Europe proposes to ban all Russian oil imports by the end of the year
The EU will sanction all Russian oil imports, both crude and refined and both oil delivered by ship and pipeline, but the ban will be “phased in in an orderly way,” EU President Ursula von der Leyen told the European Parliament on May 4.
The sanctions will be phased in over the next year with crude deliveries banned in six months and refined productions by the end of the year, von der Leyen said. The price of Brent crude jumped 3% to more than $108 a barrel after the news.
As the charts show, dependence on Russia crude imports varies widely across Europe. The two countries that are heavily dependent on Russian oil deliveries, Slovakia and Hungary, and the most resistant to the sanctions, will get an exemption and are not required to stop imports until the end of 2023, according to reports.
However, Budapest was lukewarm on the idea of a total oil embargo and complained that von der Leyen's proposals didn't spell out how its energy security concerns would be addressed.
"We do not see any plans or guarantees on how a transition could be managed based on the current proposals, and how Hungary's energy security would be guaranteed," Hungarian government spokesman Zoltan Kovacs told Reuters.
Italy and Austria are also both heavily dependent on Russian imports. Germany’s dependence has fallen rapidly in the last two months as Berlin has worked hard to replace oil piped from Russia to its Leuna and Schwedt refineries by transporting oil from Poland’s oil terminal in Gdansk to the facilities instead. Russian oil accounted for 35% of Germany’s supplies before the war, but that has fallen to 12% in the last week and Germany said it is close to becoming entirely independent of Russian oil.
Von der Leyen's statement is only one of intent, as the final terms of the deal have yet to be concluded and signed by the EU ambassadors. Hungary in particular could still potentially veto the deal, although it has softened its objections to the plan more recently.
If the deal passes it would be a watershed for Europe, which is expected to increasingly wean itself off any reliance on Russian energy, ending decades of commercial relations that started in the 1970s when the Soviet Union began selling gas to Europe.
The EU first targeted Russian energy when a ban on coal was included in the fifth package of sanctions in April. Gas imports from Russia are also likely to be ended in future sanctions, but as the majority of gas is piped and there are no easy alternative supplies, that process will be much harder and take longer.
“Putin must pay a price, a high price, for his brutal aggression," Commission President von der Leyen told the European Parliament in Strasbourg, to applause from lawmakers, reports Reuters. "Today, we will propose to ban all Russian oil from Europe.”
The US has already banned imports of Russian crude, but the US is a net exporter of oil and cutting off Russian supplies will have little consequence for the US or Russia. Europe is a lot more dependent on Russian oil.
EU ambassadors are widely expected to adopt the Commission proposals as early as this week, allowing them to become law soon after.
Oil imports to EU already under pressure
Russian crude products are 40% down since 2021 as European countries rush to wean themselves off Russian oil, but refined products are actually up this year and imported by many more EU countries, which is why the refined products ban will be phased in more slowly, as detailed by bne IntelliNews in series of articles “Sanctions by the numbers” (UN voting, coal, oil, gas, grain).
It remains to be seen how effective the bans are. As bne IntelliNews’ sister publication NewsBase.com reported, the sanctions on Russian oil are already leaky as the Kremlin is experienced in dodging sanctions and several signs of schemes and scams have already appeared to avoid the “self-sanctioning” by traders that normally buy Russian oil.
The incidence of ship tankers turning off their transponders, and so making it difficult to track which ports they have visited, is up 600% since the start of the war in Ukraine in February. At the same time, a slew of new exotic oil blends like “Lithuanian blend” and “Turkmen blend” have appeared on the market, oils from other markets mixed with Russian oil, to avoid labelling it “Urals blend,” Russia’s main oil export product, NewsBase reports.
Russian output is already falling, as the self-sanctioning by traders has hit demand for Russian oil. Russian oil storage facilities are already full, according to reports, and the discount on Urals blend to the benchmark Brent blend has blown out from the traditional $2 per barrel to around $30, as bne IntelliNews reported, after Russian oil became toxic thanks to the war with Ukraine.
Russia’s oil production has fallen from 11mn bpd in January, making it one of the biggest single producers in the world, to 10.5mn bpd as of the middle of April, and it is expected to fall further as sanctions start to bite.
Finance Minister Anton Siluanov said last week that he expects oil production to decline by 17% this year to around 9.3mn bpd, taking output levels back to their 2004 levels. Oil taxes account for 40% of Russia’s federal budget revenues, so falling oil sales will hurt its income, although that will be compensated to some extent by rising prices caused by removing 2mn bpd from the market.
Analysts say that the partial phased-in approach would probably result in higher revenues for the Kremlin in the short term and greater pain for the EU than Moscow to start with. However, the long-term consequences for Russia would be worse, as 70% of its oil exports go to Europe and it cannot easily redirect those to other markets in the east and south.
New bank sanctions and Russian counter-sanctions
In addition to the oil embargo, von der Leyen also announced new banking sanctions on the state-owned banking giant Sber (formerly known as Sberbank) from the SWIFT messaging service that allows for international bank transfers. So far, only seven out of 365 Russian banks have been included in SWIFT sanctions imposed in March, but those sanctions included Sber and VTB Bank, which between them account for half of all the banking deposits in Russia.
"We hit banks that are systemically critical to the Russian financial system and Putin's ability to wage destruction," von der Leyen said as cited by Reuters. "This will solidify the complete isolation of the Russian financial sector from the global system."
