Slow Oil Ban Is Latest Idea In EU-Russia Coordinated Decoupling

The EU may be poised to unveil a ban on Russian crude.

But it’ll be phased in over eight months and could face opposition from Viktor Orban’s Hungary, even as Germany is now provisionally on board.

In addition, a sixth sanctions package could include more penalties on Russian banks, as well as financial institutions in Belarus, which would see their SWIFT access severed.

The new measures could be agreed next week, sources told Bloomberg.

If you’re inclined to emit a fatalistic sigh, you’re not alone. I’ll recycle some language I employed earlier this week, when the Kremlin cut off gas flows to Poland and Bulgaria. If either side were truly dedicated to crippling the other economically, there would be no discussion in Moscow, nor in Brussels. Russia would cut all supplies to Europe in retaliation for sanctions and weapons shipments to Ukraine and Europe would impose a total energy embargo in order to deprive Vladimir Putin of revenue.

The debate over how to pay for gas that Russia “shouldn’t” be selling and Europe “shouldn’t” be buying is just an example of both sides subjugating principle to expediency, as is European foot-dragging over an oil ban.

As Eurostat gingerly noted in color accompanying a series of infographics illustrating 2019’s energy imports by “partner” country, “the stability of the EU’s energy supply may be threatened if a high proportion of imports are concentrated among relatively few external partners.”

Unfortunately (considering recent events), nearly two thirds of the extra-EU’s crude oil imports came from Russia in 2019 (figure above). The figures for solid fuel (i.e., coal) and natural gas were 47% and 41%, respectively.

Although first quarter GDP data out Friday suggested an EU recession isn’t necessarily imminent, an abrupt cessation of energy imports from Russia would almost surely trigger a downturn. The impact on Germany in a so-called “supply freeze” scenario is the subject of vociferous debate.

JPMorgan’s Shikha Chaturvedi called the situation “fragile” and “just one supply disruption away from completely falling apart.” The figure (below) underscores the point.

Still (i.e., expediency aside), the juxtaposition between, on one hand, the threat of armed conflict between NATO and Russia and, on the other, the gradualistic character of the EU’s prospective crude ban and the farcical lengths both sides are going to in order to keep the gas flowing, is almost too much to bear.

There’s still no consensus on whether utilization of Gazprombank’s dual-account system breaches EU sanctions. In spirit it quite plainly does. It’s just semantics, and it doesn’t address the absurdity inherent in the fact that both sides are transacting with a wartime belligerent.

The EU claims member states can purchase Russian gas as long as the transaction is considered complete once payments are made in euros (or dollars) to a single account at Gazprombank. Putin demands buyers have two accounts, and acquiesce to the conversion of hard currency payments to local currency.

Effectively, Brussels wants Putin to declare the transaction complete upon receipt of euros, while Putin wants buyers to accept the idea that the transaction isn’t official until the payments are converted, ideally via the matching ruble account. The ruble account is problematic for a number of reasons, not least of which are the involvement of Russia’s (sanctioned) central bank and the distinct possibility that Moscow is attempting to inoculate Gazprombank from sanctions by making it an integral part of the settlement process.

That’s all just as ridiculous as it sounds, and when considered in conjunction with Europe’s (apparently imminent) announcement of a gradual ban on Russian crude, it looks quite a bit like both sides have accepted the inevitability (and perhaps even the desirability) of a total decoupling, and are now working in begrudging concert to ensure the energy divorce is as painless as possible for everyone. Well, everyone except the beleaguered Ukrainian populace, which faces a stark choice: Remain in Ukraine at the risk of being killed, or join a growing diaspora.

“When Vladimir Putin denies the reality of the Ukrainian state, he is speaking the familiar language of empire,” The New Yorker‘s Timothy Snyder wrote this week. “As we see in the ruins of Ukrainian cities… the claim that a nation does not exist is the rhetorical preparation for destroying it.”