The likely impact of EU sanctions on Russian oil imports
Although Russian oil companies appear to have shifted some deliveries to Asia, Moscow is already well-versed in embargo evasion – and Brussels has some incentives to look the other way
WHAT: The EU is mulling proposals for introducing a formal embargo on Russian oil imports.
WHY: US sanctions on Venezuela gave Russia an opportunity to practise techniques designed to obscure the origin of oil cargoes.
WHAT NEXT: Those techniques already appear to be in play in the Mediterranean and may become more common if Brussels introduces formal sanctions.
As of this writing, the energy ministers of the European Union’s 27 member states are debating the question of whether to impose an embargo on the importation of Russian crude oil supplies. They have yet to make a final decision on the ban, which would be part of the sixth set of sanctions imposed on Russia since the invasion of Ukraine in late February.
The issue is a contentious one, not least because Russia is one of the EU’s most important sources of oil. It is also not an abstract matter. Multiple EU member states host the pipelines and marine terminals that deliver Russian crude to European refineries. As a result, if Brussels bars Russian oil imports, there is a very real risk that EU countries will start to experience fuel shortages, along with all the price rises, privations and social disruptions that are likely to accompany them.
It’s no wonder, then, that Germany was slow to decide whether it would veto the proposed EU oil embargo. The EU’s largest economy remains heavily reliant on Russian fuels, especially natural gas (as it is the endpoint of several major Russian gas export pipelines), so of course it has only pledged to drop Russian oil supplies after ensuring that it had extra time to find other suppliers.
Nor is it a surprise that Hungary and Slovakia are both adamant about vetoing the new sanctions. Both of these countries host sections of the Druzhba pipeline network, and both have pointed out repeatedly that they do not have any easy way to replace the energy they would lose if they dropped Russian oil companies as suppliers.
But there may be a way around the veto. On May 2, two unnamed EU officials told Reuters that Brussels was mulling the possibility of striking a deal with Budapest and Bratislava in order to prevent an impasse over sanctions. Specifically, one of the officials said, the European Commission might grant Hungary and Slovakia extended waivers from an oil embargo or give them extra time to replace Russian supplies.
Russia’s new workarounds
It’s not just the EU that will be working around obstacles, though. Russia will be doing the same thing, along with global oil trading networks.
There are plenty of signs that Russia is already seeking out alternative avenues for the sale of its crude. Ami Daniel, CEO of Israel’s Windward consultancy, told CNN in late March that the amount of so-called “dark activity” among Russian tankers – that is, incidents that involve ships switching their transponders off for hours at a time – had risen by 600% since the invasion of Ukraine.
Meanwhile, Dow Jones Newswires quoted oil traders as saying last month that Russian production was a key component of certain new grades of crude that have begun showing up on the market this spring. Sellers are offering these new grades – which sport names that reference former Soviet republics, such as “Latvian Blend” and “Turkmenistani Blend” – with the unspoken understanding that they consist partly of Russian crude.
Dow Jones Newswires also reported, citing data from TankerTrackers.com, Kpler and other marine tracking services, that the volume of crude oil leaving Russian ports on tankers “for orders” (that is, without any specified destination) had risen to 1.6mn barrels per day (bpd) since the beginning of April. This is, for the record, equivalent to nearly one third of the total volume of oil that Russia exported last year – 4.7mn bpd, according to data from the International Energy Agency (IEA).
Shifting exports to Asia
Of course, there are a couple of points worth noting here. First, the developments mentioned by Windward, TankerTrackers.com et al. occurred at a time when the EU had not placed any formal restrictions on Russian oil imports and when European oil traders were only self-sanctioning in the hope of not being seen as a source of support for the invasion of Ukraine. (In other words, the evasive manoeuvres were not always technically necessary.)
Second, there is no indication that Russia has been using these workarounds purely as a means of moving petroleum into the European market. In several cases, Suezmax and Aframax-size tankers that departed the Baltic Sea or the Black Sea with Russian oil “for orders” in April have ended up transferring their cargoes to very large crude carriers (VLCCs) that then sailed from the Mediterranean to South Africa.
Meanwhile, there is information to suggest that Russia is sending more oil to Asia from its Baltic and Black Sea ports than it did prior to the outbreak of war (and in some cases, using smaller tankers than market conditions usually warrant for such long-haul voyages). For example, the Suez Canal Authority (SCA) released data earlier this week showing that the overall number of ships passing through the canal had risen year on year in May – and this makes sense, given that in April 2021, the canal operator was still coping with the backups and blockages caused by the MV Ever Given incident. But the increase in traffic didn’t affect all marine operators equally. SCA data show that while overall traffic went up by 6.3% year on year in April, tanker traffic alone went up by the disproportionate amount of 25.8% y/y. It’s not at all clear how much of that traffic consisted of Russian crude shipments to Asia, as the SCA doesn’t provide full breakdowns of the numbers it makes public. But in all likelihood, Russian oil cargoes did account for some of the upswing.
Keeping Europe’s door open
Even so, assuming that the EU does introduce sanctions, Russia is not likely to shift every last drop of the oil it has been exporting to Europe by sea to Asia (and, to a lesser extent, Africa) in the short term.
Making a shift in direction of this magnitude would present extraordinary challenges for all of the parties involved. Finding the tankers needed to move the oil would be difficult. Finding the credit needed to finance the deals (and the banks to handle the transactions, especially now that Russian access to capital markets has been restricted) would be difficult too. Finding the incentives needed to convince potential buyers to ignore pressure from the West to join the sanctions regime might also be difficult.
What’s more, Russia already has plenty of practice with respect to finding ways to work around the limitations imposed by embargoes. For example, state-owned Rosneft spent enough time helping Venezuela’s national oil company (NOC) PdVSA to find creative new ways to export crude to China and other markets in Asia despite that under US sanctions Washington actually blacklisted two of its subsidiaries, Rosneft Trading SA and TNK Trading International, in February 2020. Rosneft has also used some of the same tricks noted lately in the Mediterranean – according to a Bloomberg report from November 2019, which noted that a tanker chartered by the Russian company had switched off its transponder upon entering Venezuelan territorial waters in order to obscure its activities. (Russia also seems to be very familiar with the practice of blending and relabelling crude exports in order to obfuscate their origin, as Venezuela has been doing in Asia for several years.)
Sanctions: not 100% effective
It seems likely, then, that Russia will use these tried-and-tested techniques (when it can get away with it) to keep at least some of its crude oil moving into Europe. It already knows how to do so, and it has an incentive to keep serving its European customers (and avoid the headache of an abrupt shift to Asia) if it can.
At the same time, the EU will also have incentives not to work too hard to enforce sanctions, assuming that it does adopt them. It will be motivated by the desire to assuage the concerns of member states that lack easy alternatives to Russian oil supplies – including those such as Hungary and Slovakia, which may be granted exemptions from the ban. It will also be motivated by the desire to stave off the social and economic disruption that might follow energy shortages. And in the end, it might also be motivated simply by the lack of political will to take the kind of action needed to chase down every European company with direct or indirect ties to Russia’s oil sector.
In any event, even with sanctions, the EU will continue to import some Russian crude – less than it has been doing, but some.