EU: Eyeing Oil Sanctions on Russia

Published on April 5, 2022
SGH Insight
Our understanding from senior EU officials is that while oil is not part of the new sanctions package now, it is likely to be in the next one, when that comes.

At present, Austria stands in open opposition to a Russian oil embargo, but Germany appears to have softened its resistance, with officials in Berlin stressing that while Germany cannot cut itself off from Russian gas for now, oil is different.

France’s President Emmanuel Macron has already called for a ban on Russian oil imports in response to the Bucha atrocities, a position that would incidentally highlight him in stark contrast to his challenger from the right, Marine Le-Pen’s, who is generally seen as pro-Kremlin, in the first round of presidential elections this weekend.

EU officials know that the oil lever is key, as while the EU is more dependent on Russia’s natural gas, Moscow’s revenues from oil are higher than from gas: in 2021 Russia received $110.2 billion for crude oil and $68.7 billion for oil products, as opposed to $54.2 billion for pipeline natural gas and $7.7 billion for liquified natural gas.

With the war in Ukraine, we believe, nowhere close to an end, and the likelihood if anything mounting of an escalation of direct combat between Russian and Ukrainian forces in the Donbas and Ukraine’s east, we suspect another round of sanctions, this time including oil, may not be so far off.
Market Validation
Bloomberg 4/5/22

EU Moving Toward Adopting Phased-in Ban on Russian Oil, NYT Says

The European Union is moving toward adopting a phased-in ban on Russian oil intended to give Germany and other countries time to prepare alternate suppliers, the New York Times reports, citing officials and diplomats.

Russia oil embargo wouldn’t be put up for negotiation until after French elections.

The European Commission proposed a fifth package of sanctions today against Russia over its invasion of Ukraine.

Originally meant to be more of a maintenance and loophole closing package when first presented to EU ambassadors last Sunday, the atrocities committed by Russian forces in Bucha, Ukraine, that were exposed this week changed all that.

The sanctions package includes embargoes on wood, cement, chemicals, technology items, luxury goods, transport, port access for non-energy use, as well as sanctions against additional individuals and Russian banks including VTB.

Most notably though, with today’s decision, the European Commission also has now made its first foray into sanctions on the Russian energy sector by proposing a ban on all Russian coal imports into the European Union.

The package will be discussed by ambassadors of EU countries in Brussels tomorrow but is unlikely to face much resistance, as these measures are generally pre-negotiated in bilateral consultations with key countries ahead of time. Germany has already indicated it will support the coal ban.

Worth an estimated 4 billion euros, almost half of the coal that Europe currently imports comes from Russia, and the EU will now seek out other even if more geographically remote global suppliers like South Africa and Australia.

Equally importantly, and of greater consequence to global economies and markets, European Commission head Ursula von der Leyen said today that the Commission was also “working on additional sanctions including on oil imports.”

The Commission, she said, would be analyzing ideas including the imposition of a special tax on Russian oil, or the establishment of “specific channels such as an escrow account” that would keep Moscow from using the money the EU remitted for its war efforts. That, we believe, would almost guarantee a response in turn from Moscow.

Our understanding from senior EU officials is that while oil is not part of the new sanctions package now, it is likely to be in the next one, when that comes.

At present, Austria stands in open opposition to a Russian oil embargo, but Germany appears to have softened its resistance, with officials in Berlin stressing that while Germany cannot cut itself off from Russian gas for now, oil is different.

France’s President Emmanuel Macron has already called for a ban on Russian oil imports in response to the Bucha atrocities, a position that would incidentally highlight him in stark contrast to his challenger from the right, Marine Le-Pen’s, who is generally seen as pro-Kremlin, in the first round of presidential elections this weekend.

EU officials know that the oil lever is key, as while the EU is more dependent on Russia’s natural gas, Moscow’s revenues from oil are higher than from gas: in 2021 Russia received $110.2 billion for crude oil and $68.7 billion for oil products, as opposed to $54.2 billion for pipeline natural gas and $7.7 billion for liquified natural gas.

With the war in Ukraine, we believe, nowhere close to an end, and the likelihood if anything mounting of an escalation of direct combat between Russian and Ukrainian forces in the Donbas and Ukraine’s east, we suspect another round of sanctions, this time including oil, may not be so far off.

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