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Russian Sanctions: The European Oil Embargo

Herald Publishers by Herald Publishers
June 18, 2022
in International, Opinion, Politics
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European Oil Embargo

Russian Sanctions: The European Oil Embargo

How Europe can get rid of its dependence on Russian oil and gas is a complex issue. Since the start of the Russia-Ukraine war, Europe has spent more than 58 billion euros on Russian oil and gas. There has been a sharp rise in energy prices. Thus the European Union (EU) will pay about 54% more for Russia’s fossil fuels than it did in 2021. Revenues from fossil fuels make up a significant portion of Russia’s general budget (40% at 2021 prices). Therefore, the EU’s purchase of Russian oil and gas helps Putin pay for his war. Moreover, it offsets some of the effects of the current sanctions on Russia. This indicates that the European embargo on Russian oil inflicts more damage on Europe more than it does on Russia.

The European Oil Embargo on Russia

Among the Russian sanctions, the European embargo on oil seems to be the toughest. According to the European Commission, the EU will ban the import of seaborne crude oil from Russia. There will be a transitory period of six months to allow global markets to adjust.  The EU will also prohibit the import from Russia of refined petroleum products. This will happen after a transitory period of eight months for existing contracts and spot transactions. Imports by pipeline remain permitted for the time being.

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As was reported by the CSIS, on June 3, the EU adopted a sixth package of Russian sanctions. It includes a partial embargo on Russian oil. The sanctions will ban seaborne imports of Russian crude oil as of 5 December 2022. Moreover, there will be a ban on petroleum product imports as of 5 February 2023. The sanctions will allow Bulgaria to continue imports until the end of 2024. They will also let Croatia import Russian vacuum gas oil until the end of 2023.

The BBC says the EU-wide ban will affect oil that arrives by sea – around two-thirds of imports. The sanctions will not include pipeline oil. This is because of opposition from Hungary, which imports 65% of its oil from Russia through pipelines.

The European Oil Embargo: Damages to Russia

As reported by the Wall Street Journal, oil and gas sales contributed nearly 42% to Russia’s federal budget revenues in the first quarter of the year. The EU pays around $10 billion a month to Russia for crude and oil products. These payments would largely vanish as Europe’s Russian oil embargo starts.  The European Commission says the impact of the oil ban on Russia will be significant. Around half of its total oil exports go to the EU. In 2021, the EU imported €71 billion worth of crude oil and refined oil products from Russia. Russia’s budget relies substantially on these oil revenues. Losing this leading profitable market will have a significant structural effect on Russia. As Politico writes, the European Council President Charles Michel tweeted, “Agreement to ban the export of Russian oil to the EU. This immediately covers more than 2/3 of oil imports from Russia. This cuts a huge source of financing for its war machine.”

Largest Concern in Europe’s Oil Embargo

According to Bruegel, the delayed activation of the embargo might make Russia even better off in the near term. This is the concern. The embargo will affect crude oil after only six months, and oil products after eight months. Exemptions for some EU countries might extend even longer.  The risk, therefore, is that an EU embargo will tighten global oil markets. This will push prices higher and increase revenue flows to Russia for several months.

Similarly, Project Syndicate reports that, in the short run, Western sanctions will not affect Russia’s oil output.  Moreover, domestic use is falling as the Russian economy contracts. Russia can thus sustain its oil exports for the time being. At $110-120 per barrel, exports of crude alone could earn Russia over $300 billion per year. Moreover, demand for oil is very inelastic in the short run. Therefore, even a small reduction in the flow of oil reaching global markets can cause prices to rise significantly.  Indeed, studies show that, in the short run, revenues from oil sales increase when less oil is available. In other words, rising prices will boost Russia’s export earnings, giving the impression that sanctions have failed.

Damages to Europe

According to the European Commission, there are sufficient global supplies that can come onto the market in the medium term. The limited transitions in the regulation will allow the EU and its partners to secure alternative supply routes in time. Thus, the EU can minimise the impact on global markets. In contrast, CSIS says that it may be hard to achieve the goal of taking Russian oil off the market. It will be hard to cut Russian export revenues without hurting consumers in Europe and elsewhere. According to the BBC, oil prices climbed on news of the EU embargo. Brent crude rose above $123 a barrel, which is its highest level since March.

According to the Wall Street Journal, the embargo is a high-risk strategy for the EU. It forces the bloc to break its dependency on cheap Russian energy. It is likely to fuel inflation already running at the highest pace in decades on both sides of the Atlantic.  As Reuters says, the embargo on Russian crude oil imports will take full effect by end-2022.  It is the toughest sanction yet on Russia and one that will itself affect the EU. Energy prices in Europe have spiked and inflation is rising.

Final Remarks

Countries like India and China can purchase Russian oil. These two countries together consume twice as much oil as the EU. It is thus not possible to stop Russia’s oil exports. It is also worth noting that the EU embargo applies only to seaborne imports of Russian crude oil, not to imports via pipeline. This plan is likely to be largely ineffective because the seaborne oil can easily be redirected to other destinations.  Moreover, the success of sanctions should be measured not by the quantity of Russian oil Western countries import, but by how much revenue Russia collects from its exports (Project Syndicate). This shows that Russia is not dependent on Europe for the export of oil. Besides, Russian sanctions will result in higher energy prices in Europe. Thus rises in energy prices will earn Russia a higher revenue.  This reveals the failure of Russian sanctions.

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Tags: Damages to EuropeDamages to RussiaEUEuropean Oil Embargohigh-risk strategy for the EURussia-Ukraine WarRussian oil embargoRussian SanctionsSanctionsThe European Oil Embargo
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