Europe’s Ban On Russian Oil Isn’t ‘Maximum Pressure’

Europe stumbled towards a modified embargo on Russian oil Tuesday, after Brussels agreed to ban seaborne crude, while sparing some pipeline flows in an effort to appease Viktor Orban, who’s busy consolidating power in Hungary.

Leaders were quick to congratulate themselves. “This immediately covers more than two thirds of oil imports from Russia,” Charles Michel declared. The move, he said, will deprive Vladimir Putin of “a huge source of financing” for Russia’s war machine. Michel called the embargo “maximum pressure on Russia to end the war.”

But that’s simply untrue. And self-evidently so. “Maximum pressure,” in an economic sense, would entail a total ban on all imports from Russia, including natural gas. That’s not up for consideration and even the oil ban is partial and phased in. Although the details weren’t finalized (itself a sign of Europe’s struggle to send a unified message to Moscow), there appeared to be all manner of carveouts in addition to the pipeline exemption.

To be fair, Germany and Poland are committed to cutting off Russian crude irrespective of the pipeline exception, which means Putin’s oil sales to Europe could drop 90% by the end of 2022, costing the Kremlin around $10 billion according to Bloomberg’s math, which attempts to factor in discounts to Asian buyers for diverted exports. But that’s a pittance. The Kremlin will take in more than a quarter trillion in energy export revenue this year.

I’ll employ some familiar language. 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 was European foot-dragging over an oil ban.

There’s no more damning testament to that than the comically ridiculous lengths both sides went to in order to craft a workaround for ruble-denominated gas payments. The dual-account system at Gazprombank is a case study in absurdity.

The problem is simple: Nobody wants to endure the economic pain that goes along with a total ban. Not Brussels and not Moscow either. So, instead, we’re witnessing a slow-moving, semi-coordinated decoupling.

Data out Tuesday suggested Europe is destined for stagflation and, quite possibly, a bloc-wide recession. Europe’s energy dependency (figure above), and specifically its dependency on Putin, is a liability. The cost is record-high inflation.

At least one bank sees a recession. “The oil boycott pushes us to downgrade our forecast. We expect the Eurozone to enter a recession at the end of this year,” Rabobank said, in a new note. “It will be ever more difficult for the economy to continue to post positive growth figures, as the boost of reopening fades amid very high inflation and equipment shortages,” the bank wrote, adding that “from a demand side perspective, we expect sharp and persisting price rises and growing uncertainty to slowly ‘kill’ households’ ability and willingness to consume.”

For Putin, a lot hinges on whether the EU and, more importantly, the US Treasury, decide to effectively make Russian oil illegal the world over. “Whether [displaced] barrels find homes in India, China and Turkey could hinge on whether the EU ultimately opts to target shipping and insurance services and whether the US chooses to impose Iran-style secondary sanctions,” RBC’s Helima Croft said Tuesday.

“To date, Western leaders have been content to allow the Asian release valve to remain open in order to prevent a politically perilous, recession-inducing move higher in oil prices,” Croft added.

Ursula von der Leyen called the new measures, which still needed approval, “an important step forward.”

There’s scant evidence that Russia’s overall seaborne crude shipments are impaired. In fact, they increased in the week to May 27, even as Baltic loading volumes fell, and flows to European buyers continued to collapse (figure below).

Shipments to unidentified buyers in “unknown” destinations were the highest yet.

In the same Tuesday note cited above, RBC’s Croft suggested Western nations’ willingness to keep the “Asian release valve” (as she called it) open may ultimately depend on the evolution of the conflict and specifically how high the civilian death toll goes. The road to sharply higher oil prices “would seem to run through a secondary sanction situation that would force refiners such as Reliance Industries to choose between accessing US capital markets and/or fulsome EU sanctions targeting shipping and insurance services,” she said.

The EU also proposed sanctions on Patriarch Kirill. That’s not new (it was floated when leaders began discussing the sixth sanctions package weeks ago) but it’s notable. “There’s no question that Putin is using religion for political purposes, yet it is also true that Kirill has instrumentalized the invasion for Russian Orthodoxy’s purposes,” The New Yorker‘s Paul Elie noted, in a recent article that’s well worth reading.

“Eastern Orthodox and Catholic leaders in this country thought it improbable that Kirill would stand back from this war, because they see the war as an extension of the Russian Orthodox Church’s efforts in Ukraine,” Elie wrote. “For two decades, the R.O.C. has used state money and propaganda to assert itself in that country [and] through his full-throated support for the war for a greater Russia… Kirill is militating against their own transnational Orthodox project, which has been under way since the fall of Communism.”

According to sources familiar with deliberations in Brussels, Hungary opposed sanctions on Kirill.