EU tightens the noose on Russia

Brussels has proposed a ban on all Russian oil imports. Could that work? Emily Hohler reports

Brussels has proposed a phased-in ban on all Russian oil imports as EU member states seek to reach agreement on a sixth package of sanctions following the invasion of Ukraine. European Commission president Ursula von der Leyen said the ban would be implemented in an “orderly fashion”, halting crude within six months and refined products by the end of the year. She also proposed that Sberbank, Russia’s biggest bank, along with the Credit Bank of Moscow and the Russian Agricultural Bank, be disconnected from the international banking payment system Swift and that three Russian state-owned broadcasters should be banned for amplifying Putin’s “lies and propaganda”.

A significant U-turn  

The oil embargo follows a significant U-turn by Germany and Robert Habeck, the German economy minister, has warned that EU consumers should brace for a “big economic hit”, says Guy Chazan in the Financial Times. Habeck said that while Germany had made “great progress” in finding alternatives to Russian oil and coal, other countries needed more time. 

They do, says Stanley Reed in The New York Times. For the EU, “cutting itself off from Russian oil will be a herculean task that may risk sowing division”. In total, roughly 25% of Europe’s crude comes from Russia, but there are wide variations in degrees of reliance. Finland, Bulgaria, Hungary and Slovakia depend on Russia for more than 75% of their oil. 

As a general rule, landlocked countries closer to Russia are “more entangled in its energy web” while more distant countries such as Spain, Portugal and France import less. The measures require the backing of all 27 EU member states, and although Hungary and Slovakia, which are particularly reliant on Russian oil, will have until the end of 2023 to comply with the ban, in a sign of continued resistance, Hungarian government spokesman Zoltan Kovacs said Budapest had seen “no plan or guarantees” on ways to manage the transition, say Eleni Varvitsioti and Sam Fleming in the Financial Times.

Unintended consequences

The other issue is whether the ban will work. Although it will “tighten the noose” on Russia’s economy, oil prices are already at their highest since 2014 as a result of the invasion and the ban could push prices even higher, “inadvertently generating yet more income” for Vladimir Putin. Brent crude oil climbed 2.5% on Wednesday to a high of $107.58 a barrel on the back of the announcement. It’s a very real concern, agrees Stanley Reed. Rystad Energy forecasts that the Russian government’s total income from oil is likely to be up 45% this year to $180bn. Russia is “finding homes” for its oil in India and, to a lesser extent, Turkey, by offering steep discounts. China’s independent refiners have also been buying oil “discreetly” to avoid scrutiny and US sanctions, adds Gordon Smith in the Financial Times.

The embargo will work, Matt Smith, an oil analyst at Kpler, tells Business Insider’s Phil Rosen. Russia’s economy was already set to contract by more than 10% this year, and an EU embargo is likely to send the economy “spiralling into a depression”. European oil export revenues accounted for 11% of Russia’s GDP in 2021 compared with roughly 2.5% for gas, according to the Rhodium Group. Without European buyers, Russia will need to find a home for about 2.5 million barrels a day. Even if China and India buy more, it is “highly, highly unlikely” they could make up the difference, says Smith, due to logistics and simple lack of demand. And in the end, “every single dollar a country is paying for Russian oil is funding the war”.

SEE ALSO:

Russia ups the ante on Europe's gas supplies

Why Europe could be heading for a "nuclear renaissance" with energy prices at record highs

How to beat rising energy prices

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