Switzerland keeps profiting from Russian oil and gas

Hidden away in the Alps, Switzerland is known for being a major banking center. Commodity trading, on the other hand, makes fewer headlines, but this business is much more important. This may seem strange for a country far away from major trade routes, without access to the ocean and without former colonies or any significant raw materials of its own. Still, the country is one of the world's most important trading centers for raw materials.

"In Switzerland, the industry has a significantly larger share of gross domestic product than tourism or the machine industry," Oliver Classen, from the Swiss nongovernmental organization Public Eye, told DW.

Huge transactions are made here in near secrecy. According to a government report from 2018, the trade volume processed via Switzerland was estimated at almost $1 trillion (€906 billion). The five largest Swiss companies in terms of sales are not banks or pharmaceutical companies, but commodity traders. Most of the 900 companies active in commodity trading are based in Geneva, Zug or Lugano.

Russian commodities often go through Switzerland

About one-third of the oil traded worldwide is bought and sold in Geneva. Likewise, two-thirds of the global trade in base metals such as zinc, copper and aluminum, and two-thirds of internationally traded grains are processed in Switzerland.

Russia, with all its oil and gas, is no stranger to the country. According to a report by the Swiss embassy in Moscow, around 80% of Russian raw materials are sold via Switzerland.

Oil and gas exports are the main source of income for President Vladimir Putin. Together they make up between 30%-40% of the Russian state budget. In 2021 alone, Russian state-owned companies earned around $180 billion from oil exports.

With the war raging in Ukraine, Swiss politicians are becoming more critical. "Switzerland must now turn off the tap of Russian war financing," demanded Cedric Wermuth from the Swiss Social Democrats on SRF radio. Indeed, the country is in a unique position to cut off the commodity trade and the fortunes of rich Russians. So far, however, the sanctions imposed by the EU and the US have not affected trade in raw materials, even though American will no longer import Russian oil.

True to its history, Switzerland maintains its neutral status and does not impose sanctions on its own. The country's embargo law means it can only join sanctions others have put in place, so the country only steps up if pressured after major trading partners or the UN Security Council decide on economic sanctions.

Swiss efficiency for the commodities trade

Commodities are often traded directly between governments and through commodity exchanges. Companies in Switzerland have specialized in the direct sale of commodities, because they have enough money to handle the trade in the first place.

Depending on the current price of oil, a single tanker load of crude oil can come in at $100 million. That is money most companies don't just have sitting around. But Switzerland was at the forefront of developing financing instruments for such big transactions.

In these transactions, letters of credit are often used. A bank gives the dealer a loan and temporarily becomes the owner of the goods. As soon as the buyer has paid the bank for the raw materials, the ownership of the raw materials is handed over. As a result, the retailer has a large credit line and the bank has the commodities as security. 

Details are hard to come by

In the end, the raw materials usually never touch Swiss soil, but go directly from the country of origin to the recipient. Called transit trades, these deals ensure that normally only the money flows through Switzerland.

Accordingly, no information about the scope of trade ends up with the Swiss customs. The Swiss National Bank publishes some data, but this information does not record the flow of raw materials in detail.

"The entire commodity trade is underrecorded and underregulated," Elisabeth Bürgi Bonanomi from the University of Bern told DW. "You have to gather quite a bit of data, and not all the information is available."

Who buys which raw materials from whom at what prices remains in the shadows. The ultimate owners of most commodities-trading businesses in Switzerland are often unknown since they are all privately held companies, with the exception of Glencore.

"There's a whole range of companies that fly under the authorities' radar and whose real beneficiaries aren't known, because they're managed in obscure offshore holding companies," Classen said.

A big lack of regulations

The lack of regulation is very fortunate for commodity traders, especially as many commodities are mined in nondemocratic countries. "In contrast to the financial market, where there are rules to combat money laundering, illegal or illegitimate financial flows and a financial market supervisory authority, there is currently no such thing for commodity trading," David Mühlemann from Public Eye told German public broadcaster ARD.

"Commodity trading needs to be regulated. You need transparency about the payments made by commodity traders to governments, especially to autocratic regimes, which divert this money into their own pockets or, in the worst case, finance wars," Mühlemann said. "This is not just about Russia."

Some commodity traders have become so powerful, they are now able to influence entire countries, Classen said. In just one example, Glencore gave Chad over a billion dollars as a credit line and in return got access to its crude oil deposits.

A new regulator for commodities?

"Although the Swiss Federal Council recognizes the problem, it continues to rely on the indirect supervision of commodity traders by the banks themselves," Adria Budry Carbo, a commodities expert at Public Eye, said in an interview with Amnesty International.

The banks are not obliged to find out who their customers are doing business with or where the money is going. "For the government this seems to be enough. In their view, there is no need for a commodity law or a special regulatory body," Carbo said.

For years, Public Eye has been calling on Switzerland to introduce a commodity market regulator that would be an independent authority modeled on its financial market regulator. An initiative backed by the Greens in 2015 failed; now the party wants to propose new rules to create a regulatory authority. Others in the government are not so sure.

As long as other Western countries do not sanction trade in raw materials, however, Swiss commodity traders can continue to earn money with Russian oil and gas — and fill Putin's war chest.

This article was originally published in German.