Criticism of the EU oil embargo: does Russia even benefit from it?

In the EU, talks on the planned oil embargo against Russia are in full swing. Apparently, Hungary, the Czech Republic and Slovakia are to receive exemptions. Croatia is also considering demanding such. For the remaining countries it is planned that they will stop importing crude oil within six months and imports of all petroleum products by the end of the year.

India and China as laughing third parties

However, the EU’s actions have drawn critics into action: Because the loss of Russian quantities in an already tight oil market will raise the price of oil, Moscow could end up earning more than without the embargo. The higher price would then compensate for the lower volume. This effect is even more extreme when the embargo is introduced slowly: the market is already reacting with price increases, while the oil flows are only gradually being stopped.

In addition, according to the critics, the embargo can be circumvented by countries such as India or China. They also benefit because Russian oil is currently being offered at a discount to the world market price, which is not usual elsewhere. As a result, the energy prices for these countries fall relatively compared to the costs for Europe. Even higher prices for petrol, diesel or kerosene will also fuel inflation and could also contribute to a recession.

Russia deserves more

The criticism is absolutely correct. The question, however, is what the EU countries want to achieve with the sanctions and whether there is a better way than a general ban on imports of Russian oil. However, the current picture of the situation is still inconsistent: According to official figures, Russia took in more nominally in the first quarter and probably also in April from sales of oil and natural gas than in the previous year. This is mainly due to the increased energy prices and the weakened external value of the rouble.

According to the Bofit institute of the Finnish central bank, oil and gas funds accounted for around 40 percent of all federal revenues of the Russian state in the first quarter. However, the next few months could be more difficult for Moscow because the price of the Russian oil variety Urals has fallen and the ruble has appreciated.

Stronger storage at sea

In Russia, due to the measures taken since February, around 1 million barrels of oil per day less than before is likely to be produced. Some European companies report that they have already stopped using Russian oil, even if it can still be imported. The word of self-sanctions is doing the rounds.

However, the drop in production could be even greater in the coming weeks as storage facilities gradually fill up, the Oxford Institute for Energy Studies (OIES) writes in a report. In addition, the number of tankers carrying Russian oil that do not specify their final destination has increased. The OIES expects the amount of oil from Russia stored in ships at sea to expand in May.

At the same time, it can be observed that oil has already been increasingly shipped towards Asia from the Russian ports on the Baltic and Black Seas. The information as to how much oil is involved differs depending on the source and should be treated with caution, which is probably also in the interest of the countries involved, who do not want to draw the attention of western countries to themselves. The Finnish institute Bofit reports that although Russian energy exports to China rose sharply in March in terms of value, they fell in terms of volume. The OIES points to data showing larger crude oil exports to Asia in March and April.

Paradoxically, more rebalancing of international oil trade would take some of the wind out of the argument that European sanctions are driving up oil prices. It is important for Europe not only to change trade flows, but also to dry up an important source of income for Moscow. The better this succeeds, the more difficult it will be to meet global demand for oil.

No trading in Russian oil

The EU is aware of the holes in a possible embargo. In a preliminary version, the EU Commission therefore proposed that European companies should be banned from global trade in Russian oil with third countries. This includes financing, shipping and insurance services in the context of oil trading. Because Switzerland reflects the EU sanctions, this would also be relevant for Swiss companies. The impact would be great because European companies are leaders in these areas. The majority of all oil tankers worldwide are insured in Europe.

In order to at least formally plug all the holes, the USA could also introduce secondary sanctions: Washington could use such measures to prohibit foreign companies from trading in Russian oil. The main lever would then be to exclude banks and companies that would violate this from the dollar. So far, the US, which has already introduced an embargo against Russia, has not considered this because of its European partners.

There are ways around this, too, but trading is becoming more difficult. The United States, for example, has imposed such restrictions on Iranian oil exports. Tehran helps itself with barter transactions, trading in Chinese or Indian currency and cloak-and-dagger operations such as transhipment of crude oil deliveries on the high seas in order to disguise the origin of the oil. Iranian tankers also regularly switch off the satellite system that is used to locate the ships. However, due to these attempts to circumvent them, the costs of transport are also rising, which would melt any discount for Russian oil.

Penalty instead of import ban

There are proposals that try to avoid the disadvantages of a general ban on imports. At the same time, Moscow should earn significantly less from its natural gas and oil business with these solutions. The idea of ​​a levy on Russian energy supplies instead of an embargo often comes up in the discussion.

Above all, the oil or gas price and the income for the Kremlin and not the delivery quantities are to be targeted. As a result, Russian energy revenues above the production costs could be skimmed off for the most part. At the same time, the international oil price would react more slowly because the Russian quantities would still be available on the market. But even with this proposal, attempts to circumvent the Russian origin of the oil could be disguised.

Another suggestion is aimed directly at the price of oil: Instead of tackling the quantities as with an embargo, the international price for crude oil should be lowered in general so that Moscow earns little. This can be achieved by reducing demand or by increasing supply.

Both are easier said than done. Above all, flooding the oil markets with more supply is probably not within the scope of the European countries that do not produce oil. The release of strategic oil reserves so far has also resulted in little price reaction. In addition, a low oil price should give petro-states less incentive to increase production.