EU oil embargo on Russia will be painful for both – but will reduce Putin’s ability to wage war | Business News

The EU was notable by its absence when, in early March, the US and the UK announced they would no longer be importing oil from Russia.

The reason was that the EU was worried its economies, particularly those with big energy intensive industrial users like Germany, would grind to a halt without access to Russian hydrocarbons.

But the 27-member bloc has taken a major step towards depriving Russia of much needed income with Wednesday’s announcement that it plans to forego Russian crude within six months and refined products such as petrol, naptha and kerosene by the end of the year.

The measures, part of the EU’s sixth sanctions package against Vladimir Putin, will severely hurt Moscow in response to its invasion of Ukraine.

Much has been said and written about the importance of Russian gas.

But crude oil and refined products are much more important than gas to Russia as an export earner.

Russia made $74.4bn from its oil exports during the pandemic-hit year of 2020, when the oil price was depressed, rising to $110.1bn last year.

This year, with crude prices trading higher, it was expected to reap as much as $180bn from crude sales.

The International Energy Agency says Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia.

Of this, the vast majority goes to Europe, which accounts for between 60-70% of Russian crude exports; China, by comparison, takes a fifth of Russia’s crude.

So, by refusing to buy Russian crude and refined products, the EU is striking a heavy blow against Moscow. The bloc is estimated to have already paid Russia something like €22bn for crude and refined exports since the start of the war.

Some commentators are sceptical that the measure will have much of an impact. They argue that Russia will simply sell more crude to other countries like China and India instead.

That is certainly a risk – Reuters estimates that India has bought more than twice as much crude oil from Russia in the two months since its invasion of Ukraine as it did in the whole of 2021 – but there is also evidence that Indian buyers will demand a discounted price.

The industry analysts S&P Global Platts estimate that Indian refiners have been buying Russian crude recently at a discount of around $40 per barrel to the recent industry average of around $104 per barrel. So Russia will not make as much, per barrel, as it would from selling to EU members.

And that is assuming it can sell its crude at all.

Most of Russia’s oil export facilities face to the west and not the east. There is only one oil pipeline that runs from Russia to China, and it is at full capacity, so any crude that is sold to that country or India would have to be transported by sea using tankers.

That may not be possible because the big international trading houses that trade, ship and store crude and refined products around the world, such as Vitol and Trafigura, are becoming increasingly wary of handling Russian crude in case they are accused of sanctions-busting.

Both companies have long-standing contracts with Rosneft, the state-controlled oil producer in which BP is currently trying to offload its 19.75% shareholding, which pre-date the war. But both are seeking to reduce their exposure to Russia to comply with the EU’s fourth sanctions package, which only allows pre-existing contracts with Russian companies to be honoured up until 15 May.

Vitol, one of the world’s biggest oil trading houses, has made clear it will cease trading Russian oil entirely by the end of the year.

Another factor is insurance. Several insurers have withdrawn cover for tankers carrying Russian crude and, even where such cover is available, the premiums are likely to be substantial. This reflects the increased risk of transporting crude in some cases through the Black Sea – where the Ukrainian navy and military have already proved themselves adept at attacking Russian vessels.

It also explains why, according to recent reports, India has been struggling to access tankers to carry crude it has bought from Russia. Shipping Russian crude from Baltic or Black Sea ports is also time-consuming which is why, prior to the war in Ukraine, India was not a particularly big buyer of Russian crude.

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The move is not without a heavy cost to the EU – one reason why it has taken time for the bloc to agree on this measure which, in truth, has only really been made possible by Germany’s agreement to a ban.

Russia accounts for around 27% of the EU’s crude imports and replacing that is going to come at a cost. It is why the price of Brent crude has risen today by 3.5% to $108.74 per barrel. It is unclear that the US, to which the EU will undoubtedly look in seeking to replace Russian crude imports, will be able to produce as much as will be needed.

Germany and Poland have already switched to buying more seaborne Saudi crude but at present have only limited infrastructure to handle it.

This helps explain why the EU has not instigated an immediate ban on Russian crude. Its members need time to access alternative supplies and, moreover, an immediate ban might even help Mr Putin by driving up crude prices further and handing him even more revenues in the short term.

The EU ban requires unanimity from its members which is why Hungary and Slovakia, the two EU members most dependent on Russian crude, will be given until the end of next year to wean themselves off the fuel.

Some will say this latest sanctions package, which also involves a ban on Sberbank, Russia’s biggest lender, from the international telecommunications messaging service Swift and a ban on three Russian broadcasters from the EU’s airwaves, is too little too late.

But it does put in place another permanent means of reducing Mr Putin’s ability to wage war on Ukraine and, potentially, his other neighbours.