Oil markets are on edge over the possibility of new EU sanctions on Russian crude oil and petrochemical products. European public opinion is demanding a much tougher stance from EU governments against Russia, but resistance in Berlin, Budapest, and other capitals has prevented a complete ban on Russian oil imports. As Russian military forces flood into eastern Ukraine, causing immense damage and committing war crimes, EU leaders are worried about the economic and geopolitical cost of a confrontation with Putin’s regime. Putin’s current weaponization of his energy exports to Europe has been very successful. Regardless of the atrocities being committed in eastern Ukraine, certain EU member states have been fighting to maintain the flow of Russian energy. But it looks like that is about to change. The EU has already put 5 sanctions packages on the Russian elite, Putin’s political backers, and Russian companies, but the impact of said sanctions has been limited. The Russian war machine may have experienced multiple military failures, but European sanctions are not forcing any reassessment by Putin of Russia’s invasion. It could be argued that Putin’s pre-Ukraine war strategy of splitting the European political powers cooperation options has been very effective. For more than two decades, Moscow has been hooking Germany, eastern Europe, Austria, and even France, Netherlands, and Italy, on cheap Russian energy imports. The lack of room to maneuver for some, especially Germany, is now preventing a direct and effective EU energy sanctions regime.
Berlin, Budapest, and even the Netherlands are still playing Putin’s game. Their addiction to Russian energy supplies means they are unable to sanction all of Russia’s oil and gas exports without risking a major recession in the economic heart of the European Union. It has become very clear that the main obstacle at present for Brussels to put any new sanctions in place before May is Berlin, where a political lame-duck is heading a new German government, made up of Liberals, Social-Democrats, and Greens. Berlin’s reluctance to even provide the much-needed German military hardware that German PM Scholz had promised Ukraine is a worrying sign. If Berlin is unwilling to take its portion of the pain, Ukraine’s future and the security of the European continent will be put in danger.
Despite this resistance, some EU officials are moving forward with their own strategies, setting up plans and programs not only to wean Europe from its Russian energy addiction as soon as possible but also to put more pressure on Putin in the meantime. EU Commissioner for Energy Kadri Simson stated to the press that the sixth package of EU sanctions against Russia is being prepared and will be presented very soon. At present, no specific date has been given, but Simson implied that energy sanctions, including oil and gas sanctions, are being set up. The main obstacle to these new EU sanctions will be EU regulations, which require the unanimous vote of all members. Most member states are willing to support new sanctions, including on oil and gas, but it is unclear if Berlin and others will follow suit. German PM Scholz has warned that new sanctions on Moscow could be met by Putin’s decision to block oil and gas supplies immediately. Scholz also keeps on repeating that if the EU becomes more involved in the Ukraine war Russian could attack NATO member countries. The German PM has continuously warned of the WWIII scenario that he wants to prevent.
EU members are divided, with even the Netherlands, Italy, and France being worried about the cost of new sanctions. All EU members are looking at an economic recession or lower GDP in the short term. European voters, however, are not as split, with support growing for harsher sanctions and further military support for the beleaguered Kyiv government of president Zelensky. Oil and gas prices are showing no signs of falling back, even with China’s zero-tolerance COVID strategies causing some demand destruction. Sanctions on Russia would push prices up further. OECD countries are relatively helpless when it comes to controlling oil prices, with even a release of 180 million barrels between May-October failing to have a significant effect.
Despite soaring oil prices, it seems the EU’s best option would be to hit Russian oil exports with new sanctions. There will undoubtedly be pain for OECD economies as oil prices climb, but global oil markets are slightly more capable of countering a supply shock than global natural gas markets. If Russian oil is hit, a vast part of Putin’s revenues will be blocked, Moscow delivers 29% of EU oil demand. Natural gas is much more strategic, as Russia supplies around 40% of the EU’s gas demand, and new supply options are not available.
From May 15th onwards, new EU regulations will come into effect banning companies from entering into transactions with Russia’s state-owned oil companies Rosneft and Gazpromneft. Market reports already show that European and Asian traders are backing away from Russian oil and petrochemical deals. Russia’s Rosneft has been trying to counter some of this by trying to offload large amounts of crude oil before the deadline but has not succeeded. Rosneft offered around 37.4 million barrels of Urals in May-June, and 11 prompt cargoes of Siberian Light-Sokol-ESPO. Even Indian traders have been keeping away from them in recent days despite their previous hunger for discounted Russian oil. Tanker trackers are indicating that Russian oil production is already down by 1 million bpd, hitting 10 million bpd. This falling production will add pressure to the OPEC+ alliance.
Putin has urged Russian energy companies to come up with a plan to counter any sanctions from the EU. According to a statement made by the Kremlin, Putin has asked his compatriots to come up with strategies to bring oil and gas to Asia. Russian options on this front are very limited as Europe makes up for a vast part of Russia’s total energy exports. Meanwhile, demand for oil and gas in Asia has been hit by inflation, higher price settings, and COVID restrictions in China. Moscow is still dependent on its access to European markets. The pressure on Putin is building, but his German friends and access to Berlin, Budapest, and other capitals could yet save him. In a move to increase pressure on the EU and Moscow, Poland has imposed new sanctions already, this time on Russia’s oil and gas companies Gazprom and Novatek. The Polish ministry of interior has frozen all assets of Novatek in Poland, while it is also targeting Gazprom. The latter owns a 48% stake in STG EuRoPol GAZ SA, a Polish company that is a co-owner of the Yamal-Europe gas pipeline.
While new EU energy sanctions are being contemplated, Brussels has proposed imposing a ceiling on what they would pay for Russian oil. British newspaper FT stated that the move was being considered as a way to hit Kremlin revenues. Brussels seems to see this as a way to increase pressure. Italy is supporting the move, but Berlin is skeptical, as it is worried that setting a price cap could mean a breach of contract. As long as discussions are still based on purely legal assessments, which is political jargon for being scared of Russian repercussions, Putin cannot be countered.
The future of Ukraine is still unclear, and European governments are split on almost everything. Energy sanctions appear to be the most applicable and functional strategy, even if they will bite both sides. Berlin’s reluctance is helping Putin’s war machine, but could also become a major undermining factor of Germany’s future role inside of the EU. There are no easy decisions here, but extraordinary times often call for extraordinary measures.
By Cyril Widdershoven for Oilprice.com
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