Russian Invasion of Ukraine: Global Implications

Explained: European Union’s ban on Russian Oil

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Global sanctions on Russia

As part of the sixth package of sanctions since Russia’s invasion of Ukraine, the European Union member states reached an agreement to ban 90% of Russian crude oil imports by the end of the year.

Oil embargo on Russia

  • The proposal is to completely phase out Russian crude and refined products from EU territory.
  • It includes a complete import ban on all Russian oil, seaborne and pipeline crude and refined.
  • This however needed the agreement of all the 27 EU member states in order to be implemented.

What was the rationale behind such a move?

  • The Russian economy is heavily dependent on energy exports, with the EU paying billions of dollars every month to Russia.
  • The EU wants to block this massive revenue inflow.
  • This is akin to Europeans bankrolling Russia’s war.

Why such a move now?

  • The EU has been attempting, ever since the Ukraine invasion, to build consensus on ways to hurt Russia economically.
  • The most obvious route was to stop buying Russian energy, which isn’t easy given European households’ dependence on Russian oil and gas.

What are the terms of the ‘compromise deal’ that has been agreed upon?

  • EU leaders have agreed to ban all seaborne imports of Russian crude, which account for two-thirds of EU’s oil imports from Russia.
  • Germany and Poland are pledging to phase out even their pipeline imports from Russia by the end of the year.
  • The embargo would eliminate 90% of Russian oil imports.

Special concessions to Hungary

  • The remaining 10% that’s been allowed represents a free pass for Hungary, the Czech Republic, Slovakia, and Bulgaria to continue imports via the Druzhba pipeline, the world’s largest oil pipeline network.
  • Hungary has obtained a guarantee that it could even import seaborne Russian oil in case of a disruption to their pipeline supplies.
  • This was deemed a legitimate concession since the pipelines do pass through the war zone in Ukraine.

Why was exemption given for pipeline imports?

  • The exemption for pipeline imports was made on the logic that landlocked countries (Hungary, Czech Republic and Slovakia).
  • They are heavily dependent on Russian pipeline oil and do not have a ready option to switch to alternative sources in the absence of ports.

How will the sanctions affect Russia?

  • Analysts calculate that a two-thirds cut in Europe’s imports might cause Russia an annual loss in revenue of $10 billion.
  • Given Russia’s limited storage infrastructure, the cutback in demand would force Russia to find other markets.
  • Since that won’t be easy, Russia might have to cut production by 20-30%.
  • So far, Asian importers, especially India, have absorbed some of the excess inventory at discounted prices.

Impact on the ongoing war

  • It remains unclear if the embargo would have any impact on Russian military operations in Ukraine.

How will the sanctions affect Europe?

  • It is likely to further fuel inflation in Europe, where many countries are already facing a cost-of-living crisis.
  • European lifestyles have tended to take cheap Russian energy for granted, and if inflation peaks further, the EU runs the risk of losing public support for harsh sanctions.

What about the import of Russian gas?

  • Compared to Russian oil, Europe’s dependence on Russian gas is much greater, and this embargo leaves the import of Russian gas — which accounts of 40% of Europe’s natural gas imports — untouched.
  • In other words, Europe will continue to pay Russia for gas imports.
  • But since crude is more expensive than natural gas, the oil ban is expected to hurt Russian revenues.

Indian response to these developments

  • India ramped up purchases of Russian crude at discounted prices in the months following the Russian invasion, and this policy is expected to continue.
  • The announcement of the EU ban caused an immediate surge in oil prices, and as Europe seeks alternate sources – from West Asia, Africa and elsewhere — for its oil needs, prices are expected to stay high.
  • In this context, with Russia reportedly offering discounts of $30-35 per barrel, India has found it convenient to make the most of the cheap Russian crude on offer.

 

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