To punish Moscow, EU bans most Russia oil imports
European Union leaders agreed late Monday to cut Russian oil imports by about 90% over the next six months, a dramatic move that was considered unthinkable just months ago.
The immediate result was a spike in oil prices, raising the specter of even higher gasoline prices and intensifying economic reverberations for both consumers and the White House.
Brent crude, the global benchmark, swelled above $120 a barrel before pulling back after the EU levied its most significant economic penalty yet in response to Moscow’s invasion of Ukraine.
Meanwhile, the U.S. average for a gallon of gasoline hit a record $4.62 on Tuesday, AAA data shows; that’s 52% higher than last year and an inflationary pressure point that can quickly choke consumer spending and flatten economic growth.
Drivers in seven states — including Illinois, Nevada and Oregon — are paying at least $5 for a gallon of gasoline on average, while Californians are shelling out more than $6. In every other state, the average is $4 or more.
The 27-country EU bloc relies on Russia for 25% of its oil and 40% of its natural gas, and European countries that are even more heavily dependent on Russia had been especially reluctant to act.
Yet European heads of state hailed the decision as a watershed. Analysts were more circumspect.
Pavel Molchanov, an analyst with the investment bank Raymond James, said that because the EU embargo targets only tanker deliveries, at least for now, the global market can adjust by rerouting seaborne shipments. So instead of shipping oil to European countries, he said, Russia will boost shipments to other markets, such as China, India and Turkey. In turn, those countries will buy less oil from the Middle East, whereas more oil from that region will go to Europe, he said.
“Ultimately, it will cancel out, or just about, in the sense of global supply,” he said.
The EU ban applies to all Russian oil delivered by sea. At Hungary’s insistence, it contains a temporary exemption for oil delivered by the Russian Druzhba pipeline to certain landlocked countries in Central Europe.
In addition to retaining some European markets, Russia could sell some of the oil previously bound to Europe to China, India and other customers in Asia, even though it will have to offer discounts, said Chris Weafer, CEO at consulting firm Macro-Advisory.
“Now, for the moment, that’s not financially too painful for Russia because global prices are elevated. They’re much higher than last year,” he said. “So even Russia offering a discount means that it’s probably selling its oil for roughly what it sold for last year also.”
He noted that “India has been a willing buyer” and “China’s certainly been keen to buy more oil because they’re both countries who are getting big discounts on global market prices.”
Still, Moscow has traditionally viewed Europe as its main energy market, making Monday’s decision the most significant effort yet to punish Russia for its war in Ukraine.
“The sanctions have one clear aim: to prompt Russia to end this war and withdraw its troops and to agree with Ukraine on a sensible and fair peace,” German Chancellor Olaf Scholz said.
Ukraine estimated the ban could cost Russia tens of billions of dollars.
“The oil embargo will speed up the countdown to the collapse of the Russian economy and war machine,” Foreign Minister Dmytro Kuleba said.
Ukrainian President Volodymyr Zelenskyy said in a video address that Ukraine will be pressing for more sanctions, adding that “there should be no significant economic ties left between the free world and the terrorist state.”
Simone Tagliapietra, an energy expert and research fellow at the Brussels-based think tank Bruegel, called the embargo “a major blow.”
Matteo Villa, an analyst at the ISPI think tank in Milan, said Russia will take a pretty significant hit now but cautioned that the move could eventually backfire.
“The risk is that the price of oil in general goes up because of the European sanctions. And if the price goes up a lot, the risk is that Russia starts to earn more, and Europe loses the bet,” he said.
Like previous rounds of sanctions, the oil ban is unlikely to persuade the Kremlin to end the war.