EU Embargo on Russian Oil, Implications and Consequences
The European Union (EU) embargo on Russian oil, which came into force on December 5, 2022, is a long-awaited sanction for Kiev that should block one of Moscow’s main sources of revenue. The decision, made after lengthy negotiations, concerns only oil transported by sea.
The decision was not an easy one, as Europe’s dependence on Russia is still strong. Last spring, the 27 EU Member States declared their intention to completely get rid of Russian hydrocarbons. But they have adopted a differentiated programme for each energy source, with some being easier to replace than others.
Since the start of the conflict in Ukraine in February 2022, Russia has earned EUR 67 billion from Russian oil sales to the European Union. However, its annual military budget amounts to around EUR 60 billion a year.
Europe has already adopted several sets of sanctions against Russia over its invasion of Ukraine. But to stop indirectly financing the war in Ukraine, it has implemented this oil embargo from December 5, 2022. On one condition, however, that it only affects seaborne oil.
A crucial step in the sanctions imposed by the West on Russia
From December 5, 2022, it will be prohibited to unload Russian oil into an EU port. The US, UK, Japan, and Australia have made similar commitments. As a result, all democratic countries are the ones almost completely giving up oil from Russia, thus trying to weaken Vladimir Putin in his war against Ukraine.
For coal, the embargo came into force in August 2022. No date has been set for gas because Member States know they will suffer quite a lot by stopping imports from Russia. Eventually, it was Vladimir Putin himself who accelerated the withdrawal, by turning off the taps on most of the pipelines supplying Europe.
Russian imports, affected by over 90%
Today, two thirds of Russian oil consumed in Europe is transported by sea. The remainder is transported by pipeline and largely concerns landlocked countries that will continue to be supplied in this way. For crude oil, negotiations between Member States have been difficult, especially as Hungary has opposed the embargo. This is for political reasons – the pro-Russian Prime Minister Viktor Orban is hostile to sanctions – but also for economic reasons. Hungary is a landlocked country. It receives oil from Russia through pipelines and cannot easily diversify its supply, unlike countries with access to the sea.
Hungary, which had threatened a veto, will finally be able to continue importing oil through the Druzhba pipeline. Same for Slovakia and the Czech Republic. Brussels is giving them time to reorganise their energy systems.
As for Germany and Poland, the two countries have decided of their own accord to stop their supplies through the same pipeline until the end of 2022. Therefore, Russian imports will be affected by over 90%.
For Moscow, however, it is easier to find other buyers for its exports by tanker than by pipeline. Some Member States fear, however, that the conditions of competition for oil purchases will be distorted.
Destabilization or reorientation?
Some analysts fear that the European Union’s move could destabilise the global oil market. An observation not shared by Francis Perrin, Senior Research Fellow at the French Institute for International and Strategic Affairs (IRIS). According to him, “reorientation does not mean destabilization”.
“I don’t think we can speak of destabilization of the world oil market. It is not an absolute embargo, but it makes it possible to reduce the volumes imported by more than 90% compared to before the war, this is an absolutely major measure. Obviously, there will be an impact. We cannot take a measure as strong as an embargo without having an impact on the oil market and oil prices,” said the expert.
Embargo covers refined products
Europeans will soon have to find other suppliers of Russian diesel, which they imported heavily before the war.
The European Union has agreed to cap the price of Russian oil sold to third countries at USD 60 per barrel, following talks at the G7 summit. Much discussed, this cap has been tightened by adding a provision to keep it 5% below the market price of Russian crude oil, because the latter is already trading at a deep discount and fluctuates widely. Ukraine immediately showed its dissatisfaction with the amount of the cap, although it was revised downwards by European diplomats compared to the original ambition.
Poland has exerted strong pressure in this direction, blocking the negotiations until the last straight line. Ukrainian President Volodymyr Zelenskyy said it was “not a serious decision” and would be “quite comfortable for the terrorist state budget”.
Russian Deputy Prime Minister Alexander Novak said the West’s move was a serious interference that contradicts the rules of free trade. “We are working on mechanisms to prohibit the use of a price cap instrument, regardless of what level is set, because such interference could further destabilise the market.”
