Russian Oil Ban: European Council Reaches Agreement On 6th EU Sanctions Package

June 1, 2022
The European Council has reached an agreement in principle that could lead to a ban on around 90 percent of Russian oil imports to the EU by the end of 2022.

The European Council has reached an agreement in principle that could lead to a ban on around 90 percent of Russian oil imports to the EU by the end of 2022.

Following a two-day meeting from May 30-31, European Commission President Ursula von der Leyen said the key elements of the sanctions have been decided by the heads of state that make up the European Council.

The plans include a total ban on seaborne imports of Russian oil — which currently make up about two thirds of the EU’s total oil imports from Russia — and a ban on pipeline oil to Germany, Poland and other northern European countries.

The remaining 10 percent of Russian oil imports that would be exempted from the ban are those that supply the landlocked countries of Hungary, Slovakia, Austria and the Czech Republic via the Druzbha pipeline.

Viktor Orbán, prime minister of Hungary, is currently leading the campaign to secure an opt-out from the oil ban.

Newly energised from his re-election last month, in which his Fidesz party won over two thirds of parliamentary seats, Orbán has promised to veto any EU-wide ban on Russian oil.

“Plans in Brussels would further raise the price of petrol and diesel,” Orbán wrote in a Facebook post after the meeting. “We will not allow this to happen.”

Ultimately, however, both von der Leyen and Charles Michel, president of the European Council, said the goal remains to widen the sanctions as far as possible.

“We want to revert to the European Council as soon as possible in order to address this temporary exception, and to make sure that we'll be able to target all Russian oil,” said Michel.

In future, von der Leyen suggested that non-Russian oil could be supplied to Hungary via Croatia’s Adria pipeline, but it would take 45-60 days, plus further investment in the pipeline, to increase its capacity.

Although broadly in favour of the new proposals, some members of the European Parliament suggested that too much flexibility had been given to countries such as Hungary.

Belgian MEP Guy Verhofstadt, for example, called the exemption a “shameless compromise” by the council.

“Three months after a full US ban, we in the EU will still buy Russian oil for the rest of the year and finance Putin’s war machine, and even then countries like Hungary get an exception,” he said on Twitter.

“Enough is enough. It’s time to end unanimity and veto rights.”

Other key elements of the sanctions proposals include further lockouts from the SWIFT messaging system, and a ban on the provision of certain types of business services to Russian companies.

Sberbank, which accounts for almost 40 percent of bank assets in Russia, would be disconnected from the SWIFT messaging system.

EU companies would also be barred from offering insurance and reinsurance services to Russian vessels, and three Russian state media channels would be barred from broadcasting in the EU.

Reception of the proposals has so far been mixed among those studying the situation.

Marco Giuli, scientific advisor and energy specialist at Italy’s Istituto Affari Internazionali (IAI), said that although the oil ban will impact Russia’s finances, it is unlikely to affect its war effort.

“The long timeline leaves Russia time to re-organise,” Giuli wrote on Twitter, “and they are already learning from the Iranian playbook how to circumvent secondary sanctions that might ensue once Europe no longer buys Russian oil. High prices may also compensate partly or entirely.”

Ultimately, it will be easier for Russia to find new buyers for its oil than it will be for the EU to find alternative energy supplies, even if prices rise after the ban.

At present, Russia is forging strong partnerships with India and China, for example, by selling crude oil to both at a steep discount.

This arrangement could expand further, and if prices rise after the EU ban, it would help to compensate for the loss of revenue from Europe.

One executive, Leonid Fedun of Russia's Lukoil, went even further, suggesting that Russia could cut production by 20 to 30 percent to force a better price and avoid selling at a discount.

In either scenario, it would mean that Russia’s current account surplus — i.e. its net holdings of foreign assets — will continue to rise.

Since the invasion, the sanctions carve-out for Russia’s energy has led to an explosion in Russia’s current account surplus.

So far this year, it stands at $96bn, which is not far from its current account surplus of $122bn for the whole of 2021.

Robin Brooks, chief economist at the Institute of International Finance (IIF), has pointed out that much of this extra liquidity has made its way to Gazprombank, which remains unsanctioned, rather than Russia’s central bank, which is sanctioned.

“To really hurt Russia, you must hit its current account surplus, which only an energy embargo can do,” Brooks wrote on Twitter.

“The EU oil embargo doesn't prevent Russia from shipping its oil elsewhere, so it doesn't shut down Putin's money machine,” he added.

Brooks said he would be in favour of EU sanctions on Greek oil tankers, for example, which transport about two thirds of Russia’s oil internationally. “The objective must be to trap Russian oil in Russia,” he said.

However, according to Spanish MEP Luis Garicano, such sanctions were originally included in the latest proposals, but were withdrawn at Greece’s request.

The energy spat between Russia and Europe is likely to escalate over the coming months, as both sides engage commodities brinkmanship, especially over gas supplies.

On Monday (May 30), for example, Dutch gas company GasTerra announced that it will not comply with Russia’s decree that gas purchases be paid for using two Gazmprombank accounts: one denominated in euros and the other in roubles.

On May 31, Ørsted, a Danish energy company, said it too will not comply. In response, Gazprom said it cut off gas supplies to GasTerra on May 31, and Ørsted’s gas supplies will be cut off on June 1.

On its official Telegram channel, Gazprom has also said that it will cut off gas supplies to Shell Europe on June 1 as well for non-compliance with Russia's preferred payment method.

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