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Insights into Editorial: The European Union’s ban on Russian oil

 

 

Context:

As part of the sixth package of sanctions since Russia’s invasion of Ukraine, the European Union member states on May 30 reached an agreement to ban 90% of Russian crude oil imports by the end of the year.

The partial embargo worked out following extended negotiations in Brussels, exempting pipeline oil in order to bypass Hungary’s objections to the ban.

 

What was the original proposal of the oil embargo?

The proposal to completely phase out Russian crude and refined products from EU territory within a time frame of six to eight months was first mooted by European Commission President in early May.

Addressing European lawmakers, EU sought a “complete import ban on all Russian oil, seaborne and pipeline crude and refined.”

It needed the agreement of all the 27 EU member states in order to be implemented.

 

How much Russian oil does the European Union import?

Europe was the destination for nearly half of Russia’s crude and petroleum product exports before Russia’s invasion of Ukraine, according to the International Energy Agency (IEA).

The EU imported 2.2 million barrels per day (bpd) of crude in 2021, including 0.7 million bpd via pipeline, as well as 1.2 million bpd of refined oil products, IEA data shows.

 

What was the rationale behind such a move?

The Russian economy is heavily dependent on energy exports, with the EU paying billions of dollars every month to Russia for its crude and refined products.

The EU wants to block this massive revenue inflow which, as repeatedly pointed out by Ukrainian President, is akin to Europeans bankrolling Russia’s war.

The EU has been attempting, ever since the Ukraine invasion, to build consensus on ways to hurt Russia economically so that it is forced to roll back its military offensive.

The most obvious route was to stop buying Russian energy, which isn’t easy given European households’ dependence on Russian oil and gas.

However, in the context of two long term EU objectives:

1.reducing fossil fuel dependence in favor of renewables, and

2.eliminating dependence on Russian energy for greater strategic autonomy and energy security — member states agreed to make a start by phasing out Russian oil.

 

What are the terms of the ‘compromise deal’ that has been agreed upon?

The main departure from the original proposal is the “temporary exemption” from the oil embargo for countries that import Russian crude via pipeline.

In other words, EU leaders have, in principle, agreed to ban all seaborne imports of Russian crude, which account for two-thirds of the EU’s oil imports from Russia.

However, with Germany and Poland pledging to phase out even their pipeline imports from Russia by the end of the year, the embargo would eliminate 90% of Russian oil imports.

The remaining 10% that’s been allowed represents a free pass for Hungary, the Czech Republic, Slovakia, and Bulgaria to continue imports via the Druzhba pipeline, the world’s largest oil pipeline network.

Additionally, Hungary has obtained a guarantee that it could even import seaborne Russian oil in case of a disruption to their pipeline supplies.

This was deemed a legitimate concession since the pipelines do pass through the war zone in Ukraine.

 

Why was exemption given for pipeline imports?

The exemption for pipeline imports — essentially at the behest of Hungarian Prime Ministe— was made on the logic that landlocked countries (Hungary, Czech Republic and Slovakia) that are heavily dependent on Russian pipeline oil do not have a ready option to switch to alternative sources in the absence of ports.

While Hungary imports 65% of its oil via pipeline from Russia, 50% of the Czech Republic’s oil imports are Russian, while Slovakia gets 100% of its oil from Russia.

Bulgaria, which gets 60% of its oil from Russia, is not landlocked. But its refineries at present are only equipped to process Russian crude.

Until it invests in infrastructure to be able to process non-Russian crude delivered to its ports, it wants to be able to continue importing Russian oil via pipeline and has accordingly claimed the exemption.

 

Are there other elements in the sixth package of sanctions?

Apart from the oil embargo, the sixth package of sanctions also contains other tough measures against Russia.

These include:

  1. Cutting off Sberbank of Russia, Russia’s largest bank that holds one-third of Russian banking assets, from the SWIFT messaging system;
  2. A ban on three Russian-owned broadcasting networks from the EU;
  3. Sanctions on individuals responsible for war crimes in Ukraine; and
  4. A ban on EU-based firms offering insurance,
  5. Financing,
  6. Brokering or any other technical services related to the transport of oil to Russian ships — a measure aimed at curbing Russia’s ability to divert its oil to non-EU destinations.

 

How will the sanctions affect Russia?

  1. Analysts calculate that a two-thirds cut in Europe’s imports of Russian oil would mean a reduction of 1.2-1.5 million barrels a day in oil, and one million barrels in refined products, which might cause Russia an annual loss in revenue of $10 billion.
  2. Given Russia’s limited storage infrastructure, the cutback in demand would force Russia to find other markets.
  3. Since that won’t be easy, Russia might have to cut production by 20-30%, say, industry experts.
  4. So far, Asian importers, especially India, have absorbed some of the excess inventory at discounted prices.
  5. But it remains unclear if the embargo would have any impact on Russian military operations in Ukraine.

 

How will the sanctions affect Europe?

It is likely to further fuel inflation in Europe, where many countries are already facing a cost-of-living crisis.

EU leaders have tried to balance contradictory pressures — of having to take decisive action against a military aggressor on European soil, but without causing too much pain to its citizens.

But European lifestyles have tended to take cheap Russian energy for granted, and if inflation peaks further, the EU runs the risk of losing public support for harsh sanctions.

 

What about import of Russian gas?

Compared to Russian oil, Europe’s dependence on Russian gas is much greater, and this embargo leaves the import of Russian gas — which accounts of 40% of Europe’s natural gas imports — untouched.

In other words, Europe will continue to pay Russia for gas imports. But since crude is more expensive than natural gas, the oil ban is expected to hurt Russian revenues.

 

How has India responded to these developments?

India ramped up purchases of Russian crude at discounted prices in the months following the Russian invasion, and this policy is expected to continue.

The announcement of the EU ban caused an immediate surge in oil prices, and as Europe seeks alternate sources – from West Asia, Africa and elsewhere — for its oil needs, prices are expected to stay high.

In this context, with Russia reportedly offering discounts of $30-35 per barrel, India has found it convenient to make the most of the cheap Russian crude on offer.

 

Conclusion:

The EU leaders discussed Russia’s military aggression against Ukraine and its implications for the European and world economy and security and agreed to impose an embargo on Russian oil supplies to the EU and extended such restrictions on oil supplies, using sea routes.

For European countries surrounded by land and unable to obtain oil from other sources, the import of Russian oil via pipelines is temporarily allowed.

The package of sanctions also means reducing the EU’s dependence on Russian oil imports.

Together with the implementation of national decisions by Poland and Germany, the decision will reduce Russian oil imports to the EU by 92 percent by the end of this year.