How Dubai is reshaping the global oil trade

This is an audio transcript of the Behind the Money podcast episode: ‘How Dubai is reshaping the global oil trade’

Tom Wilson
I’m at the Fujairah oil terminal in the mountainous northeastern corner of the United Arab Emirates on the Gulf of Oman. The sun’s high in the sky. And behind me, to my left and to my right, I can just see rows and rows of enormous oil storage facilities.

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Michela Tindera
Earlier this year, the FT’s energy correspondent Tom Wilson took a trip to Fujairah. It’s a port city in the United Arab Emirates. The city is roughly an hour’s drive east from Dubai and sits along a major shipping route in the Gulf of Oman.

Tom Wilson
The port symbol is a big blue F on a white circle, and the entrance is a big, sweeping, concrete blue wave. Cars queue up to get access. Behind the barriers is the oil terminals, a network of pipes, heavy goods, vehicles and other trucks moving back and forth.

Michela Tindera
Lately, business at the port has exploded.

Tom Wilson
The dome has been a hive of activity this year as commercial activity in the UAE booms. But in particular flows of oil into the area have jumped. Port statistics suggest it’s been a record year for the number of oil vessels calling at the ports of Fujairah, with as many as 12,500 vessels stopping at its offshore anchorage area. What’s behind that boom? Russian oil.

Michela Tindera
When Russia invaded Ukraine last year, western sanctions put a chokehold on Russian exports, including oil. Here’s what Tom told me about this.

Tom Wilson
Western sanctions on Russia have certainly led to what is one of the biggest redirections of global energy flows in history. But in preceding months, as I’ve spoken to traders and been talking in hushed tones about who was trading Russian oil and where Russian barrels were moving to, and one name or one jurisdiction kept coming up time and time again. And that was the United Arab Emirates.

Michela Tindera
What Tom heard about during those conversations only became more clear after he visited the UAE and saw everything for himself. What he could see was how energy trading was shifting into the Middle East.

Tom Wilson
Every single commodity executive that I spoke to was incredibly bullish about the future and about the growth of energy trading in the UAE and about its potential to become one of the major energy trading hubs in the world.

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Michela Tindera
I’m Michela Tindera from the Financial Times. On today’s episode of Behind the Money, we’re looking at the rise of the UAE as an oil trading hub and how that shifts the balance of power in oil markets and the global economy.

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For years, Tom Wilson says that one of the world’s top oil trading centres was actually in a country that doesn’t produce any oil at all.

Tom Wilson
Switzerland’s been a jurisdiction of choice for the world’s biggest commodity traders for decades. The likes of Glencore, Vitol, Trafigura, Gunvor. So these are among the world’s biggest independent energy traders. These are all headquartered or have major offices in Switzerland.

Michela Tindera
At the most basic level, these oil traders are middlemen. They connect buyers with sellers.

Tom Wilson
So a big producer of oil, the focus of their work is to produce that oil, but they don’t necessarily have the connections with buyers all around the world. They don’t necessarily have the expertise or the desire to get involved in the shipping of that oil. So it’s much easier for them to sell in advance their production to big commodity trader like Trafigura, for example, who has both the logistics expertise, the relationships with the shipping companies and the relationships with buyers around the world to collect that oil from the port in question and then move that to the place where it’s needed and ultimately get the best price for that oil.

Michela Tindera
And so Switzerland was considered to be an ideal place for traders to set up shop for a few reasons.

Tom Wilson
There’s two factors that made Switzerland particularly attractive to commodity traders. One was secrecy. So Swiss bankers are famously discreet, meaning it’s much easier to keep your commercial secrets hidden from prying eyes. And then secondly, Switzerland had this history of political neutrality, meaning that traders who generally feel agnostic about the kind of politics of the regime from which they’re buying commodities . . . Commodities, particularly oil, are often produced in parts of the world where there’s a history of conflict or in countries where rule is authoritarian rather than democratic. And these traders have to go there and buy oil because that’s where the oil is produced. And Switzerland, because of its history of neutrality, I think those traders have felt confident that they generally be able to continue to do business with those parts of the world without being challenged by the Swiss government.

Michela Tindera
But that changed a year and a half ago when Russia launched its full-scale invasion into Ukraine.

Tom Wilson
Firstly, there was a big public backlash against any western company continuing to do business with Russia. Then we saw that European banks started to get cold feet about continuing to process transactions involving Russian business. And subsequently the biggest European traders of Russian oil, like Trafigura and Vitol, announced plans to wind down that business.

