“This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined,” Ursula von der Leyen said Wednesday, unveiling a sixth EU sanctions package against Vladimir Putin’s regime.
The goal, she said, is to “maximize pressure on Russia” while “minimizing” what she called “collateral damage” for Europe and its allies.
Sberbank’s access to SWIFT would be severed as part of the package. Credit Bank of Moscow and the Russian Agricultural Bank would also be banned. The EU is also poised to target Belarus’s Belaruskali OAO, the potash producer, along with its export arm, Belarusian Potash Co.
Although the package was variously described as a “dramatic escalation,” there’s something undeniably disingenuous about that characterization. I weighed in at length on the proposed crude embargo last week in “Slow Oil Ban Is Latest Idea In EU-Russia Coordinated Decoupling.”
Von der Leyen’s promise to “minimize collateral damage” was emblematic of what I’ve called the subjugation of principle to expediency. One wonders, for example, whether Brussels would be similarly slow to act if the bombs were falling on Berlin and Paris instead of Odesa and Lviv — if the “collateral damage” wasn’t just economic.
“Let’s be clear: It will not be easy,” Von der Leyen said, in a social media post. “But we simply have to work on it.”
As a reminder, the EU relied on Russia for more than quarter of crude imports in 2019 (figure above).
Slovakia and Hungary won’t have to comply until the end of 2023. Viktor Orban, emboldened by another victory at the polls last month, is an impediment. A spokesperson for his government was unsatisfied that Hungary’s concerns were addressed by the proposal. It’s also possible Orban needs to at least pretend to stall the package to placate Putin, with whom he’s keen to maintain a semblance of cordial relations.
The sanctions would ban vessels from carrying Russian oil as well as services linked to its transport. Although Vitol, Trafigura and Glencore, which together accounted for around 40% of seaborne Urals cargoes in the six months ended March, are pulling back from dealing in Russian commodities, Moscow took in more than $860 million from export duty revenues in the month to April 29, according to Ministry of Finance and vessel tracking data compiled by Bloomberg, 30% more than the prior four-week period.
The destination breakdown (which is subject to change) for Putin’s Baltic crude has shifted materially since the invasion (figure below).
Logistical problems are piling up. Although many market participants seemed to believe Zoltan Pozsar said something new or otherwise novel while elaborating on the likely fallout from escalating sanctions on Russian energy flows, none of this is particularly complicated at the conceptual level. When a major buyer for something stops buying it, you need to sell it somewhere else, and if the logistics aren’t in place, that means friction and higher costs. If you can editorialize around that for 4,000 words, congrats –you’re Zoltan Pozsar.
In an article published Tuesday, Bloomberg called this “simple.” “Traders are unwilling to charter expensive tankers to load Urals without a confirmed buyer at destination being in place,” Archie Hunter and Sherry Su wrote. “The risk of being saddled with a stranded crude oil cargo in a strongly backwardated market is seen as too great.”
If sanctions target logistics, that means Russia, its energy companies and any countries still willing to buy, will need to establish their own logistics and financing. That sounds feasible (albeit expensive and cumbersome) until you consider the West could simply sanction those too.
For example, the FT on Tuesday reported that China’s independent refiners are “discreetly” buying deeply-discounted Russian oil. Why “discreetly”? Well, because state-owned commodity trading firms don’t want to be seen dealing in what’s now effectively contraband, so they’re kicking their quotas to independent operators. “The purchases… reveal how some importers are bypassing traditional routes to access cheap Russian oil, helping Beijing maintain a low profile as the West barrages Moscow with sanctions,” the FT said.
Estimating the economic impact is guesswork given the impossibility of modeling the knock-on effects of higher energy prices, but in a note out Wednesday, Rabobank suggested oil prices could rise to $170 during the first three quarters of the ban, before receding thereafter. “Elevated prices might induce US shale companies to increase the number of rigs for oil, which ultimately results in higher supply and pushes prices down,” the bank said, before estimating the impact on the EU economy, which would suffer a somewhat modest hit this year, but contract 0.3% in 2023.
“What could be more challenging for the EU is the banning of refined products, particularly middle distillates,” ING wrote, in a quick take. “The middle distillate market is extremely tight in most regions around the globe,” Warren Patterson, the bank’s head of commodities, remarked, adding that “risks around Russian supply, lower Chinese exports, recovering demand following COVID and limited ability of refiners to respond, has meant that inventories in the US, Europe and Asia are at multi-year lows.”
The impact on Russia of a full ban on the country’s fossil fuels would be devastating in Rabobank’s estimation. Notably, the bank said subjecting Moscow to “Iran-like” isolation would result in a 21% contraction for the Russian economy up to Q2 2023.
“Any import ban would come with considerable economic sacrifice,” the bank wrote, of Europe. “As such, the upcoming months will be the ultimate test case of whether Europe is capable of operating as one united bloc.”
Every party is acting like this is an existential crisis to them in one way or another. To put it simply… it is …. The ones that flaunt that fact are delusional ..