The EU’s embargo on Russian oil: Reaching consensus while diversifying options
Brussels decided to phase out supplies of Russian crude oil within six months and petroleum products by the end of 2022. After weeks of negotiations concluded with the particularly hard-won agreement on the Russian oil embargo via seaborne shipments, the European Union (EU) adopted the sixth sanctions package against the Russian Federation.
The agreement of new sanctions would also prohibit insurance and reinsurance of Russian ships by EU companies as well as financial and broadcasting measures. Further measures of the new sanctions package include removing of Sberbank, Russia’s largest consumer bank from the SWIFT international payment system, suspending broadcasting in the EU of three Russian-controlled media outlets that were being used to spread Kremlin propaganda and other export restrictions.
When it comes to the EU’s oil dependence, Russia is the largest oil exporter and one of the main gas sources of the European market. Consistently limiting the fossil fuels imports from Russia was one of the key economic objectives of the European Union since Moscow started the war against Ukraine. While the main goal of the sanctions is modelling the behavior of the sanctioned country, since the beginning of the Russian war against Ukraine, cutting two thirds of Russian oil imports to the EU was seen as a measure that could have serious, immediate impact on the Russian economy.
Despite the contrasting position of Budapest, that is acting cautiously, the agreement was reached after 26 days of Hungary blocking the proposed ban. The EU approved a temporary exemption to continue to receive crude oil by pipeline for member states who have a particular pipeline dependency on Russia with the condition of not to resell oil and petroleum products to third countries. Another temporary derogation has been agreed for Bulgaria which will import crude oil and petroleum products via maritime transport. Estimations show that the embargo will hit some 1.9 million barrels per day of Russian crude imports by the end of the year, with around 300,000 b/d still flowing to Hungary, Slovakia, and the Czech Republic via pipeline. Another 1.2 million b/d of refined product imports from Russia would cease by the end of the year.
Although Russia’s oil exports decreased during the pandemic by 11%, down to 7.3 million barrels per day, the country is now the third largest exporter of oil (down from second place in 2019). Europe, followed by China, are Russia’s top export oil markets. Supplying 2.2 million barrels per day of oil and 1.2 million bpd of oil products to the EU, Russia is the biggest exporter of oil and oil products to the European Union’s market.
Russia is known for using its energy exports for economic
gains but also as a tool of foreign policy leverage. It uses gas disruptions or preferential gas agreements to punish or to reward countries that are highly dependent on Russian energy. Creating energy crises by disrupting gas flows or setting ultimatums was seen on display on several occasions. The suspension and cutting-off gas in 2006 and 2009 that impacted also the EU market, energy embargo against Georgia, ultimatums to halt the gas flow set to Moldova, seizing the drilling platforms in the Black Sea during the illegal annexation of Crimea, when Ukraine has lost about 80% of its oil and gas fields in the Black Sea and a significant part of its port infrastructure, (in fact, confiscation of Naftogaz facilities operating in the Black Sea) are a few examples. These disruptions impacted both transit states and end-consumers. Unfortunately, these actions of the main fossil fuel supplier of the EU did not trigger a comprehensive consolidation of energy sovereignty within the bloc. This feature is especially pronounced in the countries that are most vulnerable to disruption across the states of Central and East European (CEE).
Once the negotiations on imposing the oil embargo against Russia were initiated, oil prices reached record highs. As a commodity that plays a disproportionately large role in Russia’s budget, oil prices have a significant importance on Russia’s geopolitical calculations. Despite some opinions stating that high prices will compensate the markets Russia will lose during the embargo, the global oil price is not the only one factor that is able to compensate Russian loses after sanctions. The resulted conundrum poses a lot of challenges to all energy market players. Indeed a high volatility for oil prices is a trend that will continue despite the recent decision of the 23-member group of the Organization of Petroleum Exporting Countries (OPEC) and allies, that agreed to lift output by 648,000 bpd in July, up from 432,000 barrels in recent months. The decision to raise daily production falls short of closing the gap created by less output from Russia and will be inadequate to meet global demand.
Simultaneously another factor not to overlook is the withdrawal of COVID-19 restrictions in Shanghai after two months of lockdown and fuel demand is expected to increase in the country. Nevertheless, the EU has leverage over Russia due to its inelastic energy supply - it is difficult and costly for Russia to divert its energy elsewhere. On top of that, Russian oil reaches several markets with a huge discount because of the sanctions as it is the case of India that buys Russian oil at a preferential rate with $30-40/barrel discounts, therefore the potential high oil price perspective is not enough for strengthening the already hampered resilience of Russian economy against the embargo’s effects.
Additionally, the prohibition of insurance and reinsurance of Russian ships is a critical part of the June 2022 sanctions package. Cutting off shipping insurance and reinsurance from the European Union and United Kingdom will hinder Russia’s ability to redirect crude oil and petroleum products to other regions. Supported by the UK, the initiative should enter into force after a six-month phase period. EU companies cannot provide “technical assistance, brokering services or financing or financial assistance, related to the transport, including through ship-to-ship transfers, to third countries of crude oil or petroleum products” from Russia.
The ban on insurance on Russian ships was disputed by Cyprus, Malta and Greece, the largest ship-owning nation but the coordinated move will affect Russia's ability to export crude oil and shut Moscow out of the Lloyd's of London insurance market. This could have much wider consequences for Russian exports and force it to turn to less developed markets for insurance, insurance prohibiting measure potentially becoming an important lever.
As global oil flows are being reshaped, in the past few months, the EU increased its imports of oil from the United States, West Africa, and the Middle East. European refiners seeking substitutes for Urals, Russia’s flagship crude oil, are now turning their attention to alternatives sources in Norway, Nigeria, Iraq and other oil producing countries.
Apart from speculations whether the adoption of the sixth sanction package represented a challenge for the EU and the potential seventh sanction package, measures being significantly weakened because of wrangling between the EU member states, the fact that new sources and delivery routes for oil and petroleum products are being contracted is a step forward in reducing the bloc’s massive dependence on the Russian fossil fuels.