East, or further afield.

In simple terms, all this (and more) has led to a scramble for LNG. This is most obviously reflected in the market price of LNG, which has rocketed, with spot prices rising more than 1,800% in the last 18 months. Asian states that were previously heavily reliant on coal and oil are looking to sign up to long term LNG sale and purchase arrangements. Europe is looking to do the same. There is potential for a major energy security issue to arise for many Asian states, in circumstances where global analysts had anticipated an oversupply of LNG for the next few years or even decades. We have seen the brutal reversal of that assumption in a tremendously short period of time. (Against this backdrop of sudden and surging demand for LNG and growing energy security concerns, it is interesting to note that despite its announcement last year, the PRC has in fact continued to build overseas coal-fired power stations.)

Other, broader LNG market developments have added to the legal complexity of some trades and shipments. These include the move away from traditional ‘tram line’ production facility to end buyer trade routes, and the influx of proprietary traders in the LNG space. It is now not uncommon for an individual LNG cargo to be traded multiple times on the water. The LNG space has become a fertile one for disputes, as borne out by the significant range of issues on which we have, increasingly, assisted our clients over the last few months and years.

From a legal perspective, aside from the sanctions issues which will undoubtedly remain relevant for some time, the consequence of all this is that significant disputes are now emerging in the global LNG markets. These may relate to participation in upstream production projects; shortfalls in supply; or non-performance of individual cargoes. The exponential growth in the value of individual LNG cargoes means that such disputes are too big for parties not to contest them. In the same way, pricing disputes under long-term LNG sale and purchase agreements are set to increase in both volume and value, with many more of these likely to be submitted to price review arbitration globally.

The Russia – Ukraine conflict has significantly exacerbated existing issues with the result that increasing energy security concerns and challenges in Asia will give rise to greater complexity and more disputes in the LNG space going forward.

Dan Perera
Partner, Singapore
T +65 6411 5347

Justine Barthe-Dejean
Senior Associate, Singapore
T +65 6411 5344

Seismic shift in oversight of commodity traders offers opportunity for the industry

Commodity traders and the energy markets have got the world’s attention. The Russian invasion of Ukraine has sparked the beginning of what is likely to be a seismic shift in the oversight, regulation and enforcement of the commodity trading industry. This offers a unique opportunity for commodity traders to help shape that shift and to ready their businesses for what is coming, in turn increasing their competitive advantage.

In the UK, we have seen a Bank of England liquidity fund of £40 billion for energy suppliers and a package of £100 billion to deal with surging energy prices. Top of the EU’s agenda is an attempt to reach consensus on what to do about intervention in the energy market. In the meantime, hikes in energy prices have created raging inflation in Europe, foreshadowing a European – if not global – recession.

Energy market price increases have been likened to a “Lehman moment” for the energy sector and have sparked a UK government review described as being intended to “ undertake fundamental reforms to the structure and regulation of energy market through recommendations from a new review of the UK energy regulation.

The UK review mirrors a global concern and review of the energy and other commodity markets.

The Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, is looking at three areas in relation to commodity markets under the umbrella of its snappily titled “non bank intermediation sector” work. First, it is looking into “ linkages between commodity markets and the rest of the financial system. … second, … commodity market volatility [which] has led to large margin calls for commodities derivatives, that seem to have placed strains on a number of market participants. Third, [gaining]…. a more comprehensive picture of leverage in the financial system and possible amplifiers in the event of market stress, including through banks’ prime brokerage businesses.”. A report is due next month.

When explaining the problem in the aftermath of Lehman, Mary Schapiro, then SEC Chairwoman, referred to “ the proliferation of complex financial products, including derivatives, with illiquidity and other risk characteristics that were not fully transparent or understood.

The comparison to the Lehman moment is likely a good one. Commodity traders have long been under the radar and their business not well understood. Central banks have this year spoken of the opacity of commodity trading. For example, physically settled transactions that are not reportable create potentially huge unknown exposures. The LME nickel market meltdown earlier this year is a stark reminder of and wake-up call to the problems which can ensue.

While the catalysts for Lehman and the global financial crisis may be different, governments have identified the importance of commodity traders to global financial stability.

