The first big crack in Western unity against Putin: Oil sanctions

America is imposing a ban on Russian crude oil imports, but the EU is worried about the damage that would do to its economy.

The West’s united response to Russia’s invasion of Ukraine is splintering over whether European countries are willing to take a severe economic hit and stop buying the oil that fuels the Kremlin’s war effort.

While the US is set to impose a crude oil ban, it looks increasingly unlikely that its European allies will agree to sanction President Vladimir Putin’s energy exports because of fears about runaway inflation and retaliation from the Russians.

Sensing a danger to this vital component of its budget, Moscow is issuing a blend of dire warnings and outright threats to its neighbors. Russian Deputy Prime Minister Alexander Novak warned Monday that any restrictions on Russian crude could send oil prices spiraling above $300 per barrel, from about $130 now.

Novak also threatened to retaliate against Western measures by cutting off the gas flow to Germany along the first Nord Stream pipeline. That would be a massive hammer-blow to German supply — out of the 93 billion cubic meters that Germany consumed in 2021, 60 bcm came via Nord Stream.

In a probable allusion to China, Novak said that Russia would simply shift its sales elsewhere if it faced Western sanctions. “If you want to cut off supplies of energy resources from Russia, go ahead, we are ready for that. We know where will reroute these volumes. The question is: Who benefits? And what is the point?”

That sort of calculus now seems to be looming large in Europe. And the Europeans are shying away from a fight if it hurts their bottom line.

While Ukrainian President Volodymyr Zelenskyy has described continued energy purchases as akin to “giving money to a terrorist,” he’s facing a potential brick wall in the EU. German Chancellor Olaf Scholz is insisting that Europe currently has no alternative to Russian supplies, Dutch Prime Minister Mark Rutte is warning of “enormous ramifications” of such a measure, and Bulgarian Prime Minister Kiril Petkov said Bulgaria might seek an exemption from EU hydrocarbon sanctions. Italy also has long-standing reservations about direct sanctions on the oil and gas sector.

While top EU officials such as Trade Commissioner Valdis Dombrovskis insist direct energy sanctions should be on the table, it would be impossible for that to happen without support from member countries, and not at the speed that Zelenskyy is asking for.

The EU relies on Russia for 27 percent of its crude imports, 47 percent of its coal and 41 percent of its gas imports, and the Continent is still haunted by the gas crises of 2006 and 2009 when it suffered from supply disruptions from Russia.

Ostracized on the market

The Kremlin has good reason to be sweating over the threat to its money flows.

One of the most extraordinary dimensions to the Ukraine crisis has been the oil market’s disconnection from Russia over the past week, even without sanctions. Even the very discussion of an embargo on Moscow’s energy shipments has triggered a de facto boycott on the market. Some 70 percent of Russian oil is struggling to find buyers, according to JP Morgan, despite a discount of more than $23 against Brent crude, the industry benchmark. That means even if Russia does manage to sell — say to an Asian buyer — it›s for a much lower price than Russian vendors would like.

Much of the market reaction is based on financial prudence about not wanting to be left holding shipments that cannot be delivered.

Insurers are currently refusing to underwrite the tankers carrying Russian crude. Traders are unclear whether the requisite letters of credit and financial notes needed to purchase the goods are impacted by the already-announced sanctions on the SWIFT payment system on certain banks and individual accounts. With single cargoes of oil representing $100 million or more, no one is ready to pay now and risk not receiving delivery in 30 days should sanctions be imposed in the interim.

It remains to be seen whether the market will relax and go back to buying Russian oil if the EU rules out any ban. For now, however, the uncertainty is winning the day.

There are also moral and reputational dimensions at work. Dock workers in Britain have refused to unload shipments from Russia and Shell announced that it would stop dealing in Russian oil and gas, after Ukrainian Foreign Minister Dmytro Kuleba accused the oil major of not caring about “Ukrainian blood.”

Politico