Senior EU officials are expected to approve the oil embargo in the coming days, intensifying the bloc's economic retaliation against Russia for the
Ukraine conflict. Leaders of EU member states announced late Monday that they had reached an agreement in principle to ban Russian crude and refined fuels arriving on ships, which account for at least two-thirds of Russian imports.
According to officials and diplomats familiar with the matter, the EU is also set to agree on a ban on insuring ships carrying Russian oil, a move designed to suffocate Russia's access to international oil markets.
Stopping European companies from insuring tankers carrying Moscow's oil, according to oil traders and shipowners, is one of the most severe financial weapons the EU has at its disposal to harm the Russian economy. Few companies are willing to transport oil on uninsured tankers, and an insurance ban was effective in halting Iranian oil exports a decade ago as part of efforts to force Tehran to negotiate its nuclear program.
However, fuel imported via pipeline was exempted from the agreement in order to persuade Hungary to sign on. The ban will be implemented gradually over several months. According to EU officials, the embargo will cover 90 percent of previous Russian oil imports by the end of the year.
Moreover, Greece, Cyprus, and Malta, all major shipping nations, expressed reservations about the insurance proposal during weeks of negotiations. To assuage their fears, the ban would be phased in over six months, according to people familiar with the negotiations, an extension from the initial proposal of one month.
Oil prices rose on Tuesday as traders braced for a reduction in Russian oil supplies to international markets. Brent crude rose 1.9 percent to $119.84 per barrel on Tuesday, approaching its highest level in more than two months. West Texas Intermediate crude rose 3.5 percent to $119.06 per barrel in the United States, catching up after trading was halted for the Memorial Day holiday.
The ban would put an end to Europe's decades-long reliance on Russian oil to power its economy, forcing the bloc to look for new sources of crude and refined fuels. It could exacerbate global inflation, which is already at its highest in decades in major economies, and exacerbate a fuel shortage in poorer regions that will compete with Europe to import oil. The eurozone's annual rate of inflation reached 8.1 percent in May, according to the EU.
In 2020, Russia supplied 29 percent of the EU's crude-oil imports, with the United States providing 9 percent. According to the International Energy Agency, Russia is also a major exporter of refined fuels to Europe, accounting for 10% of the region's diesel demand in 2021.
The stakes are high for Russia, which relies on energy exports to fund government spending after international sanctions cut off a large portion of its economy from the West. According to the Brussels-based think tank Bruegel, the EU currently pays Russia around $10 billion per month for crude oil and oil products.
Moscow will not be relieved by the pipeline exemption. Prior to the war, the EU imported approximately 2.5 million barrels of Russian crude per day, with 800,000 barrels passing through the Druzhba pipeline, the world's longest pipeline network at 5,500 kilometers in length.
According to Amrita Sen, founder of the consulting firm Energy Aspects, Russian crude oil flows into the EU will be 500,000 barrels per day by the end of the year, or 20% of prewar levels. At the current discounted prices for Russian crude, this equates to approximately $170 million in lost revenue for Russia.
In recent months, Europe has shifted away from Russian oil, reducing purchases from Moscow and instead sourcing crude from West Africa, the United States, and elsewhere. Germany, which imports Russian oil via the northern branch of the Druzhba pipeline, quickly reduced its purchases of Russian oil after the war began, reducing its reliance on Moscow to 12% from 35% prior to the invasion.
The search for new exporters has a cost. The European Union's rush to stockpile oil from other producers has driven up the price of high-quality crudes produced from West Africa to Azerbaijan to levels not seen in years. With China emerging from the Covid-19 shutdowns, which have tamed oil demand, Europe will face increased competition for those crudes.
"There will be even more competition for crude," Ms. Sen predicted.
Replacing Russian diesel will be even more difficult for Europe than finding new crude sources. Analysts and traders predict that the fuel, which powers a larger share of Europe's auto fleet than in the United States, will likely come from the United States, the Middle East, and India. According to Ms. Sen, diesel will be in short supply globally this winter.
The loss of the majority of the European market would be a significant blow to Russia's budget, even though Moscow has already redirected some of the flows to Asian customers. In the first quarter of the year, oil and gas sales accounted for nearly 42 percent of federal budget revenues.
The EU ban adds to the difficulties faced by Russia's oil industry, which has already seen major traders avoid its cargoes and its flagship oil blend sell at a significant discount to global prices.
Russia will struggle to sell the oil that would have gone to Europe. As insurers and banks fear the impact of sanctions, the country has struggled to charter ships to transport its oil. According to analysts, some of Russia's Chinese and Indian customers, such as refineries, have had difficulty obtaining bank funding for the shipments.
Russian President Vladimir Putin has directed his government to expand energy-export infrastructure to Asia, including the construction of new oil-and-gas pipelines from Siberia and the development of the Northern Sea Route, a shipping route along Russia's Arctic coast. Those projects, on the other hand, are mostly still in the planning stages and will take years to complete.
In recent weeks, India has purchased record amounts of Russian crude, but analysts believe this will not be enough to compensate for the barrels that the EU intends to ban. "This means that, in time, Russian storage will fill and production will begin to falter," RBC Capital Markets strategists wrote in a client note.
Russian officials have stated that Western sanctions could reduce oil production by up to 17% this year. This is a longer-term issue for Russia because much of its oil infrastructure is not designed for rapid and deep production cuts. Pipelines can burst without oil due to the cold Siberian climate, and low-yielding Soviet-era fields are costly to maintain and restart. According to analysts, much of Russia's current production would be permanently lost.
Another disadvantage for the Kremlin is that the EU embargo is likely to drive down the price of Russian crude, reducing Moscow's revenue from those barrels it can sell. Longer distances to ship crude to Asia reduce Russia's margins even further, according to Simone Tagliapietra, a senior fellow at Bruegel.