Why is the EU delaying banning Russian oil?


Punishments

European diplomats are trying to strike a deal ahead of the two-day summit of European leaders which begins on Monday afternoon. The starting point for their discussions is the European Commission’s proposal of May 4, which provides for the sixth and most severe series of European sanctions against Russia. This proposal included an import ban on all Russian oil, whether transported by sea or by pipeline, as well as crude oil and refined products.

An oil embargo would deprive Moscow of an important source of revenue, which helps finance its military activities in Ukraine. Research body CREA says EU countries have paid Russia nearly 30 billion euros for oil since February 24, when it launched what Moscow calls a ‘special military operation’ .

Europe is Russia’s largest oil export market. About half of Russia’s 4.7 million barrels of crude exports are destined for the EU, according to the International Energy Agency. The EU depended on Russia for 26% of its oil imports in 2020, as well as around 40% of its gas.

However, reliance on Russian crude varies widely between EU countries, as does their ability to replace Russian supplies with alternatives. Therefore, the EU is struggling to find a set of oil sanctions that is accepted by all states.

Main foreign oil exporters to the European Union, in % of total value (Source: Eurostat)

The Hungarian pebble in the European shoe

The 27 member countries of the EU must unanimously agree on the sanctions. Hungary, which is the main opponent, believes that stopping Russian oil imports would hurt its landlocked economy, as it cannot easily source oil elsewhere.

Slovakia and the Czech Republic, also landlocked, have also expressed concerns. Like Hungary, they depend on the Druzhba pipeline, located in southern Russia, for their oil supply. The three countries were therefore offered a longer transition period to cut off Russian oil, and the EU said this month that it would offer 2 billion euros in funding for oil infrastructure to help countries to do so.

This proposal has not yet convinced Hungary, which says it needs funding to modernize an oil pipeline from Croatia and to adapt its refineries to non-Russian oil. However, it cannot easily access funding offered by the EU due to Brussels’ action against Budapest for allegedly undermining EU democratic principles. According to the IEA, Hungary, whose Prime Minister Viktor Orban had closer ties to the Kremlin than other European Union countries, received more than half of its imports of crude oil and petroleum products from Russia last year.

A compromise is needed

Having already imposed five rounds of sanctions on Moscow, Brussels is trying to avoid a public dispute over oil sanctions, which would undermine the hitherto united front of EU countries against Russia. In a bid to reach a deal, the countries were discussing a compromise on Monday that would ban only Russian oil brought into the EU by tankers, with a temporary exemption for pipeline deliveries. Russia’s Druzhba North pipeline, which supplies Poland and Germany, would also be exempt from the embargo.

Some European diplomats, however, warned that this would make the sanctions too weak and suggested that the exclusion of the northern branch of the pipeline was unnecessary, since Germany has declared that it would be ready to support an embargo on oil by the end of the year and that Poland has long supported the Russian oil ban.

The challenge is to find a compromise that does not unfairly penalize certain countries. For example, exempting pipelines from the ban could create competition concerns in the EU, as countries connected by pipelines would get cheaper Russian oil, while other states would have to look to Brent crude, more dear.

According to think tank Bruegel, three-quarters of Russia’s oil from Europe is delivered by tankers, while a quarter is delivered by pipeline, so an embargo on deliveries by sea would still a significant impact.



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