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Europe’s Russian oil embargo: significant but not yet

The ban on most Russian oil significantly scales up the EU response to aggression against Ukraine, but the bloc should stand ready for retaliation.

Publishing date
01 June 2022
Oil tanker

The European Council this week agreed to a partial ban on imports into the European Union of Russian oil. While not perfect, this deal significantly scales up the EU response to Russian aggression against Ukraine. It was a welcome signal of unity that the embargo was decided unanimously after difficult discussions. Germany’s willingness to give up on Russian pipeline oil imports demonstrated that the country is able to support Ukraine despite potential economic repercussions.

The largest concern is that the delayed activation of the embargo might make Russia even better off in the near term. The embargo will affect crude oil after only 6 months, and oil products after 8 months. Exemptions for some EU countries might extend even longer. The risk therefore is that an EU embargo will tighten global oil markets, pushing prices higher and increasing revenue flows to Russia for several months. The agreement may also shore up trade in Russian oil for the rest of the year, in contrast to the current situation in which uncertainty has seen Russian oil being traded at discounts to global prices. Therefore, while the measures will be a significant blow to Russia, this will be only in 2023 and beyond.

The embargo also contains exemptions. While almost all Russian seaborne oil (crude oil and oil products) will be covered, exemptions are granted for Druzhba pipeline imports. In practice, commitments by Germany and Poland to end oil imports from Russia anyway by end-2022 mean that this exemption applies only to the southern branch of the pipeline running through Hungary, Slovakia and Czechia.

Flows of Russian oil through Ukraine via the southern branch of the Druzhba pipeline have been granted an indefinite exemption. To alleviate concerns of unfair competition, trade in oil products refined from Russian crude will be prohibited (again, with potential exemptions). Here, it is important to note that in March, Hungary increased month-on-month imports of Russian crude oil by 35% to their highest level for four years, apparently exploiting price discounts on Urals crude.

Nonetheless, cuts to EU demand will become increasingly difficult for Russia to re-route and then only at a significant discount. Eventually, Russia might lose a large share of the around €10 billion per month the EU currently spends on Russian oil. In April, reduced Russian flows to the EU, United Kingdom and United States were partially offset by increased flows to India and China, but Russian production still declined around 10% month-on-month.

The EU has levers that can further hinder Russia’s ability to redirect oil flows to third countries. Over 90% of the world’s ships are insured via the International Group – a London-based association of insurers. After agreement with the UK, the EU also decided to include in its sixth package of sanctions a ban on insuring ships carrying Russian oil. With this measure, shipping Russian oil will become more expensive as it will have to rely on less-efficient insurance markets; however, a six-month delay grants time for alternative providers to make improvements. Much of Russian oil is transported by EU-owned ships. While a ban on transporting oil was shied away from, diplomatic pressure together with the US can dissuade third countries from significantly boosting Russian imports.

The EU should now stand ready for retaliatory actions by Russia. Strong coordination is needed at EU level to prepare for a potential interruption of all Russian gas supplies to Europe. EU countries need to empower the newly established EU Energy Platform so it can procure gas for storage refilling ahead of next winter and coordinate emergency gas dispatch across the EU. This is essential to ensure energy system resilience and political solidarity. Coping without Russian gas depends fundamentally on cooperation between individual countries and the continued free trade of energy across borders.

About the authors

  • Ben McWilliams

    Ben is working at Bruegel as a Research Analyst in the field of climate and energy policy. He studied his BSc Economics at the University of Warwick, with one year spent studying at the University of Monash, Melbourne. He then studied an MSc in Economic Policy at Utrecht University.

    His MSc thesis investigated carbon taxation in British Columbia, Canada, and his research interests revolve largely around energy and environmental topics. Further research topics of particular interest include: economic history (20th century), labour markets, and industrial policy.

    Ben is a dual English and Dutch citizen.

  • Simone Tagliapietra

    Simone Tagliapietra is a Senior fellow at Bruegel. He is also Adjunct professor of Energy, Climate and Environmental Policy at the Università Cattolica del Sacro Cuore and at The Johns Hopkins University - School of Advanced International Studies (SAIS) Europe.

    His research focuses on the European Union climate and energy policy and on the political economy of global decarbonisation. With a record of numerous policy and scientific publications, he is the author of Global Energy Fundamentals (Cambridge University Press, 2020), L’Energia del Mondo (Il Mulino, 2020) and Energy Relations in the Euro-Mediterranean (Palgrave, 2017).

    His columns and policy work are published and cited in leading international media such as the Financial Times, The New York Times, The Guardian, The Wall Street Journal, Le Monde, Die Zeit, Corriere della Sera, Il Sole 24 Ore and others.

    Simone holds a PhD in Institutions and Policies from Università Cattolica del Sacro Cuore. Born in the Dolomites in 1988, he speaks Italian, English and French.

  • Georg Zachmann

    Georg Zachmann is a Senior Fellow at Bruegel, where he has worked since 2009 on energy and climate policy. His work focuses on regional and distributional impacts of decarbonisation, the analysis and design of carbon, gas and electricity markets, and EU energy and climate policies. Previously, he worked at the German Ministry of Finance, the German Institute for Economic Research in Berlin, the energy think tank LARSEN in Paris, and the policy consultancy Berlin Economics.

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