Tuesday, September 26, 2023

What will the EU’s Russian oil ban mean?

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The European Union will forbid many Russian oil imports, an aggressive and punitive sanction against Moscow. But it could come with unpredictable costs for the bloc and the rest of the global economy.

Late Monday, the European Union finally agreed to a partial embargo on Russian oil as part of its sixth sanctions package against Moscow for its invasion of Ukraine. The deal came after weeks of arguingmostly with Hungary† Hungary finally agreed, but only after actually getting Ban himself (and two other countries) for now, creating a loophole in sanctions.

Most of the rest of the European Union will impose a ban on Russian maritime supplies of crude oil in the next six months, and refined oil products (things like gasoline and diesel). The EU has agreed to a (theoretically temporary) exemption for oil passing through the south Druzhba pipeline, allowing Hungary, the Czech Republic and Slovakia to continue receiving Russian oil for the foreseeable future. Germany and Poland also extract oil from the northern branch of the Druzhba pipeline, but both have already agreed to wean themselves from these imports at the end of the year

Even a partial EU ban on Russian oil is a dramatic step — one that seemed almost impossible before Russia launched its war. According to Charles Michel, President of the European Council, this EU embargo will affect about 75 percent of Russian oil imports immediately and 90 percent by the end of the year. The European Union has proposed other sanctions as part of this packageincluding an insurance ban on Russian oil ships, making it more difficult for Russia to export its oil products around the world. The technical details of the sanctions package are being finalizedand all 27 EU members will probably have to formally adopt them this week.

The EU ban will hurt Moscow, which has been able to resist some of the sanctions pressure by continuing to export its energy and raw materials. The EU gets about a quarter of its oil from Russia, which amounted to approximately 2.2 million barrels of crude oil per day in 2021, according to International Energy Agency (IEA) data collected by Reuters. This EU embargo will reduce trade volume and money flow between Europe and Russia – another pressure point against Moscow as the West also ramps up its support for Ukraine with weapons and financing.

This embargo also entails costs for Europe, especially when it comes to higher energy prices. Russia may escalate also his retribution. “It’s shocking that we’re at this point where the EU is actually sanctioning Russian oil because it’s very painful for the EU,” said Emily Holland, an assistant professor at the US Naval’s Russia Maritime Studies Institute. War College. † “It’s going to cause really serious economic damage. There is no escaping it.”

It’s not just Europe. The war in Ukraine and the West’s sanctions against Russia are already painfully rippling through the global economy. This could affect the rest of the world, especially poorer countries, which are less able to absorb the shocks of higher oil prices† Indeed, following the EU announcement, oil prices soared up to about $120 a barrel

“It’s a big rock to be thrown into the water and it will be felt across the entire oil market,” said Georg Zachmann, senior fellow at the Bruegel Institute in Brussels.

Europe is ready to cut itself off from some of Russia’s oil

At the beginning of May, President of the European Commission Ursula Von der Leyen proposed to phase out all Russian oil and oil products. “Let’s be clear: it won’t be easy”, von der Leyen said:† “Some member states are heavily dependent on Russian oil. But we just have to work on it.”

It took weeks for the European Union to finally reach an agreement. Hungary is the reason it took so long. Viktor Orban, Hungary’s right and most right Putin’s Curious Presidentthreatened to block such sanctions and called any energy embargo a “nuclear bomb” for its economy. †Hungary gets more than 60 percent of its oil and 85 percent of its natural gas from Russia

In reality, cutting off Russia’s oil supplies is an “atomic bomb” for many European economies – which is why the bloc required unanimity to take such a step. Instead, it was given a veneer of solidarity: a European Union embargo on Russian oil that gave in to Hungary’s demands in exchange for Budapest not torpedoing the whole thing.

Europe’s ban only applies to oil transported by tanker, although that represents about two-thirds of Europe’s total oil imports. Europe receives about 750,000 to 800,000 barrels of crude oil per day through the Druzhba pipeline. Oil transports flow through the pipeline is exempt, so Hungary, the Czech Republic and Slovakia can continue to receive Russian oil. The EU has said that this exemption is temporary, but is currently in effect indefinitely.