Michela Tindera
What followed then was a series of European sanctions. These included a ban on importing Russian oil into Europe and a price cap on all other shipments that made it, so western companies couldn’t be involved in the trade of any oil pumped from Russia unless it fell under a certain price.

Tom Wilson
Those sequence of events basically meant that Russian oil trading was gonna have to move from the household names that I was very familiar with to a whole slew of new partners. And then the question was who? Who was going to keep moving or trading Russian oil?

Michela Tindera
This all meant that Tom had a mystery to solve.

Tom Wilson
For much of the last year, various names would start to filter through, anecdotally from conversations with trading executives. But it was hard to get concrete evidence, not least because the Russian government started to reduce the level of official statistics that it was publishing. And then equally, those companies still involved in the Russian oil trade were generally the type of operators that were less willing to talk publicly about what they were doing. So it was hard to get a full picture.

Michela Tindera
But then Tom had a breakthrough.

Tom Wilson
What we were then lucky enough to do in this recent reporting was get access to some Russian customs data, which is really the last reliable source of information on Russian trade. And by analysing that information, we could suddenly get a full picture of who was buying Russian oil today and therefore who the big traders had become.

Michela Tindera
Inside this data, Tom found that the UAE had become what he calls the single most important trading spot for Russian oil during the first four months of 2023.

Tom Wilson
I mean, through the rumours and various conversations I’ve had with traders over the year, it was clear to me that the Emirates was becoming a major centre for the trade in Russian crude and that was really borne out in the customs data that we got hold of. The customs data demonstrated that companies traded in the UAE had moved around $17bn worth of oil between January and April, representing about a third of Russia’s exports. So a massive amount. And that boom in Russian oil, it’s not the only product that, you know, these UAE traders are trading. The Russian oil is helping lubricate the system. One veteran of the oil trading industry told me that Dubai, in his words, was the new Geneva.

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Michela Tindera
While the UAE is the world’s eighth largest producer of oil, it historically hasn’t been a major trading hub for it. Once sanctions went into effect in Europe, some oil traders that had bought and sold Russian oil began to look for other places to operate from.

Tom Wilson
In western capitals, there’s a sense that doing business with Russia is now morally wrong. In the UAE, the view was that it is legal. It’s not prohibited by UAE law. And therefore Russian oil is just one commodity among many. And there’s no difference between a Russian customer and any other customer.

Michela Tindera
The price cap was designed in a way to keep Russian oil flowing while reducing the revenue collected by the Kremlin. As a result, western companies can still be involved in the trade of Russian oil, but only if that oil is sold below the cap. However, those restrictions don’t apply to companies in the UAE, which, like most countries outside the G7, has chosen not to enforce the west’s sanctions. Tom says that in the UAE, the types of traders that have set up there fall into two categories. The first are what he describes as well-established trading houses. Over the last 12 months, some of these companies have set up new entities in the UAE that allow them to trade Russian oil more freely. One example of that is the Swiss trading house called Gunvor.

Tom Wilson
Gunvor already had one entity in the UAE, but then set up a second entity in Dubai last year specifically to trade Russian oil. Gunvor told us that it set up that business in order to create a separate structure, to separate the trading activity from the rest of its business. However, importantly, Gunvor is going to continue to trade Russian oil, it tells us, in compliance with the G7’s price cap even though it’s not legally required to in Dubai, but it has decided it will trade under the price cap because it wants to retain access to western banking and shipping services in order to facilitate that trade.

Michela Tindera
But there’s actually a second much larger group.

Tom Wilson
The vast majority of the Russian oil trade moving through the UAE is a network of newly established little known names with unclear ownership that are now collectively moving billions of dollars of Russian oil a month. And in most cases, those companies didn’t exist before the war started. They’ve been incorporated in the last 18 months and we really still know very little about them.

Michela Tindera
Tom says that these new lesser known companies raise some important concerns.