“We will sell oil and petroleum products only to those countries that will work with us under market conditions, even if we have to reduce production a little,” Alexander Novak added. All eyes are now on big buyers such as China, India, and Turkey.
Fragile balance and uncertainties
The cap to be set by the G7 should lower Russian oil margins without penalising global supplies. But the balance is fragile, and uncertainties remain. Markets are hesitant.
According to Francis Perrin, “Russia will suffer more from the European embargo […] on refined products than from the capping mechanism”. “It is a difficult task for Europe, but not impossible,” the expert also said, adding that EU Member States have prepared for it.
In October 2022, the EU already imported only 1.4 million barrels of Russian crude oil per day, of which a marginal part (0.3 million) transits Hungary by pipeline and will therefore not be affected by sanctions. To this crude oil is added about 1 million barrels per day of refined petroleum products.
Short term solutions
“In the short term, Europe can find solutions,” says Carmine de Franco, Head of Research at Ossiam, citing the Middle East, the United States, Norway, or Africa as other substitute regions for supply. “On the other hand, it will be more difficult for diesel, because the EU still imports a lot and we have little production capacity for refined products,” he warns.
Many experts expect big strains in diesel supply chains, even though the EU has taken this into account and is counting on new refining capacity in late 2022 and 2023.
“There is indeed a transfer of the value of Russian exports to emerging countries which buy volumes at big discounts, refine them and make margins by exporting them to Europe,” confirms Marc-Antoine Eyl-Mazzega, Director of Centre for Energy of the French Institute for International Relations (IFRI).
Since the beginning of the conflict in Ukraine, Russia has extracted EUR 67 billion from oil sales to the European Union, EUR 7 billion more than its annual military budget.
Seaborne imports, which accounted for two-thirds of oil purchases before the conflict, are now banned in the EU. Pipeline imports, in particular through the Druzhba pipeline, are still allowed to ensure the supply of landlocked countries, in particular Hungary. Another exemption: Bulgaria has an additional period to implement the embargo.
Questions about the European embargo on Russian oil
The European Union, which imported 1.5 million barrels of Russian crude a day in October 2022, hopes the embargo will weaken Russia’s economy.
Not a drop of Russian crude oil should reach the European Union by sea. European countries have activated the embargo on Russian black gold. Decided in the spring of 2022, the sanction is aimed at weakening the Kremlin’s financial capacity to wage war in Ukraine. Moscow is the world’s second largest exporter of crude oil. In February 2023, the second part of this ban is due to come into force: refined products – such as diesel – from Russia will also be banned. This European measure, which coincides with the activation of the cap on the sale price of Russian oil by the West, raises several questions.
How much Russian oil is still imported?
At the end of August 2022, the international press revealed that Russian oil imports to Europe were at their highest level since April, at 3.4 million barrels per day. In October 2022, the European Union still imported 1.5 million barrels of crude oil per day, according to the International Energy Agency.
Before the war, in 2021, the main oil importing countries in the European Union were Germany, the Netherlands and Poland. Within six months of the start of the conflict, Russian hydrocarbons were arriving mainly in Turkey, Italy, the Netherlands, Romania, and Bulgaria.
Bulgaria has also been given a deadline to adapt to the EU embargo. This will allow it to continue importing Russian oil by sea until the end of 2024.
How does Russian oil get to Europe?
The vast majority of Russian crude oil (still unrefined) reaches European ports by sea. In March 2022, for example, a Russian ship containing 100,000 tonnes of oil was authorised to unload in the port of Le Havre (north-western France).
Another part of Russian crude oil enters Europe by pipelines. But these onshore deliveries are not affected by the embargo. Hungary, the Czech Republic, and Slovakia will therefore still be able to receive Russian crude oil in this way. Germany and Poland, also supplied by pipeline, have decided to end these imports by the end of 2022.
Can the embargo be effective?
According to the European Union, the ban would stop 90% of Russian imports by the end of 2022. But many experts point out that Russia will be able to circumvent the European embargo quite easily.
The Russians can always find solutions, believes Phuc-Vinh Nguyen, Research fellow at the Jacques Delors Energy Centre: “either by trying to mask the commodities, mixing them with other types of oil to hide their origin, or with a fleet that would make various detours through Asia and then Europe.”
