Russian oil: historic embargo comes into force on Monday

Posted on December 5, 2022 at 7:20 amUpdated December 5, 2022 at 9:14 am

On Monday, a decisive step is taken in the sanctions imposed by the West on Russia. Starting from December 5, no ship will be able to unload Russian oil into the port of the European Union. The US, UK, Japan and Australia have made similar commitments. Therefore, all the rich and democratic countries are almost completely refusing oil from Russia and thereby trying to weaken Vladimir Putin in the war against Ukraine.

Since Europe’s dependence on Russia is strong, this decision was not easy to make. It must be admitted that in the spring of last year, “Twenty Seven” declared their intention to fully use Russian hydrocarbons. But they adopted a differentiated schedule for each energy source, some easier to replace than others.

The coal embargo took effect in August. No date was set for gas, as Member States knew they would suffer greatly by stopping imports from Russia. In the end, it was Vladimir Putin himself who accelerated the withdrawal by turning off the taps of most of the gas pipelines supplying Europe.

Difficult negotiations

Negotiations among member states for crude oil were difficult, especially since Hungary opposed the embargo. This is for political reasons – pro-Russian Prime Minister Viktor Orban is hostile to sanctions – as well as economic ones. Hungary is a landlocked country. It buys oil from Russia by pipeline and, unlike landlocked nations, cannot easily diversify its supply.

Finally a compromise was found. Only oil arriving by boat, which accounts for more than two-thirds of the volume, is affected by the European embargo. The rest is up to the Member States. Apart from Hungary, most countries, including Germany and Poland, have also announced that they will stop importing Russian oil through the pipeline.

As a result, the vast majority of Russian crude oil can no longer enter Europe. “This is not an absolute embargo, but it allows us to reduce the volume of imports by more than 90% compared to the pre-war level, which is an absolutely huge measure,” says Francis Perrin, director of research at Iris.

Another significant event is planned for February 5. From this date, the European embargo will also apply to refined products. Therefore, the Europeans will have to find other suppliers for Russian diesel fuel, which was their main importer before the war.

60 dollars per barrel

And that’s not all. On Friday, the European Union agreed to limit the price of Russian oil sold to third countries at the level of 60 dollars/barrel as part of discussions with the G7.

This much-discussed ceiling has been tightened by adding a condition to keep Russian crude oil 5% below the market price. Because the latter is already trading at a steep discount and is highly volatile.

Ukraine showed immediate displeasure with the amount of the ceiling, although it was revised downwards from the original ambition by European diplomats.

Poland really exerted strong pressure in this direction and blocked the negotiations to the last straight line. Ukrainian President Volodymyr Zelensky said that this was “not a serious decision” and would be “comfortable enough for the budget of a terrorist state.”

The equation was not simple: it was necessary to find a ceiling that would allow non-embargo countries (India, China, etc.) to cut Moscow’s income by limiting the price at which crude oil is sold. at the same time, it keeps Russian oil in circulation to prevent the rise of world prices.

The G7 and Australia said the cap would come into effect on Monday “or shortly thereafter”. Ships that loaded their cargo at sea before Monday were given a 45-day grace period until January 19 to unload the oil. In addition, no new rates can be decided before the 90-day transition period.

It remains to be seen how this measure will affect Russia’s oil exports. Russia already said on Saturday that it “will not accept” this decision. “We will negotiate directly with our partners,” Russian Foreign Minister Sergey Lavrov warned on Thursday. Partners who continue to work with us will not see these ceilings. »

On Sunday, Russian Deputy Prime Minister for Oil, Gas, Atomic Energy and Coal Alexander Novak added that this step of the West is a gross interference against the rules of free trade. “We are working on mechanisms to prevent the use of the price cap tool regardless of the level set, as such intervention could further destabilize the market,” he said.

“We will sell oil and oil products only to countries that will work with us on market terms, even if we have to cut production a bit,” he added.

All eyes are now on big buyers like China, India and Turkey.

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