Explainer: The case for and against EU sanctions on Russian oil

By Kate Abnett

BRUSSELS (Reuters) – European Union countries on Thursday approved a ban on Russian coal imports from August as part of new measures against Moscow, but are split over whether oil or gas sanctions should follow.

The coal embargo is the EU’s first energy sanction against Moscow following its invasion of Ukraine. Officials say the bloc will now discuss sanctions on oil, which represent far bigger imports from Russia than coal.

However, not all countries are on board, with some like Germany and Hungary fearing the economic impact even though civilian killings in Ukraine have increased Europe’s resolve to punish the Kremlin.

Russia denies allegations that it has targeted civilians in what President Vladimir Putin calls a “special military operation” to disarm Ukraine.

Here are arguments for and against sanctioning Russian oil.

THE CASE FOR OIL SANCTIONS

Ukraine and EU states including Poland and Lithuania want a ban on Russian oil and gas. Oil is Russia’s most lucrative energy export, and blocking it would deprive Moscow of a major revenue stream those countries complain is funding the war.

EU lawmakers on Thursday approved a non-binding resolution for an immediate embargo on Russian energy imports.

Oil and oil products made up more than a third of Moscow’s export revenues last year. Currently, Europe spends around $450 million per day on Russian crude oil and refined products, around $400 million per day for gas, and roughly $25 million for coal, according to think-tank Bruegel.

In theory, producers such as Saudi Arabia and the United Arab Emirates have enough spare capacity for Europe to replace the Russian oil it buys, which is roughly half of Russia’s total crude exports of 4.7 million barrels per day. However, producer group OPEC+ has so far only committed to incrementally increase output.

The terms of any oil embargo could determine its support among EU states, with options for flexibility including a transition period – like the four-month phase-in agreed for the EU’s Russian coal sanctions – or carve-outs for specific products, such as the 10% of Europe’s diesel that comes from Russia.

Some countries have suggested halfway measures that would not ban Russian oil purchases, but would withhold some payments for it.

Estonian Prime Minister Kaja Kallas – who supports oil and gas sanctions – last week asked the European Commission to propose skimming off a share of Europe’s payments for Russian fossil fuels and placing them in a third-party account instead of sending them to Moscow, effectively imposing a tariff on such imports.

THE CASE AGAINST OIL SANCTIONS

Germany and Hungary are opposed to an immediate oil embargo, which Berlin has said would risk German economic and social stability.

Russia is Europe’s biggest oil supplier, providing 26% of EU oil imports in 2020. Europe gets roughly a third of its gross available energy from oil and petroleum products, in sectors from transport to chemicals production.

Sanctioning Russian supply could push up already-high oil prices, which soared to a 14-year peak last month. Germany, Sweden, France and Italy have announced subsidies to shield motorists from high prices – moves criticised by climate campaigners as fossil fuel subsidies.

Brent crude prices could be around 21% higher on average in 2022 under EU oil sanctions, compared with a reference case where voluntary “self-sanctioning” by companies caused a smaller shut-in of Russian supplies, according to the Oxford Institute for Energy Studies.

The price impact of sanctions would also depend on factors including releases of strategic oil reserves aimed at cooling prices.

Brent crude futures were last trading 0.8% up on Friday at $101.36. [O/R]

Another concern is that EU oil sanctions could see Russia retaliate by also cutting off the 40% of EU gas it supplies.

Gas sanctions are seen as the last resort in the EU’s package of potential energy measures, because of the dependence of European industries and home heating on the fuel, plus the challenges Europe would face to replace Russian supply in a tight global gas market and with limited infrastructure for importing more liquefied natural gas.

(Reporting by Kate Abnett; Editing by John Chalmers and Emelia Sithole-Matarise)