Why Europe will not be able to agree on an energy embargo against Russia

Why Europe will not be able to agree on an energy embargo against Russia

The European Union announced the introduction of a sixth package of sanctions against Russia this week
It was expected to include cutting off several more banks from SWIFT as well as restrictions on oil supplies. However, the countries of the Old World have so far decided to abandon the latter.

European diplomatic chief Josep Borrell was forced to say that he does not now see enough support in EU member states for a full embargo on Russian oil and gas. “This also applies to alternative sanctions, such as punitive duties on Russian oil and gas supplies,” he said.

According to Josep Borrell, “stopping oil and gas imports or imposing punitive duties would be important to put pressure on Putin and bring him to the negotiating table.” “But at the moment we do not have a closed position in the EU on this issue. At the next EU summit we will discuss the topic again, and until then the discussion will continue,” the European diplomatic chief said. However, the mentioned summit will take place in five weeks, on 30 and 31 May. Until then, no decisions can be expected, presumably.

Today, several EU countries, including Germany, Austria and Hungary are strongly against the import suspension. As Borrel notes, this is why there is no final proposal for an embargo on oil and gas yet. And since foreign policy issues must be decided unanimously among EU countries, it is crucial that there is consensus among the capitals on how to proceed.

On the one hand, Austria and Germany say they can agree to an embargo if they are provided with alternative supplies. But, on the other hand, where to get them this month? It is worth remembering that OPEC head Mohammed Barkindo warned Europe that the embargo on Russian oil and oil products would cause a loss of about 7m barrels a day that could not be replaced. The release of 240m b/d from the MAE member countries would only bring the market 1.3m b/d, Iran and Venezuela are under sanctions, the Middle East is in no hurry to accommodate the State Department’s requests for production increases.

Hungary, on the other hand, has categorically ruled out stopping imports. Prime Minister Viktor Orban, immediately after his recent re-election, said he would veto any form of energy embargo, explaining it succinctly and clearly: such a move would kill Hungary.

It is fair to say that even in the EU they realise very well that the embargo on Russian energy resources will lead the economies of the Union’s countries to a complete collapse. According to Borell, in case of complete blockage of oil and gas supplies from Russia, Europe will face “the biggest famine in the history of mankind”.

That is why today the European Commission is not so much trying to persuade the opposition to impose a ban as to offer them compromise options for putting pressure on the Russian energy sector. A number of alternatives are now being discussed in Brussels. Italian Prime Minister Mario Draghi has repeatedly proposed a price cap as an alternative to oil and gas sanctions. In addition, the introduction of barrier duties on Russian oil and gas is being discussed. There have also been ideas to restrict supplies not of all Russian oil, but only of certain grades that can easily be replaced on the world market. The cherry on the cake: Europe wants to transfer only part of the money for oil and gas to Russia, with the rest accumulated in a trustee account, where it will be frozen until Moscow stops the special operation.

The last sentence is very clear: no money, no supply. And it is unlikely that anyone in Europe will go for it, as the risk of stopping pumping is too great. To be fair, last week the European Commission so far sent a document to its member representatives explaining the mechanism for paying for gas in roubles, noting that it is still possible to pay for gas without violating EU laws. This is probably why the UK’s Office for the Implementation of Financial Sanctions (OFSI) has issued a licence to Gazprombank allowing it to receive payments for gas supplies to the EU until 31 May – the day when the EU summit will be completed and decisions on the pressure on the Russian energy sector will be taken.

As for oil, all alternative proposals to the embargo are essentially just called sanctions or restrictions. The introduction of barrier duties is unlikely to change anything in terms of supply volumes. Today, Russian Urals crude trades at a steep discount to Brent. The difference in price is more than $30-35 per barrel. Although the amount of the barrier duty has not been voiced, it is unlikely to be 100% of the world price. It would be suicidal for European refineries. A duty of 30-35% for oil price of $100 would be equal to today’s discount. Thus, European consumers will pay the market price for Russian oil without prejudice to the volume of supply.

If the sanctions do not affect all of Russia’s oil, but only certain grades that can easily be replaced on the world market, it is not so clear-cut either. Several grades of black gold are produced in Russia today: Urals, Siberian Light, ESPO, Sokol, Vityaz, ARCO and Sakhalin Blend.

The quality of oil is determined by the percentage of sulphur: the lower it is, the more valuable the grade is. Russian low-sulphur grades are Siberian Light, Sokol, ESPO, Vityaz and Sakhalin Blend, and high-sulphur grades are Urals and ARCO. It is the latter that are sent to Europe. Historically, most European refineries are geared to Russian high-sulphur crude, which could be replaced by Iran or Venezuela. But they are under sanctions, and the volumes that these countries could collectively provide would not be an equal substitute for Russian supplies.

Either way, Europe has given itself another five weeks to find a way out. Five weeks to find a compromise, to look for alternative supplies, to look for the mythical Prometheus that will give them fire. The stakes are too high and the threat of being without gas is more than real.

Irina Kezik, Izvestia newspaper

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