These countries, which are landlocked and dependent on Russian gas, argued that they need more time to switch from Russian oil. Hungary eg. also asks Europe for more money to upgrade their refineries so they can accept crude oil from elsewhere. It is also a political victory for the Hungarian Orban, who can boast that he really stuck it to the European Unionwhile isolating its economy somewhat from the shock waves that the rest of Europe is preparing for.

Also, Europe is not immediately closing itself off from Russian oil. These sanctions will phase out crude oil over the next six months and refined products by the end of the year. That gives Europe time to adapt. It also gives Russia time to adapt.

Experts said Russia’s oil revenues could actually increase in the near term, with countries importing more oil from Russia before it becomes illegal to do so, and stockpiling as much as possible. Russia will also benefit from higher oil prices. Benjamin Schmitt, a research associate at Harvard University and senior fellow at the Center for European Policy Analysis who has called for tougher energy sanctions against Russia?, said the EU should still try to take money from Putin in the short term — for example, by imposing tariffs on Russian oil to make it more expensive. And of course, this EU ban doesn’t completely loosen the bloc’s energy dependence on Russia. For the time being, the natural gas is still flowing

“It’s a huge leap in terms of reducing the amount of oil imports that Europeans themselves buy from Russia by about two-thirds of the total amount,” Schmitt said. “But there is still a long way to go on what needs to be done to increase the pressure on the regime.”

Even with the carve-outs and exemptions, Europe’s step is a very big one. In the past, the EU has been reluctant to put energy on the table when it comes to dealing with Russia. The war in Ukraine changed that. The EU has sanctioned coal† Now the block is aiming for oil.

“It’s still material, it’s still big,” said Ben Cahill, senior fellow for the Energy Security and Climate Change program at the Center for Strategic and International Studies. “Even if you exempt all pipeline imports, which is say 750,000 barrels per day, you still have about 1.5 [to] 1.6 million barrels a day of oil exports that could be targeted.”

What is the impact on the EU’s oil ban? We don’t quite know.

Russia’s audacity, Ukraine’s resilience in defending its democracy and sovereignty — all of this has remarkably changed the calculus in the United States and Europe about the trade-offs they are willing to bear to punish Russia. That means inflation and higher energy prices in a global economy who struggled with this all before the invasion of Russia.

Cutting off Russia’s energy exports is what hurts Moscow. But as the Netherlands said, Russia is a major oil exporter. If the West tries to curb its exports, there is a risk that less oil will enter the world market, period. “The fact that the West continues to ramp up sanctions, they want to make sure that Russian oil doesn’t flow to other states, this will keep the oil price high. There’s just really no way around it,” Holland said.

Much will depend on where Europe goes to replace Russian oil, and whether Russia can find replacement buyers for the oil that would normally go to Europe — places like India for example† “The big question is: to what extent EU measures will take Russian oil offline or force it to re-direct flows elsewhere,” Cahill said. “So we don’t know the answer to that question yet.”

This exposes the uneasy dilemma: It is probably better for the global economy if Russia can still sell its oil, even cheaply. But if Russia can still sell oil, it will retain a source of hard currency to fund its war effort in Ukraine.

If the EU ban (along with other sanctions, such as those on marine insuranceShutting down Russia and shrinking the amount of oil available on the world market will increase costs, and that supply shortage will hurt the US, Germany and other parts of Europe. But it will also hurt poorer countries, which are less equipped to compete in the global market and who had no real say in the sanctions regime.

This EU embargo also exposed some rifts in Western unity – fissures that Putin, once the opportunist, may find a way to exploit as the war continues. Russia already has cut off power to countries like Bulgaria and Polandand it could take even more revenge.

As von der Leyen said, “it won’t be easy.” But Western governments may be underestimating how difficult and disruptive such measures will be, even if they are among the tools to help support Ukraine. “Everyone is excited. ‘Yes, let’s punish Russia. We have to stop sending oil money to their war chest,” Holland said. “Yes, all those things. But what does that mean, as a result, that will not take center stage.”


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