The oil market, unlike the gas market, eases the task. “You have no way of ensuring that the oil you buy from traders in Mumbai, Singapore or Saudi Arabia is not from Russian fields,” says Matthieu Auzanneau, director of The Shift Project, a French think tank advocating the shift to a post-carbon economy.
“We have to pay attention to the real capacities and willingness of the European players to manage without Russian oil,” adds Matthieu Auzanneau, who believes that the European Union is aware that it cannot completely give up Russian oil and gas.
Does the sanction risk penalizing Europeans?
By wanting to give up Russian oil, don’t Europeans risk become vulnerable? Certainly, EU countries have diversified their sources of supply to prepare for the embargo, but they could still suffer from higher prices. These difficulties are expected to increase with bans on imports of refined products from February 2023.
“It will be harder in the case of diesel supply,” warns expert Carmine de Franco. “Because the EU still imports a lot, and we have a small production capacity for refined products.”
On the other hand, Francis Perrin notes that Russian imports have nevertheless fallen by 40% for crude oil since the beginning of the conflict.
Reviving the Burgas-Alexandroupolis oil pipeline
As the EU embargo against maritime shipments of crude oil from Russia went into effect on December 5, 2022, Greece and Bulgaria are talking about reviving a long-defunct oil pipeline project that bypasses the Bosporus Strait.
The pipeline would run 280km (about 174 miles) from the port of Alexandroupolis on the Aegean Sea to the port of Burgas on the Black Sea and might continue as far north as the port of Constanza in Romania, Bulgaria’s Energy Minister Roman Hristov told Al Jazeera. “We have a two-year derogation to buy Russian oil, but after that, we will face problems because of the hike in transit fees through the Bosporus,” Roman Hristov said. “So, we have begun discussing the revival of the Burgas-Alexandroupolis pipeline, and its extension north to the ports of Varna and Constanza,” he added.
“We support the project,” added Greek Energy Minister Kostas Skrekas.
The Burgas-Alexandroupolis pipeline was a proposed oil pipeline project for transportation of Russian and Caspian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis. It was seen as an alternative route for Russian oil, bypassing the Bosporus and the Dardanelles. In March 2007 Russia, Bulgaria and Greece signed an intergovernmental agreement to build and operate the Burgas-Alexandropoulis oil pipeline between Bulgaria and Greece. However, in December 2011 the project was suspended by the Bulgarian government due to environmental and supply concerns.
Production quotas will be maintained at the level agreed in October 2022, when OPEC countries decided to reduce oil extraction by two million barrels per day, sparking discontent in Western countries, particularly the US. The next OPEC meeting is set for June 4, 2023, but the group said it could meet whenever necessary if immediate additional measures are needed. OPEC’s decision came a day before the EU embargo on Russian seaborne oil came into force.
Jacques Rousseau, managing director of Clearview Energy Partners, believes that oil prices and production quotas will be adjusted as a result of the embargo and price cap. “If Russia takes more than a million barrels a day off the market, then there will be a global oil shortage that someone will have to make up for somehow, whether it’s OPEC or not. This will be the key factor, how much Russian oil will disappear from the market,” he said.
Impact of the EU embargo on Russian oil in Romania
President Klaus Iohannis has stated, regarding the entry into force of the EU embargo on seaborne Russian oil, that this will have consequences in Romania, but that the government will find a solution to this problem. “There will be consequences, that is very clear, but the government will also be concerned about this issue and certainly, as good measures have been taken so far to protect the population, a solution will be found to this problem as well,” the head of state said.
Moreover, even the Ministry of Energy has announced that Romania has found alternative sources for Russian oil and that there will be no problems with supply as is happening in Hungary, for example.
Romania’s three major refineries – Petromidia, Petrobrazi and Petrotel-Lukoil – have found alternative sources to oil imported from Russia, according to the Ministry of Energy.
“The refineries in Romania will process non-Russian crude oil, alternative routes have been established, alternative sources of oil supply. In this respect, Romania has practically become independent from Russian oil. Romania has enough fuel in stock, we have no supply problems,” said Energy Minister Virgil Popescu.
According to the National Commission for Strategy and Prognosis, Romania’s oil imports are estimated at over 7 million tonnes in 2022, up more than 6 percent from the previous year.