EU leaders’ plans to impose a bloc-wide embargo on Russian oil carry political heft. But some analysts believe it will not deliver the intended blow to Russia’s economy.
Brussels proposed a measure on Wednesday that would ban all imports of Russian oil by the end of the year. The plan, which still needs to win the backing of all 27 member states, is part of the sixth package of EU sanctions intended to undermine the Kremlin’s ability to wage war on Ukraine by hitting the Russian economy.
But Sergey Aleksashenko, the former deputy governor of Russia’s central bank, believes the ban is “not very powerful” as a measure, as prices for crude have risen substantially, counteracting the costs of losing the European market.
The Russian budget is heavily dependent on revenues from oil exports, which accounted for 45 per cent on its total income in 2021. However, the government will break even if Russian producers can sell their oil for $44 per barrel or more.
Sanctions have — at least on the face of it — made that possibility more, not less, likely. Russia’s key crude blend, Urals, is trading at $70 a barrel, and though that constitutes a hefty discount compared with Brent, it is far above Russia’s budgetary needs.
The price of Brent, the oil industry benchmark, rose 5 per cent to $110.39 a barrel over the course of Wednesday following the announcement that the EU had proposed a ban.
If an embargo is agreed, oil prices are likely to head even higher, allowing Russia comfortably to absorb the blow while placing a serious strain on Europe, which relies on the country for 30 per cent of its oil.
Asian buyers are the most likely recipient of any surplus of Russian crude. China’s independent refiners are already buying more from producers in the country, though big state-owned commodity traders are shying away from purchases because of western sanctions.
But analysts questioned whether a pivot to Asia was so easy to achieve. Sixty per cent of Russia’s oil exports go to Europe — three times the quantity that goes to China — and pipeline infrastructure is predominantly geared towards carrying oil west.
According to Craig Kennedy, an associate at Harvard University’s Davis Center, it remains unclear just “how much appetite” countries such as China have for importing Russian oil at a scale that would fully absorb current EU exports.
Capacity to carry oil to Asia by rail is even more highly constrained than usual, after an EU coal import ban already sent exporters scrambling to secure rail capacity to send additional coal volumes east.
“Russia will face infrastructure bottlenecks, uncertain demand and logistical challenges [to export oil to Asia],” said Maria Shagina, visiting senior fellow at the Finnish Institute of International Affairs. “Russia will continue selling oil to China and India but they will not be able to fully compensate the loss of the European market.”
Shagina added that while oil revenue would continue to flow to the Russian government, the industry “will no longer be the cash cow it historically was”.
Sofya Donets, Russia and CIS economist at Renaissance Capital, said that while the immediate impact of the embargo was bearable for the Russian economy, the difficulties involved in pivoting sales to Asia meant the long-term impact could be more severe.
“In the short term this hit is largely an expected one, and compensated for by the spike in oil prices,” said Donets. “In the long term, it will hit economic activity and the value of the rouble. But most of these impacts will become a reality with some delay in 2023.”
Another part of the EU sanctions package — a limit on shipping insurance on vessels carrying Russian crude — is also significant.
Robin Brooks, Institute of International Finance chief economist, said: “Sanctions on maritime insurance will cut tanker traffic lots, as few will ship without.”
Kennedy agreed, pointing out that Russia was “unlikely to secure nearly enough tankers” to move all its EU oil exports to Asia, especially if “marine insurers, banks, and vessel owners” refused to do business because of the sanctions risk.
Europe, meanwhile, is expected to increase its consumption of Middle Eastern oil, but that could prove challenging. Most European refiners are set up to process the heavier Russian Urals crude blend rather than the lighter Middle Eastern kind.
Processing a different grade of crude oil may require adjusting refineries but the sort of investment needed for that to happen would go counter to environmental goals, a senior oil executive said.
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2022-05-05 04:01:01Z
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