Exclusive-Russia’s Surgut works with China to allow oil sales to go on

By Florence Tan

SINGAPORE (Reuters) -Russian producer Surgutneftegaz has allowed Chinese buyers to receive oil without providing guarantees known as letters of credit (LC) in order to bypass Western sanctions, three people with knowledge of the matter said.

The change in terms is allowing Surgutneftegaz to continue to sell ESPO Blend crude from the port of Kozmino in Russia’s Far East to China, the world’s top oil importer.

Russian ESPO crude exports, at 754,000 barrels per day in April, provide China’s biggest source of spot crude.

Following Russia’s invasion of Ukraine that began on Feb. 24, oil prices have risen to 14-year highs on global markets. Russia is the world’s top exporter of crude and oil products combined. [O/R]

Western sanctions in response to the invasion, which Russia describes as a “special military operation”, have led banks to halt the issuance of LCs for all oil that originates from Russia.

China has repeatedly voiced opposition to the sanctions, calling them ineffective and insisting it will maintain normal economic and trade exchanges with Russia.

To get round the restrictions, Chinese companies are using open accounts that allow the customer to buy goods on a deferred payment basis, with a requirement to pay in full up to three days after the cargo is loaded, the sources said. They could not be named because of the sensitivity of the matter.

It was not immediately clear which banks were involved.

Surgut declined to comment.

A letter of credit, which allows 30 days for payment and is backed by a bank, is seen as the strongest guarantee for both sides.

The parties have been forced to find a solution for cargoes that have already been traded and due for loading in March and April, the sources said without giving quantities.

One of the sources said payment in U.S. dollars was still possible during a grace period until June for the implementation of U.S. sanctions on Russia’s access to the SWIFT international payment system.

The sources said arrangements were also being worked out with buyers of Russian Urals crude.

Since late February, Surgutneftegaz has failed to award most of the spot tenders for March-loading Urals as potential buyers did not bid after banks halted the issuance of LCs for Russian oil.

(Reporting by Florence Tan; additional reporting by Nerijus Adomaitis in Oslo; editing by Barbara Lewis)