By Alexander Miller, consultant in international politics, for Eurasia Business News – June 1, 2022

The European Union, after disputes during more than five weeks, agreed on the sixth package of sanctions against Russia, including a partial embargo on the purchase of oil and petroleum products.

Part of the oil supplies that Europe will refuse, Russia will be able to redirect to other markets, but it is possible that it will have to reduce oil production. One thing is certain: logistics will become both more complex and more expensive for the energy industry. This new ban would also worsen inflation in the European countries.

6th package of sanctions

Officially, it is only known that the EU sanctions will apply not only to Russian oil imports, but also to Russian petroleum products. The European Union intends to ban Russian oil supplied by sea, which is two-thirds of Russian exports. Poland and Germany will also refuse pipeline supplies. As a result, by the end of the year, the European Union will block 90% of oil coming from Russia, and will soon discuss the issue of blocking the remaining 10%. De facto, oil after the implementation of the embargo will flow only through the Druzhba pipeline to a number of countries in the south of the EU.

In 2021, Russia supplied 25% to 30% of the crude oil and 15% of the petroleum products purchased by Europeans. “The bill for Russian oil imports was four times larger than that of gas, 80 billion dollars against 20 billion,” recalled the head of European diplomacy, Josep Borrell, on May 4.

A number of countries will be granted with special measures : the Czech Republic will be able to reconfigure from the processing of Russian oil within 1.5 years, Bulgaria – until the end of 2024, for Hungary, which consumes only Russian oil and was the most ardent opponent of the embargo, the final deadline for restructuring has not been set, but preferably as soon as possible.

The European energy market is waiting for clarifications: what and when the deferral period will be given (the press sources write about six months for oil and eight months for petroleum products), the nomenclature of petroleum products, in what form the ban will be (in particular, whether there will be some kind of ban on the use of European tankers for the transportation of Russian oil and oil products).

Permanent representatives of the European Union on June 1 will perform the legal registration of the agreements reached.

The global oil market reacted to the decision of the European Council by increasing the cost of Brent crude futures for delivery in July for the first time since March 24 above $ 122 per barrel.

Previous Western Sanctions

These are not the first sanctions against Russian oil: on March 15, new investments in the Russian energy sector, including the sale of oil and petroleum products, were banned, and many companies had old contracts expiring at the end of the year. Since March, there has been an embargo on the import of oil and petroleum products by the UK and the United States.

On May 9, the leaders of the G7 countries announced their commitment to phase out imports of Russian oil. “Today, the G7 expressed its commitment to phase out russian oil imports or ban it altogether,” the White House said in a statement.

The G7 statement emphasizes that these countries agreed to work together to ensure a stable energy supply in the world, intensifying efforts to reduce dependence on fossil fuels. G7 countries also commit to take steps to prohibit or otherwise prevent the provision of key services on which Russia and its businesses depend. “This will increase Russia’s isolation in all sectors of its economy,” the G7 said.

On May 15, a ban on any operations with state-owned oil and gas companies came into full force. An exception is made for operations that are strictly necessary for the purchase, import or transportation of fossil fuels, in particular coal, oil and natural gas from and through Russia to the European Union. The market interpreted this to mean that it is allowed to buy oil to supply the European market, while selling for trading purposes is prohibited. As a result, large traders who traded Russian oil (Trafigura, Vitol, Gunvor) are expected to soon completely leave the Russian market.

According to the International Energy Agency, as a result of the Western sanctions already imposed, Russia was able to redirect part of the flows previously sent to Europe and the United States to Asia, in particular, to India and Turkey. Thus, in April, Russia’s oil exports to the EU fell by 330 thousand bpd compared to the level of January-February, as a result, the EU’s share in the total volume of Russian oil exports decreased from 49% in January-February to 37% in April, and India’s share increased from zero to 14%. Asian countries now buy more Russian oil than Europe.

At the same time, the European Union itself depends on Russian oil and petroleum products by an average of 40%. According to various estimates, the largest share in imports of supplies from Russia is occupied by Lithuania, Finland, Slovakia, Germany and Poland, which depended on Russia by almost 60%. “The largest European countries – recipients of Russian oil in 2021 were the Netherlands, Germany, Poland, Italy and Finland, they together accounted for about 36% of exports.