Against that backdrop, more government oversight, scrutiny and enforcement is inevitable. Indeed, enforcement in the commodity sector had been gaining momentum even without the energy crisis.

Glencore recently pleaded guilty in the US and UK and agreed to pay over US$1.1 billion in respect of bribery and market manipulation violations relating to the Platts oil benchmark. (The UK sentencing is slated for later this year). Just over a year and a half ago, Vitol entered into a US$135 million settlement with the US Department of Justice for bribery violations under the Foreign Corrupt Practices Act, and a related settlement with the US Commodity Futures Trading Commission in respect of manipulation of the Platts oil benchmark. There is reported to be an ongoing investigation into manipulation of the Platts oil benchmark involving a cooperating witness.

Against this backdrop, what should commodity businesses do?

First, in the context of the general review into the industry and global financial stability, we recommend commodity businesses work to ensure that their compliance house is in order and that existing policies and procedures are demonstrably fit for purpose.

HFW has a team of experts helping clients with their compliance programmes using a two-phase approach: first, a series of checks to understand what exactly is actually going on in a business from a compliance perspective and second, to enable change where necessary.

Second, it is likely that commodity business leaders will be called upon to explain the industry and the work they do in it as part of the global reviews of the industry being undertaken.

Barry Vitou
Partner, London
T +44 (0)20 7264 8050

The Russia-Ukraine conflict: impact on the renewable energy transition

This article considers some of the possible short and long term impacts of the conflict in Ukraine on the renewable energy transition and how these might influence net-zero commitments and geopolitical strategy going forward.

History clearly demonstrates the close connection between civil unrest and energy resources. The oil wars of the 1970s highlighted a global overreliance on oil from the Middle East and prompted consideration of energy alternatives. Now, the war in Ukraine has demonstrated Europe’s overreliance on Russian gas, with subsequent shockwaves being felt around the world in terms of both prices and policies.

War in Ukraine has made energy transition even more critical because of its potential to provide greater energy security and thereby change the future of geopolitics by decentralising supply of – and power over – energy commodities.

Against this background, we are now seeing increased nationalism and the formation of strategic partnerships to ensure energy security through energy transition at the forefront of many government agendas. However, the short-term reality also seems to be that any ongoing conflict in Ukraine will force governments to prioritise investment in immediate fossil fuel energy supply – so as to ensure energy security – over meeting decarbonisation goals through energy transition.

Energy crisis in Europe, a crisis of conscience

From an energy perspective, Europe’s reliance on Russian fuels has seen it most directly affected by the war in Ukraine. Of the EU member countries, Germany is most reliant on Russian gas and, in the wake of the Russian invasion of Ukraine, it committed to divesting of all reliance on Russian gas by 2024. As Russia has retaliated to threats of price caps by cutting supply, this sharp pivot to alternative energy sources is not without consequence. In efforts to alleviate immediate pressures on energy supply, Germany will now keep unpopular nuclear plants, previously destined for closure, in operation. Similarly, Germany and the United Kingdom have also resorted to stalling the planned closures of coal-fired plants.

In order to secure energy supplies, particularly for the coming winter, Germany is also looking to Asia and the Middle East for gas and LNG, requiring unanticipated investment in fossil fuel technologies, including the leasing of storage facilities and construction of regassification infrastructure in German ports. However, conscious of its climate commitments, Germany has partnered with Qatar not only to provide much-needed gas, but also to establish a trade deal for green hydrogen. Many pundits remain hopeful that the hastened retreat from Russian gas may in fact result in an accelerated energy transition in Europe by increasing focus on renewable projects including the North Sea Wind Power Hub, which is planned to be jointly owned and operated by various European countries.

Critical minerals, critical supply

Although no single nation has power over the sun or wind, the same cannot be said for the critical minerals required for solar, wind and other renewable technologies. The war in Ukraine has already had a significant impact on critical mineral markets, including the extraordinary price volatility in the nickel markets earlier this year.

Russia is among the world’s highest producers of a number of key critical minerals, including nickel, aluminium, titanium, scandium and palladium, the latter of which is crucial to the automotive and semiconductor industries and of which, Russia is responsible for close to 37% of global production 1. Ukraine is a key producer and manufacturer of titanium and titanium products. Investments in critical mineral projects in Russia and Ukraine are now uncertain, with the war obstructing both production and supply.

