Blog #4 from our campaign "The Future of the Economy"
EU officials have reached a deal on a Russian oil embargo, which is meant to punish Moscow for its aggression in Ukraine.
As EU-Russia relations continue to deteriorate, the oil market has become a key battleground. Russia is one of the world's largest oil producers, and EU countries are major consumers of Russian oil.
The ban will effectively cut around 90% of oil imports from Russia to the EU by the end of 2022, European Commission President Ursula von der Leyen said in a tweet on Monday. This is a major blow to the Russian economy, which is heavily dependent on oil exports. It is also likely to increase tensions between the EU and Russia, which are already at loggerheads over several issues. EU leaders are sending a strong message to Moscow that its aggression in Ukraine will not be tolerated.
The EU has been gradually trying to reduce its dependence on Russian oil and gas, and this latest measure is likely to accelerate that process. The EU is seeking to diversify its energy sources, and this ban will provide a boost to those efforts. In the long term, this could have positive implications for the EU's energy security. The EU is trying to grow energy stockpiles to prepare for a potentially stark winter as the energy crisis worsens. Bloomberg noted that the EU's energy storage levels are 46% full, which is also a 2022 high.
Why will new oil sanctions be effective in cutting off a key source of financing for the country's war machine?
The EU is also hoping that the oil export ban will put a dent in Russia's economy, which is heavily reliant on oil and gas revenues. According to the International Energy Agency, last year oil and gas made up 45% of Russia's federal budget. HSBC analysts estimate that before the war, Russia supplied about half of Europe's 1.2 million barrels per day of annual diesel imports, or 10% of total EU consumption.
Analysts say that European crude oil imports from Russia have already fallen by some 700,000 barrels per day, and that the EU sanctions could lead to even further reductions. With crude oil prices already trading at their highest levels in two months, the EU's move could put even more pressure on Russia.
Previously, Moscow has been shutting off supplies to clients who refuse to conduct transactions exclusively in rubles. After the Dutch said they would not pay in rubles, Gazprom turned off the valve to the Netherlands on Tuesday. The Kremlin has also cut off deliveries to Bulgaria, Poland, and Finland, with additional nations on the verge of receiving the same treatment.
The flip side of the coin
The EU's new sanctions against Russia will take months to go into effect, and even then they won't be as effective as many had hoped. The political deal commits to blocking seaborne Russian imports to the EU by the end of the year — which still leaves 30 percent of crude that's sent by pipeline.
Analysts point out that the deal will still allow the EU to pay Russia billions of euros for oil and oil products this year while the war in Ukraine rages on. A ban on seaborne crude kicks in after six months, while refined products will be banned beginning in 2023.
It remains to be seen how Moscow will respond to this latest development, but it is clear that the EU is taking a firm stand against Russian aggression. This could have far-reaching implications for the EU's relations with Russia, and it will be interesting to see how this story develops in the coming days and weeks.