Sber, which exited almost all its European markets in March, has previously said other rounds of sanctions would not have a significant impact on its operations.
Two other lenders were also included in the new bank sanctions as well as three state broadcasters (Rossiya 24, RTR-Planeta and TV Centre International), army officers and other individuals accused of war crimes.
A day earlier, Russian President Vladimir Putin sent a law to the Duma that would sanction people, companies and countries associated with the new sanctions and cut them off from supplies of Russia’s raw materials. So far, the sanctions regime on Russia have been limited as Europe remains heavily dependent on Russian supplies of many raw materials, which have been exempted. Putin added that the Russian counter-sanctions would, “greatly increase the costs of European citizens.”
Russia cut Poland and Bulgaria off from gas deliveries starting on April 27 after both refused to pay for gas in rubles, as demanded by a presidential decree earlier in the month.
The ban will have little effect on Poland as a new pipeline that connects it to the Norwegian gas fields is set to come online in October just as the next heating season starts. Bulgaria is much more dependent on Russian gas and also had its supplies cut off, but says that it has enough in storage for the meantime and will source gas from Germany to make up the shortfall.
Putin’s counter-sanctions decree will be ready in ten days from May 3 and come into force with its publication. It is intended to give Moscow the power to sow chaos across markets as it could at any moment halt exports or tear up contracts with an entity or individual included in its own sanctions list.
The Russian president said the new decree was a reaction to the “illegal actions of the United States and its allies,” meant to deprive "the Russian Federation, citizens of the Russian Federation and Russian legal entities of property rights or the restricting their property rights.”
European oil consumption
Russia makes a lot of money from oil exports. Russia exports some 6mn bpd to Europe – over half its total exports – and consumes a quarter of its output itself.
Currently, Europe spends around $450mn per day on Russian crude oil and refined products, approximately $400mn per day on gas, and roughly $25mn on coal, according to think-tank Bruegel as cited by Euractiv.
“Oil is where the EU has more leverage vis-à-vis Russia: diversification away from oil is less challenging than natural gas, and Russia’s reliance on oil for FX inflows and budget revenues is substantially higher,” said Elina Ribakova and Benjamin Hilgenstock, economists with the Institute of International Finance (IIF), in a recent note. “We expect an oil embargo by the EU to be a multi-step approach rather than an abrupt discontinuation of imports.” Elina Ribakova, deputy chief economist with the IIF, told bne IntelliNews.
Around half of Russia’s 4.7mn bpd of crude exports go to the EU. Europe gets roughly a third of its gross available energy from oil and petroleum products, in sectors from transportation to chemicals production.
Europe has paid Russia a total of €14bn for oil imports since the start of the war two months ago and about three times more for gas imports. In total, the EU imported €44bn worth of Russian oil, gas and coal in just the first two months of the war, estimates the Centre for Research on Energy and Clean Air (CREA).
Germany was by far the largest importer of oil, gas and coal from Russia, totalling €9.1bn, followed by Italy (€6.9bn), China (€6.bn), the Netherlands (€5.6bn), Turkey (€4.1bn) and France (€3.8bn), according to CREA.
In just the last month up until mid- April, deliveries of oil to the EU fell by 20% and coal by 40%, while deliveries of LNG rose by 20%, according to CREA. EU gas purchases through pipelines increased by 10%.
Oil deliveries to non-EU destinations climbed by 20%, and with major changes in destinations. Russian deliveries of coal and LNG outside the EU rose by 30% and 80% respectively.
China buys less than 20% of these exports, while the West normally absorbs over 70%. These Western imports represent more than half Russia’s entire oil output. At today’s prices, Kremlin tax receipts on export oil alone – about $500mn per day – will cover 70% of Russia’s federal budget for 2022, but the drive to ban Russian oil exports to Europe continues to face stiff resistance from some member states.
Slovakia and Hungary, both on the southern route of the Druzhba pipeline bringing Russian oil to Europe, are especially dependent, receiving respectively 96% and 58% of their crude oil and oil product imports from Russia last year, according to the International Energy Agency (IEA).
According to Eurostat, in 2020 Hungary imported 44.6% of its oil from Russia. Hungary’s MOL oil company is currently set up to refine the sour Russian oil, and to re-engineer it to handle other blends would involve heavy investment and take months of work to complete.
At 555,000 bpd, Germany imported 35% of its crude oil from Russia in 2021, but has in recent weeks reduced that to 12%, the German economy ministry said last week.
"We have managed to reach a situation where Germany is able to bear an oil embargo," German Economy Minister Robert Habeck said.
Poland is one of the EU’s biggest consumers of Russian oil and gas. Imports from the east covered nearly 47% of Poland’s gas demand and just over 64% of oil demand in 2020, Forum Energii, a think-tank, said recently. Coal played a smaller role at 15% of the overall use.
For gas, Poland is about to complete the Baltic Pipe, a gas link from Norway to Poland that will replace gas imported under a contract with Gazprom. The contract expires at the end of the year and Poland has long said it will not renew it.
For oil, Poland will use its oil terminal in Gdansk, which can handle 36mn tonnes per year of crude oil annually – clearly more than 26mn tonnes consumed each year. Polish oil companies, PKN Orlen and Lotos, will also not prolong their crude oil supply contracts with Russia that expire by early 2023.