European Union leaders have finally agreed to ban most Russian oil imports, paving the way for a sixth package of sanctions aimed at eroding the Kremlin’s capacity to fund its brutal war in Ukraine. It’s an imperfect solution that comes late, makes multiple concessions that draw out timing and caves to Hungary’s demands for exemptions. Sanctioning gas, where infrastructure ties Russia far more tightly to European purchases, remains off the table. It’s a vital step forward nonetheless.
First, the flaws. The deal reached on Monday is embarrassingly late. Europe has for months expressed outrage over Kremlin forces’ actions while also effectively enabling the conflict through hefty payments for imported Russian oil and gas. According to the Centre for Research on Energy and Clean Air, EU countries have paid Moscow 57 billion euros ($61 billion) for fossil fuels since the invasion — an untenable moral and diplomatic position that member states are only now starting to tackle. For gas, the plan is still to reduce demand and increase non-Russian supply, which the Commission optimistically hopes can pave the way to a dramatic reduction in imports this year, and eventual independence.
More troubling, after impressive early displays of unity and speed, the unseemly haggling in the run-up to this deal exposed fractures in Europe that will only encourage Moscow. Discussions ended with significant concessions to Hungary’s Viktor Orban, who was able to block an agreement for weeks and put his interests ahead of collective security — a troubling precedent. As a result, the sanctions will only include oil delivered by sea, with “a temporary exception” for pipeline oil that leaders will come back to “as soon as possible.” The written statement also outlines emergency measures “to ensure security of supply,” in response to Orban’s demands that he be allowed options if pipeline supplies are interrupted.
Other compromises will drag out some measures imposed so they don’t take effect until six or eight months after the proposal is adopted. Important and bold steps, like a plan to ban the EU shipping industry from carrying Russian crude, have already been dropped.
None of this should take away from what is still a significant achievement, almost unthinkable just months ago. An energy embargo, even an imperfect one, is painful for the Kremlin immediately — and is an important signal of intent. This one, if pledges from Germany and Poland to wean themselves off pipeline oil are fulfilled, should cover 90% of Russian oil imports into Europe by the end of the year.
The effects on the markets for oil and, in particular, oil products could be dramatic. Russia is by some margin the largest net exporter of petroleum products in the world (the US, whose gross volumes are larger, derives much of its exports from refining other countries’ crude). European imports of Russian diesel account for about a fifth of global trade in that product. Almost all of that will be shut down in a matter of months. Futures contracts for European diesel, which averaged $630 a metric ton over the past decade, are currently changing hands at about twice that. Inventories in western Europe’s oil trading hub are at levels last seen in a sustained way in 2008, when Brent crude prices peaked at $146 a barrel.
A repeat isn’t impossible this time around. Brent is already trading at $123. In the event of an embargo similar to the one we’re now seeing, it could hit $150 by July, the Oxford Institute for Energy Studies estimated earlier this month. That’s likely to squeeze diesel-dependent European heavy industry that’s already struggling with high prices, as well driving further inflation and enhancing the appeal of electric and hybrid vehicles that now make up nearly half of the continent’s passenger car sales.
In the short term, it’s feasible that Europe will get hurt, while Russia benefits from higher prices. The long term picture, however, looks far more challenging for Moscow. It cannot simply turn off supply temporarily without consequences, and sanctions on maritime insurance will prove nearly impossible to circumvent, given specialists operate largely in Europe, the US and allied nations, choking oil trade.
Yes, gas is absent. Russia is the biggest exporter of gas and Europe is its biggest customer, and it’s true that other than shelving Nordstream 2 pipeline, Europe has shied away from restricting imports, which Russia would have found it harder to work around. It may still have to turn to Russia to fill underground gas storage before winter. All problematic, no question.
But there’s encouragement to be found here. The wider package includes other irritants, like removing more banks, including Sberbank, Russia’s largest, from the SWIFT payments system. Sanctions have a patchy record of getting states to change their behavior — especially authoritarian governments involved in activities they perceive as core national interests — but the aim is now clearly to isolate and drain the Kremlin’s financial wellsprings. Despite a lofty ruble, propped up by capital controls, and a chunky current account surplus, measures imposed by Brussels, Washington and partners are already working. The impact of restrictions on component imports have already shown the limits of Russia’s import substitution programs. Aeroflot PJSC may soon be forced to cannibalize planes for parts, for example.
Warfare has always been dependent on finance. By cutting off the flow of dollars into the Kremlin’s coffers, Europe makes it that much harder for the Kremlin to keep up current belligerence. Even flawed sanctions are better than no sanctions at all.
More From Bloomberg Opinion:
• Europe Goes for the Knockout Blow on Russian Oil: Javier Blas
• Putin’s Parades Can’t Hide a Missing Victory: Clara F. Marques
• How Russian Is It? A Very Crude Question: Julian Lee
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clara Ferreira Marques is a Bloomberg Opinion columnist and editorial board member covering foreign affairs and climate. Previously, she worked for Reuters in Hong Kong, Singapore, India, the U.K., Italy and Russia.
David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.
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