As a result, the need for secure supply chains of critical minerals for energy transition has become even more acute. However, attempting to diversify supply is far from straightforward, partly due to the long lead times for exploration, mining and production, but also because the world’s best-known deposits of critical minerals are located in nations beset by geopolitical instability and poor ESG standards. It is estimated that 75% of the most in-demand critical minerals is produced by just three countries, including China and the Democratic Republic of Congo. 2

The complexities of the critical mineral supply chain and the potential volatility of the markets for these commodities are now influencing government agendas and policy.

There has been an increase in nationalism, particularly in the United States and Australia, with the Australian government funding domestic exploration and development of critical mineral mining as well as announcing plans to produce batteries domestically. Elsewhere, the UK government published its first ever Critical Minerals Strategy to ensure that the UK remains “in the game”.

However, at the same time, multinational trade and finance partnerships are also being established among like-minded nations, to enhance value chains and increase energy security. One recent example is the US-led Minerals Security Partnership whose members include the US, Australia, Canada, Finland, France, Germany, Japan, the Republic of Korea, Sweden, the UK and the European Commission. In September, Ursula von der Leyen announced plans for an EU Critical Raw Materials Act, aimed at avoiding the risk of becoming dependant on other countries by identifying strategic projects along the supply chain and building up strategic reserves.


There is no doubt that the short-term impact of the war in Ukraine has been increased investment in fossil fuel technologies

However, the war has certainly increased the impetus for diversification of both fuel and critical minerals supply chains, which is bound to have positive long-term consequences for the energy transition. The formation of strategic, trade partnerships for creating secure supply chains has been accelerated which will in turn, perhaps, fast-track the energy transition’s progress. These partnerships will underpin an increased desire to invest in critical mineral mining projects in stable countries with high ESG standards, such as Australia.

Ultimately, the impetus towards energy independence, born out of the energy transition, could bring about a new era in geopolitics, with reason to hope this may minimise the scope for, and duration of, future conflicts and any resultant energy crises.

Jo Garland
Partner, Perth
T +61 (0) 8 9422 4719

Kate Fisher
Senior Associate, Melbourne
T +61 (0)3 8601 4532


The Russia-Ukraine conflict: latest developments in sanctions

Following Russia’s invasion of Ukraine, an unprecedented series of sanctions was imposed that were almost bewildering in their speed and extent. The impact on the commodities sector was profound. In this article, we set out the latest developments in EU sanctions and our assessment of the situation, both to bring readers up to date and by way of illustration of the range and complexity of issues to which the sector has been exposed.

7th package of EU sanctions relating to Russia

This was announced by the EU on 21 July 2022 in further amendments to EU Council Regulation 833 of 2014 (the “EU Regulation”) as amended.


Amongst the main changes introduced was the amendment of article 5aa, which prohibits engaging in transactions directly or indirectly with entities listed in Annex XIX (including Rosneft, Gazprom Neft and Transneft). Whereas the original provision included an exception for “ transactions which are strictly necessary for the direct or indirect purchase, import or transport of Russian natural gas, oil, titanium, aluminium, copper, nickel, palladium and iron ore into the Union, a country member of the European Economic Area, Switzerland, or the Western Balkans”, it now differentiates oil from these other commodities. Transactions with entities listed in Annex XIX with respect to commodities other than oil remain prohibited unless the commodity is being imported “into the Union…”, but transactions with these entities as far as Russian oil is concerned are now permitted, regardless of whether the oil is being transported into the Union or not.

Accordingly, all transactions with entities listed in Annex XIX are now permitted with respect to Russian oil, as long as they are “ strictly necessary” for the purchase, import or transport of that oil, and in so far as the transaction is not prohibited by article 3m (prohibition on Russian oil purchase, import and transfer/ transport into the EU and related services) or article 3n (prohibition on services relating to the transport of Russian oil outside the EU). To date, the EU has not provided any guidance on what “strictly necessary” means.

