EU Proposes Ban on Russian Oil Imports

EU member states started discussing the package of sanctions in Brussels on Wednesday. All 27 countries will need to sign off on it. EU officials are pushing for a decision this week, although differences remain among member states about some of the proposals.

The Wall Street Journal reported on Tuesday that Hungary and Slovakia, two countries that are heavily dependent on Russian oil deliveries, will have 20 months to stop imports.

“With all these steps, we are depriving the Russian economy from its ability to diversify and modernize. Putin wanted to wipe Ukraine from the map. He will clearly not succeed,” Ms. von der Leyen said.

Oil prices jumped on the announcement. Brent crude futures, the international benchmark in energy markets, rose 2.5% to $107.59 a barrel. A European embargo could reduce global oil supplies because not every barrel of Russian oil that once landed in Europe will be rerouted to buyers in other markets, traders and analysts say. Russian production of refined oil products and crude has already fallen since the invasion in response to reduced demand overseas and in the domestic Russian market.

European refiners have been scouring global markets for alternative crude sources, boosting imports from the U.S., West Africa and the Middle East. Diesel prices in the region, meanwhile, have climbed to records on the prospect of reduced flows from Russian refiners.

Europe’s moves come despite warnings from top U.S. officials to tread carefully with deepening oil and energy sanctions on Russia. U.S. Treasury Secretary

Janet Yellen

last month warned that a swift move to sanction oil could force up prices, offsetting the loss of revenue for the Kremlin.

U.S. and European officials have said they are working together on ways to ensure that energy sanctions hit Russia as effectively as possible. That work is continuing through the Group of Seven developed nations, officials say.

Daniel Gros,

distinguished fellow at economic think tank CEPS in Brussels, said he estimates that an oil embargo on Russia would reduce the country’s oil revenue by 20% to 25%.

“Oil is fungible. We can get oil from somewhere else but this is symmetric. Russia can quite easily sell the oil it has to other customers, although not at exactly the same price or the same amount,” he said.

However, John Lough, associate fellow of the Russia & Eurasia Programme at Chatham House, said the sanctions could have a “significant impact” on Russia’s ability to continue to fund the war in Ukraine.

“Further reductions of federal tax revenues on top of an already anticipated 5-10% decline in GDP from existing sanctions will have huge consequences for government spending across the board and may generate serious social discontent,” he said.

Ms. von der Leyen said the EU will also need to play its part in paying Ukraine’s wartime costs, which international institutions have said could run at 5 billion euros, equivalent to $5.3 billion, a month to keep paying salaries, pensions and other basic services.

She also said the EU should start working now on a massive rebuilding package.

The EU’s move toward banning Russian oil imports marks a particularly significant escalation for the bloc because of the importance of energy exports to the Russian economy. It is also potentially costly for Europe, which is highly reliant on Russian hydrocarbons for transportation, heating, power generation and industrial production.

The proposal came after Russia cut gas deliveries to two member states last week and reflects what Western officials say is the absence of signs that the Kremlin is willing to scale back its incursion into Ukraine.

Diplomats said there could be some tough discussions on a number of points in the package although a broad consensus has emerged in favor of an oil embargo.

Hungary has repeatedly warned it could veto an oil package that doesn’t give it enough time and financial assistance to set up the infrastructure needed to wean itself off Russian oil pipeline deliveries. Diplomats said at least two more member states, the Czech Republic and Bulgaria, have argued that if Hungary and Slovakia are given more time to stop buying Russian oil exports, they should be given the same leeway.

Hungary received around 60% of its oil imports from Russia in 2020, according to the International Energy Agency. Slovakia imports almost all its oil consumption from Russia.

A short exemption for the two countries wouldn’t significantly reduce the scope of the ban. Combined, Hungary and Slovakia imported fewer than 200,000 barrels a day of Russian oil in 2021, said Giovanni Staunovo, commodities analyst at UBS Global Wealth Management.

Russian oil that once went to Europe has been diverted to Turkey, India and other markets since the invasion, and analysts say China might start to buy the fuel in larger quantities when lockdowns there ease. For Russia’s oil industry, however, higher demand in Asia wouldn’t fully compensate for the loss of its biggest export market in Europe, Mr. Staunovo said.

Some countries were pressing for full sanctions against Sberbank, saying the EU’s banking sanctions aren’t as forceful as U.S. and U.K. measures, which have stopped all transactions with a swath of Russian banks.

Some member states, including Poland and the Baltic states, as well as nonmember Ukraine, have urged the EU to move toward a full energy import ban, including gas. That remains off the table for now despite Russia’s decision to stop gas deliveries to Bulgaria and Poland because of what Germany and others say would be its economic cost.

Before Russia’s invasion of Ukraine, the EU was importing between 3 million and 3.5 million barrels of oil a day from Russia, sending just under $400 million in payments daily, according to Brussels-based think tank Bruegel. That amounted to around 27% of EU oil imports.

Oil-and-gas revenue accounted for 45% of Russia’s federal government budget in 2021, according to the IEA.

EU sanctions against Russia have had an immediate and significant impact on trade flows. Germany’s statistics agency Wednesday said sales of goods from the EU’s largest member to Russia were 62.3% lower in March than in February at €0.9 billion, while the country’s imports from Russia were down 2.4% to €3.6 billion.

However, economists say a full EU oil-and-gas embargo could force energy-intensive industries to curtail or suspend production.

Most economists say an immediate and total ban on Russian energy imports would likely push the eurozone economy into recession. In a report on the outlook for the global economy released last month, the International Monetary Fund projected a total ban would lower economic output in the European Union by 3%, leading to a small contraction this year. But Russian oil is easier to replace, and the impact of a limited ban on oil imports would be less severe.

In a note to clients published Wednesday, economists at Rabobank estimated that an EU embargo on imports of energy starting in the summer would double the size of the expected contraction in Russia’s economy this year to 20%. But they said an embargo that was confined to oil imports would have a much more limited effect, and leave the contraction closer to the 10% projected in the event that there were no new sanctions on energy imports.

Write to Laurence Norman at [email protected]