Italian Prime Minister Mario Draghi stated about this new ban : “The sanctions will be in place for a long, long time. There should be no illusions in this matter. Therefore, all trade routes will need to be changed: for many years, if not forever,” the official added. According to him, “sanctions against Russia will be felt as much as possible this summer,” without specifying for whom.

In the event of the withdrawal of Russian oil from the market, the price of oil on the world market and, above all, for the European Union, will increase, since world demand for oil is not falling, and in view of China’s exit from lockdowns, it is likely to increase, while other producers will not be able to replace Russian volumes.

As Russian volumes leave the market, we should expect continued price increases. Moreover, the recovery in demand after the lifting of restrictions in China and additional consumption during the tourist period will lead to a significant gap between supply and demand and will increase pressure on oil prices. A significant imbalance of the market can reduce the dependence of prices on fundamental factors, a similar situation we observed in 2020 with a sharp increase in the imbalance of supply and demand against the background of Covid restrictions around the world.

The OPEC+ countries will adhere to their current policy, and one should not expect a sharp increase in production from the members of the alliance. It is possible that importing countries will go for an additional release of oil reserves from strategic reserves, which one way or another will have to be restored. We do not exclude that this winter a price shock is possible both in the oil market and in the gas sector.

The Mediterranean processors of Russian oil imports will suffer from this ban : Bulgaria, Romania, the Czech Republic, Turkey, Greece, Israel, Italy, Croatia, Spain, France, Portugal, Holland, Cyprus, which will have high competition for raw materials that can replace Urals oil.

At the same time, Europe will have to increase spending on the purchase of oil. The redirection of Russian oil exports will not only complicate logistics, but also increase transportation costs, which will be included in prices. “Russian oil companies supplying oil to Europe through the pipeline are now in a more advantageous position. Tatneft has pipeline exports of 90%. This is the maximum indicator in the sector.”

This ban will also weaken Europe

The most difficult situation for Europe in the event of a rejection of Russian diesel fuel. Already now, Europe, which needs diesel for the car market, is experiencing a deficit. Even if Europe refuses to export its diesel fuel, this will not be enough to compensate for the departure of Russian volumes, and therefore it will be necessary to increase imports of diesel fuel from third countries.

In the end, Russia will lose some money, quite large, but it will survive. On the opposite, Europe is shooting itself in the foot with a shotgun. The EU ban on Russian oil imports will fuel inflation which is already high in Europe since September 2021.

In early March, the US banned the import of Russian oil and gas. The UK and Canada have announced similar restrictive measures. On May 4, the head of the European Commission, the German politician Ursula von der Leyen, announced proposals for a sixth package of sanctions against Russia in response to the military operation in Ukraine. One of the key points in this next round is the gradual refusal of the EU from the supply of Russian oil.

The freeze on Russian oil imports worries European citizens and businesses, who will suffer any price increases resulting from the reduction in the supply of oil on the market. Brussels’ decision will fuel high inflation in Europe. The euro zone’s annual inflation rate was estimated at 7.5% in April 2022, compared to 7.4% in March and 5.9% in February.

Russia launched a military operation against Ukraine in the morning of February 24, with the official goal to “demilitarize Ukraine”, remove the Ukrainian government and protect the rights of Russian-speaking civilians living in Donbass, Eastern Ukraine, a region hit by the war since 2014. In a televised address to Russian citizens, President Vladimir Putin stated that circumstances “require decisive and immediate action from us, the people’s republics of Donbass  have asked for help.” 

After three months of war now, the Kremlin continues voicing that Moscow’s plans do not include the occupation of Ukrainian territories. The Russian goals would be “demilitarization and denazification” of the country. Moscow also wants Ukraine to return to its neutral status, which was enshrined in the Ukrainian Constitution until 2014 and to offer guarantee of not holding on its territory nuclear weapons.

Read also : How will Russia respond to Western sanctions ?

Ukraine and its Western partners sees the Russian military operation as an invasion and imposed strong strong sanctions against Russian state officials, banks, companies and oligarchs, to put pressure on the Russian government and lead it to a ceasefire and a withdrawal from Ukraine.

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