From February 5, the European Union will join the UK and US in banning seaborne imports of Russian diesel and other petroleum products
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The campaign by Western countries to deprive the Kremlin of resources and force President Vladimir Putin to abandon his war in Ukraine is reaching a sensitive phase, Bloomberg reports.
From February 5, the European Union will join the UK and US in banning seaborne imports of Russian diesel and other petroleum products. The measure, combined with a price cap on Russian fuel exports, is designed to put a sizable hole in Moscow's energy revenues.
The flip side: If European buyers can't find alternatives supplies, the sanctions risk weighing on new diesel-dependent industries such as agriculture and road transport and making it harder for governments to curb inflation.
1. Isn't Russian oil already under European sanctions?
Yes, but these apply to crude oil, which is subject to European bans and a $60 per barrel price cap imposed on entities that still buy from Russia. The new sanctions will affect marine Russian refined fuels. The country is also a major exporter of naphtha – which can be used to make petrol and plastics – and fuel oil, which is often used in power generation and shipping. It also ships jet fuel, gasoline and other petroleum products. Overall, Russia accounted for 9.3% of global petroleum product cargoes by volume in 2022, about 0.5 percentage points more than its share of the crude market, so these latest EU sanctions are equally important.
2. How will the price cap work?
In the same way as the crude cap imposed by countries such as the G7 and the E.U. Anyone paying more than the cap for products shipped from Russia will not be able to get insurance and financing from key participating states. This is a big deal, given that more than 95% of the world's marine oil tankers are insured through London. The idea is that, even if buyers in Africa and elsewhere are willing to buy Russian diesel above the ceiling price, most of the world's tankers won't be able to ship it. Oil product prices are fluctuating and the G7 is aiming for two price ceilings, with levels yet to be decided. It is possible that some Russian fuel is shipped at uncapped prices via a fleet of “shadow” tankers that do not depend on Western services.
3. How will EU buyers replace Russian fuel?
One of their most difficult challenges will be replacing diesel-type products that power cars, trucks, farm machinery, ships, etc. About 220 million barrels were transported to the Union from Russian ports in 2022 – enough to fill about 14,000 Olympic-sized swimming pools. Suppliers in the Middle East, where new refineries are on the rise, are an obvious alternative. India and the US could also help fill the gap.
4. Will it be enough?
It depends in part on whether companies in China use increased export quotas to get more oil products onto the world market. This will free up additional barrels for shipment to the EU. The higher quota does not necessarily mean all potential exports will take place, especially as China's economy opens up after Beijing abandons its strict zero-cases policy. There is also the question of whether Russia will continue to export diesel. If this happens, global trade flows will essentially be scrambled. There would still be the same amount of Russian fuel in the world, just sent to different places. However, if Russia cannot find enough buyers and is eventually forced to cut production, this could deplete global availability. Strikes in the French oil sector further complicate the picture, given the possibility of refinery disruptions that could reduce the EU's own production
5. What is the ideal outcome for the EU?
The leaders of the E.U. they hope the new sanctions will affect Russia's economy without causing a shock to energy supplies that disrupts key industries and makes it harder for governments to control inflation. If the price ceiling is too low, Russian companies could refuse to sell or work harder to find ways around it. If it's too high, they'll just have to go through the hassle of finding new buyers. Potential substitute customers for Russian fuel include Turkey as well as countries in Africa and Latin America.
6. Could there be unintended consequences?
Some states may expect a windfall if they effectively buy Russian diesel at peak prices to meet their domestic needs and sell fuel from their refineries to EU buyers. at a much higher price. There is also nothing to prevent non-EU buyers such as India from buying Russian crude, processing it in their own refineries to produce fuel, and then legally selling those barrels to buyers in the EU. Traders willing to bend the rules entirely could ship Russian fuel to a country, mix it with another fuel and ship it to the EU. It can become very difficult to prove the true origin of such shipments.
Source: Bloomberg
