In the economic war the West has been waging against Russia since its invasion of Ukraine, a new, potentially explosive chapter begins next Monday. Some of the toughest sanctions Europe has previously announced will come into effect. It’s a high game, say some analysts. There are serious concerns about further disruption of the energy markets that the measures could provoke. At the same time, there are doubts whether the sanctions really hurt Russia. Seven questions about the measures.
1 What sanctions will come into effect exactly?
The most far-reaching are a European ban on the import of Russian oil and the insurance of oil transport by sea. The latter measure also affects other, non-Western countries, which sometimes do not support the sanctions at all, such as China and India. Almost all insurance (95 percent) for oil transport by ship is taken out in the EU and the United Kingdom. In principle, you cannot sail without insurance.
To soften the effect of that sanction, the United States, wary of major price shocks, devised a ruse: insurance would still be possible if the oil was sold below a pre-agreed price. This will affect Russia’s war chest, but it will still be possible to transport Russian oil to other, non-Western countries. That ‘price ceiling’ must also come into effect on Monday. On Friday, after lengthy negotiations, the EU agreed on a ceiling of 60 euros per barrel, whereby it was agreed to regularly check whether the ceiling is still sufficiently below the market price for Russian oil.
Oil traders and shipping companies that violate the sanctions risk heavy fines and criminal prosecution. On paper, the sanctions are the toughest the EU has hit so far. Oil is the lifeblood of the Russian economy, even more important than gas (which Europe no longer wants to import in the long run). Every day Russia now earns about 560 million dollars.
2 What does the West hope to achieve with this?
Europe wants to deprive Russia of vital revenues to boost its war chest in order to force the Kremlin to end violence in Ukraine. The European Commission thinks the sanctions will have a “significant” impact on Russian finances. For many years, European countries were Russia’s largest customers. In 2021, they jointly prepurchased 71 billion euros of Russian oil products (crude oil and diesel), representing approximately 15 percent of the total value of all exports from Russia.
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3 Are there any other exceptions to the ban?
As always. The import ban only concerns Russian oil that comes here by sea. That is about 2.5 million barrels per day. Russian oil that comes here via pipelines, another 750,000 barrels a day, is exempt, partly because Hungary has insisted on this. Hungary has no access to the sea and so cannot easily get replacement oil, it says.
In addition, the price cap does not apply to all countries that want to introduce the sanctions. G7 member Japan is still allowed to buy 170,000 barrels a day of Russian oil extracted in Russia’s Far East. Japan is deprived of its own energy resources and is dependent on imports. Finally, ships with Russian oil that departed before December 5 are allowed to dock in European ports until the end of January.
4 Will the measures hurt Russia?
In anticipation of the import ban, European traders have already partly stopped buying Russian oil in recent months. But Russia managed to close that ‘gap’ fairly easily with new Asian buyers, especially China and India. Turkey has also reported. Those buyers have put the knife to the throat of Russia and negotiated a considerably lower price. But it is reportedly still well above the cost price, and even around the price the Kremlin now charges to balance the government budget.
The question is whether Russia will also be able to find new buyers for the rest of its oil, estimated another 1.1 million barrels per day. That is uncertain, and depends on whether the Chinese economy picks up again. Until recently, economists counted on China to ‘open’ again next year, after months of strict lockdowns due to the corona epidemic. But the virus is suddenly spreading there again at lightning speed.
The International Energy Agency (IEA), the energy watchdog of the West, writes in its latest oil market report (November) that it sees little move from countries such as China, India and Turkey to buy even more Russian oil, “despite the huge discounts”. There is also less demand for oil in those countries due to the weak economy. The irony may be that Russia has provoked a global recession with its energy weapon, but that recession is now rendering that same weapon ineffective.
5 And the insurance ban?
On paper, this is even more problematic for Russia than the import ban, because it also endangers exports to non-Western countries. Until now, those countries also arranged their oil insurance in the West. But there are endless ways to get around this sanction. China is likely to set up its own insurance industry. And obscuring the origin of oil is something smugglers are very skilled at. There is now an entire fleet engaged in this clandestine trade, causing “billions of dollars worth of oil to cross the seas unchecked” every year, writes an analyst of the London oil insurer Lloyds. It is not large enough to transport all Russian oil elsewhere, but it is a lot.
With the agreed level of the price cap of USD 60 per barrel, the West is also undermining its own insurance ban. That is reportedly above the price that China and India are already paying. In other words: those countries can continue to receive insurance and thus buy oil from Russia, without explicitly participating in the sanctions.
It seems that that is exactly the intention. Poland and the Baltic States wanted a much lower level of around USD 30, which would really hurt Russia, but the US in particular was pushing for a significantly higher level. Otherwise, the country fears a serious disruption to the oil markets if China and India suddenly can no longer buy Russian oil. They then have to look elsewhere and then a huge price war ensues. The government of US President Biden does not want that, because inflation could then spiral out of control and unrest could arise among the population. An analyst from an American think tank therefore previously mentioned a ceiling of this size “toothless”.
6 What are the consequences for Europe itself?
Previous sanctions have never been without consequences for Europe itself, and this is no different. Whoever wants to punish another must be prepared to suffer pain himself, is an iron law in the world of sanctions. But the question now is whether Europe is not getting itself into existential problems with this.
Firstly, European countries must find alternatives for the last quantities of Russian oil they still import, and that has not been done lightly. Five months after the import ban was announced, these are still significant quantities, the IEA reports: almost half of all Russian oil that previously came here. The oil market is still relatively tight, so that could become difficult.
Secondly, it remains uncertain exactly how Russia will respond to the sanctions, even with a price cap that does not seem too painful. Russia has previously threatened that cooperating countries will no longer receive oil at all. If it does, the consequences are incalculable. The American investment bank JPMorgan predicted this summer that global oil prices “stratospheric” heights would reach $380 a barrel if Russia in response stopped all exports. A barrel of oil now costs 80 to 90 dollars in the West.
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The US thinks Russia is bluffing, and shutting everything down will hit Russia hard. But the Kremlin has previously issued strong threats and acted on them. At the beginning of this year, Russia suddenly demanded payment for its gas in rubles (instead of dollars or euros). Those who didn’t, got nothing. Poland, Bulgaria and Finland refused – and were promptly shut down.
7 Will the price at the pump go up soon?
That is not inconceivable. And that while the price of petrol was actually falling again. In two months, on February 5, European countries will also be prohibited from buying Russian diesel. EU countries are traditionally very dependent on this and so they have to buy it elsewhere. However, diesel is scarce and EU countries will then have to compete with other buyers. That battle will be “fierce”, the IEA already predicts.
With the cooperation of Clara van de Wiel