EU embargo on Russian oil puts strain on region’s economies

Senior EU officials are expected to sign off on the oil embargo in the coming days, adding to the intensity of the bloc’s economic retaliation against Russia. war in ukraine, The leaders of EU member states said late Monday that they had agreed in principle to impose sanctions on Russian crude. Refined fuel arriving on shipsWhich accounts for at least two-thirds of the imports from Russia.

Fuel imported through pipeline was exempted from the deal Hungary to agree to get holdout, The ban will be phased out over several months. EU officials said that by the end of the year, the embargo would cover 90% of previous Russian oil imports.

deal raised oil prices Traders on Tuesday had to be prepared for losses in Russian oil supplies in international markets. Global benchmark Brent rose 1.9% to $119.84 a barrel on Tuesday, trading near its highest level in more than two months. US West Texas Intermediate rose 3.5% to $119.06 a barrel, after trading closed for the Memorial Day holiday.

The embargo would end Europe’s decades-long reliance on Russian oil to power its economy and force the bloc to find new sources of crude and refined fuel. It could increase global inflation, is already running at its highest rate in decades in major economies, and exacerbates fuel shortages in poor regions that will compete with Europe to import oil. The European Union said on Tuesday that the annual rate of inflation in the eurozone rose to 8.1% in May, hitting a new high.

In 2020, 29% of the EU’s crude oil imports came from Russia, with the US, the second largest supplier, providing 9%. According to the International Energy Agency, Russia is also a major exporter of the refined fuel to Europe, supplying 10% of the region’s diesel demand in 2021.

The stakes are high for Russia, which depends on its energy exports to fund government spending: International sanctions have crippled its economy to a great extent. from the west. According to Brussels-based think tank Bruegel, the European Union currently pays Russia about $10 billion a month for crude oil and oil products.

The exemption from the pipeline will not bring much relief to Moscow. Before the war, the European Union imported about 2.5 million barrels of Russian crude each day, of which 800,000 barrels were via the Druzhba pipeline, the world’s longest pipeline network at 5,500 km.

Amrita Sen, founder of consulting firm Energy Aspects, said by the end of the year, Russian crude would flow into the EU by 500,000 barrels per day, 20% of pre-war levels. This equates to about $170 million per day. Lost revenue for RussiaAt current discounted prices for Russian crude.

Europe has already turned away from Russian oil in recent months, reducing purchases from Moscow and sourcing crude from West Africa, the US and elsewhere. Germany, which imports Russian oil through the northern branch of the Druzhba pipeline, sharply reduced its purchases of Russian oil after the war, reducing its dependence on Moscow from 35% to 12% before the invasion. Gave.

Looking for new exporters comes at a price, Europe’s race to stock up on oil from other producers has not seen the price of high-quality crude produced in Azerbaijan from West Africa for years. With China emerging from the Covid-19 shutdown, which has dented demand for oil, Europe will face more competition for those crudes.

“There is going to be even more competition for crude,” Ms. Sen said.

For Europe, replacing Russian diesel will be even more difficult than finding new sources of crude. Analysts and traders say the fuel, which accounts for a larger share of the auto fleet in Europe than the US, will likely come from the US, the Middle East and India. Ms. Sen said that this winter the supply of diesel globally will be less.

The loss of most of the European market would be a major blow to the Russian budget, even though Moscow has already redirected some flows to customers in Asia. Oil and gas sales contributed about 42% of federal budget revenue in the first quarter of the year.

The EU sanctions add to challenges for the Russian oil industry, which has already forced major traders to abandon their cargoes and sell their major oil blends at huge discounts to global prices.

The oil that would have gone to Europe would be difficult for Russia to sell. The country has struggled to charter ships to transport its oil as insurers and banks fear the impact of sanctions. Analysts said some of Russia’s Chinese and Indian customers, such as refineries, are having trouble getting money from the bank for shipments.

Russian President

Vladimir Putin

has ordered its government to expand energy-export infrastructure in Asia, including the construction of new oil and gas pipelines from Siberia, as well as the development of the Northern Sea Route, a shipping route along the Russian Arctic coast. . However, those projects are mainly still in the planning stages and will take years to complete.

India has been buying record amounts of Russian crude in recent weeks, but analysts say that will not be enough to eliminate the barrels the EU is aiming to impose. “This means that, over time, Russian storage will fill up and production will begin to falter,” strategists at RBC Capital Markets wrote in a note to clients.

Russian officials have said oil production could drop by up to 17% this year due to Western sanctions. This presents a long-term issue for Russia as much of its oil infrastructure is unprepared for quick and deep production cuts. The cold Siberian climate means pipelines can burst without oil in them and low-yield Soviet-era farms are expensive to maintain and restart. Analysts say Russia will permanently lose most of the production it now shuts down.

Another downside for the Kremlin is that the EU sanctions are likely to push Russian crude prices further down, reducing Moscow’s revenue from the barrels it is able to sell. The longer distance to ship crude to Asia means Russia’s margins will shrink even further, said Simone Taglipietra, a senior partner at Bruegel.