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The European Union Has Banned Russian Oil. Will It Make A Difference?

22 Jun 2022
By Rodrigo Moura
Drum of Gazprom Oil.
Source: Maxence / Flikr.

The European Union is slowly cutting off Russia’s lifeline. For Ukraine it may be too little, too late.

Vladimir Putin famously said the demise of the Soviet Union was the greatest geopolitical catastrophe of the 20th century. Since Putin came to power, Russia has tried to reassert its sphere of influence in the post-Soviet space through diplomacy, economic and psychological pressure, and military intervention. Since the 2008 invasion of Georgia, Russia has chewed off bites of post-Soviet countries that threatened to align themselves with the West, with the February invasion of Ukraine only the latest and bloodiest episode in that story.

The West – here meaning both the members of North Atlantic Treaty Organisation (NATO) and their Asia-Pacific allies – was quick to respond to the Russian aggression with sanctions and asset freezes covering Russian state entities and oligarchs close to Putin’s regime. On 3 June, the European Union (EU) announced its sixth package of sanctions against Russia, which among other measures introduces a phased and partial ban on imports of Russian crude oil and petroleum products, as well as on shipping and insurance of oil cargoes.

This oil embargo is the EU’s latest attempt to find a way to reduce Putin’s ability to finance his war with hydrocarbon exports, for which the EU has contributed handsomely: the Centre for Research on Energy and Clean Air (CREA) reports that EU member states paid Russia €93 billion for fossil fuels in the first 100 days of the war in Ukraine, which is above the estimates of the cost of the invasion to Russian coffers. By making the ban phased and partial, the EU is trying to minimise the economic cost to European businesses and consumers. Political consensus among the 27 EU member states, whose governments range from Russia-sceptics such as Poland, the Baltics and Nordics, to Putin sympathisers such as Hungary’s Viktor Orban, would otherwise not have been possible.

How will the ban work? Council Regulation (EU) 2022/879 imposes an embargo on the purchase of Russian crude oil and refined oil products by persons in EU member states, allowing for phase-outs of six months for seaborne crude oil, spot market transactions and execution of existing contracts, and eight months for refined products. Temporary exemptions have been granted to countries importing Russian oil via pipelines, mainly the Czech Republic, Hungary and Slovakia, and to Bulgaria and Croatia for certain seaborne imports. European Commission President Ursula von der Leyen expects these sanctions will cut EU imports of Russian oil by 90 percent by the end of the year, an ambitious goal. Reliable statistics are not easy to come by, but accounts by oil tanker trackers show that Russia has exported more crude oil (albeit at a discount) but fewer refined products since the launch of the war.

The EU oil shipping and insurance ban, which also covers shipments to countries outside the EU, kicks in after a wind-down period of six months, and is said to be aligned with the United Kingdom, the most powerful player in the maritime insurance industry. But like almost everything in the Ukraine sanctions saga, there are complications: the United States government is said to be lobbying to water down the insurance ban, due to concerns that withdrawing Russian volumes from global markets will push up oil prices and fuel inflation in America.

Importantly, the EU ban does not cover imports of Russian natural gas. In May, the EU adopted the REPowerEU Plan, aiming, “through energy savings, diversification of energy supplies, and accelerated roll-out of renewable energy to replace fossil fuels in homes, industry and power generation,” but achieving this will take several years. Notably, EU countries managed a 23 percent reduction in gas volumes imported from Russia in the first 100 days of the war, the CREA reports, but high gas prices have resulted in Gazprom, Russia’s state-owned gas company, doubling its revenues nonetheless.

Will the EU oil embargo deter Putin from further aggression or bring him to the negotiation table? The literature on sanctions effectiveness estimates that sanctions “work” no more than a third of the time – and potentially even less once attribution is properly considered, as sanctions are normally used jointly with other measures such as diplomacy. The most effective sanctions are those that are multilaterally imposed, directed at democratic allies rather than autocratic rivals, broad in scope, limited in aim, costly to the target countries’ decision makers, speedily implemented, and more painful to the party being sanctioned than to the sanctioning party. On most of those accounts, Western sanctions against Russia fail to meet the success criteria.

One way Russia may seek to limit the impact of sanctions is by seeking alternative markets. Developing countries’ reactions to Russia’s aggression have varied, as “qualms about Russian malevolence are a luxury only rich countries can afford” as former Pakistan PM Imran Khan put it. China, India, and others have shied away from criticising Russia’s actions and picked up some of the trade abandoned by Western countries, but it is doubtful they can do so in significant volumes once the EU unplugs itself from Russian oil and limits Russia’s ability to ship and insure its cargoes. China, for one, has offered significant rhetorical support but little of economic value besides the opportunistic trade. In their most recent telephone conversation, Putin and Chinese President Xi Jinping offered each other mutual support on matters of “sovereignty and security,” which was interpreted by analysts as code for capacity to withstand Western sanctions. But while Putin and Xi say their “partnership knows no limits” – and Graham Allison reminds us that “a no-limits partnership is a few steps beyond most U.S. treaty alliances” – Chinese firms are refraining from trade with and investment in Russia, and China-based multilateral lenders such as the Asian Infrastructure Investment Bank and the New Development Bank put new projects in the country on hold.

If the West does not succeed in promoting peace in Ukraine, a more achievable goal may be reducing Putin’s ability to finance aggression against NATO members. Anders Åslund and Maria Snegovaya of the Atlantic Council have found that Russia’s ability to finance itself was severely compromised following the U.S. Magnitsky Act of 2012 and the 2014 annexation of Crimea. By reducing Russia’s access to international financial markets, sanctions led Russia to adopt an extreme macroeconomic conservatism that has led to stunted growth and missed opportunities. Åslund and Snegovaya argue Russia missed the chance to raise some US $480 billion in global financial markets between 2012 and 2020, while Russians’ disposable income fell by over ten percent. Russia is not only poorer, but Putin’s regime has also become more autocratic – domestic political repression being an externality from foreign sanctions that is often not accounted for.

As I write, the European Commission has recommended that Ukraine (and Moldova) be granted candidate status to join the EU. Ukraine’s ride to membership will be neither easy nor short, but the recommendation sends a powerful signal to Ukrainians that there is a future with the West. For Russians, the future looks a lot like the Soviet Union Putin so ardently misses.

Rodrigo Moura is a lawyer specialising in infrastructure and natural resources, and a PhD candidate at the University of Essex’s Department of Government.

This article is published under a Creative Commons Licence and may be republished with attribution.