Tom Wilson
Western governments have been pushing the commodity industry over the last 30 years to become more transparent and have made good progress in doing so. And the commodity industry historically had been a sector where you have things like tax avoidance and for the money laundering where it was common and they’ve made a lot of progress pushing the commodity industry out of the shadows. And so the rise of these companies really kind of sets that back. And then in addition to that, the big commodity traders that dominated the Russian oil trade in the past that we’ve spoken about, like Trafigura, you know, over the last 30 years have become experts in the movement of commodities. So they are using best-in-class vessels. They are using well-known, well-tested insurance companies to kind of underwrite those cargoes. The shift of that trade to new shipping companies, often using much older vessels, and to new untested insurance companies, this can raise concerns in the industry about the potential for logistical disruptions, for accidents, for crashes involving old vessels. And we haven’t seen those yet, but it’s definitely a concern.

Michela Tindera
In recent years, Tom says that the UAE has laid the groundwork to make itself an attractive business environment for foreign expats. It’s built out schools and housing and there’s a 0 per cent personal income tax. But there are other big reasons too.

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Tom Wilson
See, you have these two different groups of companies in the UAE trading Russian oil. But interestingly, they’re both really there for the same reasons. One is the perceived political neutrality of the UAE. So the traders now recognise that they’re operating in a world where Russia is unlikely to be the last country to face western sanctions on its exports, and therefore you’ve set up your trading businesses somewhere like the UAE, which is perceived to be politically neutral. That potentially gives you a little bit more protection, that your trading contracts in the future, not necessarily with Russia, but with any other country that potentially falls foul of western sanctions, that those trading contracts are not suddenly gonna be undermined by a shift in international relations.

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Michela Tindera
As we heard at the beginning of the episode, Tom found this hive of activity at the port in Fujairah. But this boom there only tells part of the story of where all this Russian oil is headed.

Tom Wilson
Interestingly, only about 10 per cent of that oil was actually ending up in the UAE. The vast majority, about 90 per cent, never actually touches Emirati soil. Instead, it’s traded by traders on computer screens or telephones, and then moves from Russian ports directly to new buyers in Asia, Africa and South America. And that’s really one of the biggest consequences of the war, is this huge shift in energy flows. Prior to the war, the biggest destination for Russian oil exports was Europe. And following the invasion, the European Union imposed an embargo to Russia to find a new destination for its crude. And the vast majority has moved to two places, China and India.

Michela Tindera
So, Tom, what is the US and EU’s stance on what’s happening here?

Tom Wilson
So publicly, neither the US nor the EU has said anything really about this shift in trading activity out of Europe and into the UAE. And partly that’s because, again, publicly they’ve wanted to express support for the oil price cap that they created together and enforced. The public position or the west’s public position on the price cap is that it’s been a success. But I increasingly believe that privately, the US and the EU will be concerned over this shift in trading activity because ultimately it shifts money and economic activity kind of out of the west into the Middle East. And as time goes by, it is clear that more and more Russian oil is moving outside of the price cap. And the shift to Dubai is also kind of part of that story. Many of these UAE-registered traders appear to have found ways to get around the price cap and ensure that Russian oil continues to flow. And ultimately, that isn’t what the west wants.

Michela Tindera
So do you see this shift from trading in Switzerland to trading in the UAE as a permanent change? Or is it something that if the war ends, it might switch back?

Tom Wilson
I think Switzerland will remain the headquarters of the world’s biggest commodity traders for many years to come, and it will remain a key cog in that industry. But the shift to Dubai in terms of oil and precipitated by Russian oil is important. So I think you’re gonna see more traders relocating there. And we’re gonna see Dubai continue to establish itself as one of the pre-eminent energy trading hubs in the world. And for me, it really speaks to this broader economic shift that we’re seeing happening in the world.

During any period of high commodity prices, you always see a transfer of wealth from consuming countries to producing countries. And we saw that on a huge scale last year with the Middle Eastern producers, the UAE included, making billions and billions of dollars, kind of based on a high oil price. And we now see that kind of feeding through into other sectors. And I really see the shift to Dubai of . . . the oil trading as part of that story, demonstrating that the UAE and the Middle East more broadly is gonna become an increasingly important global centre for the global economy, but particularly in the commodity trading industry.

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Michela Tindera
Thanks for listening. Don’t forget, we’re still accepting your questions about business and finance for our show. We’ve already received some submissions about European banking and UK stocks, so keep them coming. There’s details on how to get in touch with us in our show notes. And if you send in a question, we might play your message on the show. Also, if you want to read more from the FT about what we talked about during this week’s episode, the articles linked in our show notes are free to read right now.

Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. See you next week.

Update: A new version of this episode was uploaded on August 9, 2023 to correct that Fujairah is roughly an hour’s drive east from Dubai, not west.