The London Metal Exchange (LME) has taken steps to prevent traders from exploiting a loophole involving Russian aluminium, aiming to profit from rule changes in compliance with new sanctions.
Following the U.S. and Britain’s ban on the LME from accepting new Russian production of aluminium, copper, and nickel to curb Russian revenues from the export of these metals, the exchange has prohibited Russian aluminium, copper, and nickel produced from April 13 to adhere to the sanctions imposed over Russia’s invasion of Ukraine.
Prior to this, LME rules distinguished between Type 1 and Type 2 Russian warrants for metal produced before April 13, creating an opportunity for lucrative “rent deals,” where warrants are title documents conferring ownership.
Type 1 contracts allowed UK LME members and their clients to freely trade Russian metal warrants in existence before April 13, while Type 2 covered Russian metal produced before April 13 but not yet on LME warrant, and which UK companies could only trade or take physical delivery of for non-UK clients.
The LME has clarified that when a Type 1 Russian Warrant is re-issued, the owner has the option to convert it to a Type 2 Russian Warrant. However, the exchange emphasized that this does not alter the fact that the warrant may still be cancelled and loaded-out by UK Persons because it was on warrant as of the end of April 12, 2024.
Industry sources indicated that the clarification of the rules aims to prevent rent deals or agreements that enable LME warehouses to share their fees or rental income with companies delivering metal to them. Under such arrangements, the delivering company can receive a share of the rent, paid by the new owners, for as long as the metal remains in the warehouse, without retaining ownership.
In response to a request for comment, the exchange stated, “The LME has made some refinements to its approach, with the aim of ensuring fairness, reducing administrative burden, and facilitating the circulation of globally usable metal without compromising the protection of its market from potential breaches of UK sanctions.”