Whilst not entirely clear from the language of the provision, the EU has stated that article 3m is only engaged when Russian oil is being imported into the EU 1. Accordingly, under article 3m it is prohibited directly or indirectly to purchase, import or transfer crude oil or petroleum products, as listed in Annex XXV, if they originate in Russia or are exported from Russia and to provide certain types of services, including brokering services and insurance, if the oil is coming into the EU. However, that prohibition is subject to various exceptions, including a wind-down period for spot contracts until 5 December 2022 for CN 2709 00 oil (crude) and 5 February 2023 for CN 2710 oil (products).

Under article 3n, it is prohibited to provide certain services, including brokering services and insurance related to the transport of Russian oil outside the EU. This is subject to a wind down period for pre-existing contracts (sales contracts and brokering contracts concluded before 4 June 2022) provided that they are executed before 5 December 2022.


Article 3o of the EU Regulation now prohibits the purchase, import, or transfer/transport, directly or indirectly, of gold, as listed in Annex XXVI, if it originates in Russia and it has been exported from Russia into the Union or to any third country after 22 July 2022. It also prohibits the provision of certain types of services in that respect, including brokering services and insurance. This ban was imposed with immediate effect, with no wind down period. There are exceptions, which relate specifically to diplomatic or cultural purposes and products which are not intended for sale. Switzerland mirrored this change on 3 August 2022.

What is the impact?

It is now permitted to trade with an Annex XIX entity, i.e. to lift Rosneft/ Transneft pipeline crude, where it is bound for a destination outside the EU.

If coming into the EU, it is permitted to lift oil products from Annex XIX entities until 5 December 2022 for CN 2709 00 oil (crude) and 5 February 2023 for CN 2710 oil (products). It is also permitted to provide brokering services and insurance with respect to the trading of Russian oil coming into the EU until 5 December 2022 for CN 2709 00 oil and 5 February 2023 for CN 2710 oil.

Pre-existing brokering or insurance contracts (concluded before 4 June 2022) related to the transport of Russian oil outside the EU are permitted, as long as they are executed by 5 December 2022. This would include paying out all claims under an insurance policy (unless the EU Regulation or FAQs are updated on that issue). However, new brokering services or insurance related to the transport of Russian oil outside the EU remain prohibited, notwithstanding the relaxation of the restrictions on trading with Annex XIX entities.

All of the above are subject to the “ strictly necessary” criteria in article 5aa of the EU Regulation, described above.

Interaction with UK sanctions

Under the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) (the “UK sanctions”), it is currently permitted to provide brokering services and insurance with respect to the trading of Russian oil. However, from 31 December 2022, it will be prohibited to do so under the UK sanctions if the oil is being imported into the UK (or the intention is that it comes into the UK). It is important to remember that if Russian oil is coming into the EU, EU sanctions would be applicable by reason of article 13(e) of the EU Regulation, even if the company involved is based in the UK with no EU nexus whatsoever.

Latest guidance

The EU updated its FAQs on the import, purchase and transfer of some listed goods on 10 August and 19 September 2022. These FAQs provided guidance on articles 3g (iron and steel products), 3i (goods which generate significant revenues for Russia) and 3j (coal) of the EU Regulation.

The update on 10 August made clear that the prohibition on the goods listed in Annexes XVII, XXI and XXII apply even when the goods are not destined for the EU. However, on 19 September, the Commission introduced an exception to these prohibitions, for the transfer/transport outside the EU of some goods listed in Annex XXI (some fertilizers, certain hydrocarbons, certain animal feed and some essential goods including wood and cement products) and all the goods listed in Annex XXII (coal and related products) and related financing or financial assistance, in order to combat food and energy insecurity and avoid negative consequences of sanctions preventing the transfer of those goods to third countries.

Given that the FAQs are non-binding in character, the question remains whether EU operators can safely rely on them.

HFW comment

The position on sanctions continues to change frequently and the only way to be sure that your understanding is up-to-date is to exercise due diligence by checking that new contracts remain lawful in all jurisdictions applicable to your situation, both in terms of suppliers and related parties’ listing status and sectoral sanctions.

Given the multi-jurisdictional nature of international trade, the situation is set to remain challenging