How European countries squabbled over banned Russian oil

The EU has collapsed talks on what price ceiling to impose on Russian oil. Positions within the European Union have radically diverged

How European countries squabbled over banned Russian oil
Poland, Lithuania, Latvia and Estonia have refused to support the price ceiling of $ 65 per barrel. The Baltic states found such a ceiling too “generous” with respect to Russia. Poland, in fact, believes that the level should be $30 per barrel.

Hungary was against any limits at all, that is against the price ceiling as such. Other countries, in particular Malta and Greece, do not want the ceiling to go below $70 per barrel. Most, however, were agreeable to $65-70 per barrel, but a unanimous decision is needed for new sanctions against Russia.

Such an EU split could be seen as a Christmas present for the Russian currency. The rouble has started to strengthen against both the dollar and the yuan against this backdrop. The tax period is also helping. The rouble is only slightly above 60. Now we should hardly expect the ruble to weaken to more than 62-64 rubles to the dollar by the end of the year, even if Europeans accept a ceiling of 65-70.

This divergence in the positions of the EU countries is due to different interests. For example, the Baltics and Poland are known for their irreconcilable political position against Russia. Their aim is to force Russia to suffer more tangible financial losses.

Poland clearly has the toughest position. Because the price ceiling of $30 is even lower than the average cost of oil production in Russia. It is at the level of $40, which has been calculated, among others, by the US Ministry of Finance. No one has even called such a low threshold until now. It is an inherently failed idea. After all, such a ceiling would automatically cause Russia to stop using European ships and insurance companies to transport its oil. And this, in turn, will affect Russian oil production and exports. And then there will be a worldwide price spike and a whole list of disgruntled people, from the US and the EU to India and China.

“The Europeans themselves will not buy Russian oil, but other oil might become more expensive as a result of their actions today. Many Europeans would not want that,” says Igor Yushkov, a leading expert at the National Energy Security Fund and an expert at the Financial University under the Government of the Russian Federation. In fact, no buyer of oil in the world – not the USA, India, China or other countries – wants artificial increase of world oil prices.


“The Poles feel quite at ease offering $30 a barrel. They are less afraid of anything, because the price ceiling only applies to oil transported by sea. Whereas Poland itself only buys Russian oil through the Druzhba pipeline. That is, the price ceiling has no effect on Poles,” says Igor Yushkov.

It is easy to be the main fighter for severe restrictions when these restrictions do not affect you. “The Baltics are easy to push, and the Baltic policy comes from a desire to hurt Russia as much as possible, so they join the tougher Polish option,” the interlocutor adds.

It is possible that Poland is doing just what the US asked for. Washington was the main initiator of the price ceiling, but then realised that this could send Brent prices into a tailspin, which is not a good idea right now. The US is already fighting record inflation as hard as it can, and not doing very well. It is not US policy to admit that the price ceiling is a mistake. But with the hands of the Poles, the idea can at least be delayed, if not buried altogether.

Curiously enough, a number of EU countries choose the maximum proposed level of $70, such as Malta and Greece. It is simple – it is profitable for them. But not because they hope to buy Russian oil. That would be impossible. It should not be forgotten that the EU oil embargo against Russian oil has long been approved; it comes into force on 5 December irrespective of the decision on the price ceiling. This means that no one in the EU will be able to legally buy Russian oil, no matter how much it costs.

But a price ceiling could put Malta, Cyprus and Greece out of business transporting Russian oil on their ships and insuring those shipments.

“If the price ceiling is high, during periods when the market price of Russian oil is within that ceiling, European companies will be able to provide transportation and insurance services, earning a no-break fee,” Yushkov said.

“For the last five years, Russia has been selling Urals oil at just an average price of around $70 a barrel. Adopting this threshold means not much change in the current situation: it suits both Russia and the buyers,” says Artem Deyev, head of analytical department at AMarkets.

Why is Hungary against new restrictions at all? After all, at first glance, it should not care; it has nothing to fear. It gets its oil through the Druzhba pipeline, and pipeline oil is an exception to all the restrictions: both the embargo and the price ceiling.

Hungary may see risks around the Druzhba pipeline. Ukraine somehow lost all generators which were supposed to stand along the pipe since the Soviet times. Without a backup power supply system, as soon as Ukraine loses power, a blackout occurs, i.e. the Druzhba oil pipeline stops automatically, the FNEB expert argues. Such risks should be understood by other countries that receive pipeline oil from Russia. It is no coincidence that the EU announced assistance to Ukraine in the form of generators.

Yushkov believes that Hungary is trying to bargain with the EU in this way. Previously it has already succeeded in such tricks – and it wants to beat out new preferences for itself. For example, it will agree to a price ceiling in exchange for giving Hungary the exclusive right to receive Russian oil by sea via Croatia, the expert reckons.

In general, experts believe that in the end the EU countries will still agree on the price ceiling. However, this process will be very difficult.

“The search for consensus with such different motivations of the EU countries may take longer, and even if some mechanism is eventually adopted, it will probably be full of assumptions and caveats that will ultimately avoid a serious drop in domestic oil exports,” Alexander Bakhtin, investment strategist at BCS World Investment, said.

“Perhaps a complicated scheme with a number of exceptions or some other more flexible system will be invented. Or they will adopt a high ceiling with a delay of its introduction for a month or two,” concludes Igor Yushkov.

That is, the majority will win in the end; they already spoke out for $65-70 per barrel. Because this price is close to the average cost of Russian oil. “European countries hope that such a decision will not lead to a drastic restriction in the supply of raw materials from our country. After all, Europe is extremely wary of an even greater energy crisis. Such a decision would be a compromise for Europe: to show increased sanctions on the Russian Federation, which in fact would not change much and would not throw the European economy into an even greater recession than it is now,” said Deyev.

Olga Samofalova, VZGLYAD