Oil embargo against Russia: when will it be introduced and how will it affect our economy

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A photo: Reuters

Friday, May 6, the permanent representatives of the EU countries disagreed on the parameters of the oil embargo against Russia. Some EU countries refused to sign the document on the proposed conditions. How can negotiations end? And what are the consequences for our country? We answer basic questions with experts.

1. What exactly do they want to do in the European Union?

They propose to completely abandon the import of Russian oil and oil products by the end of this year. The decision is under pressure from the largest economies in the European Union. But some countries oppose it. Their margin of safety is not as large as that of the same Germany and France. And the dependence on Russian raw materials is higher. According to EU rules, the decision must be taken unanimously. Therefore, the sixth sanctions package against Russia is still in question.

2. Who objected and why?

Among the “opponents” are Hungary, Slovakia and the Czech Republic. It’s all about location. These countries do not have direct access to the sea. They cannot receive oil by tanker. And ordering through intermediaries increases the cost of raw materials. Hungary, Slovakia and the Czech Republic receive oil through the Druzhba pipeline. This is a proven route over the years and well established deliveries. Everything you need for energy security.

– Local refineries are tuned to Russian-grade Ural, which has no substitute available in terms of chemical properties. To deliver other oils to refineries and process them, a serious restructuring of the infrastructure is required, which requires investment and time, – adds BCS-Express expert Igor Galaktionov.

A sharp refusal to import oil from Russia will cause enormous problems for the economies of these countries. No EU grant can cover these losses.

– The plan proposed by Brussels threatens the Hungarian economy… If the embargo on Russian oil came into force, it would destroy Hungarian energy security and through it the Hungarian economy. We cannot allow anyone to destroy the result of decades of efforts by the Hungarian people, said Hungarian Foreign Minister Peter Szijjártó, speaking at the Pata Jozsef car factory.

Hungarian Prime Minister Viktor Orban made an even stronger statement. He compared the ban on Russian oil supplies to “an atomic bomb that they want to drop on the economy” of the country.

3. How realistic is the embargo?

Despite disagreements within the European Union, the imposition of an embargo is quite realistic. Especially when it comes to phasing out Russian oil. The delay until the end of the year is quite long. During this period, some countries will be able to rebuild and find new suppliers, even if it will be difficult.

– The biggest buyers of Russian oil in the EU are Austria and Germany. The share in the total consumption of these countries is not high, but in absolute terms these are very large volumes. To replace them, alternative suppliers must be found. In today’s market, this is not so easy, because the Gulf countries are in no hurry to meet the EU, and the potential for imports from the United States is very limited. This creates risks for the implementation of the EU’s ambitious plan to phase out oil from Russia. It is possible that the real refusal will take longer than politicians assume, – says Igor Galaktionov.

According to data from Bloomberg, the three dissident countries, in order to become more accommodating, want to give a deadline to completely abandon Russian oil. Czech Republic – until June 2024, and Hungary and Slovakia – until the end of 2024.

Moreover, nothing prevents the European Union from replaying everything in the future. If it is not possible to abandon Russian oil in a short period of time, the actual embargo may be postponed. To be fair, so does the OPEC oil export cartel. Producers outline a plan to gradually reduce or increase production, but at any time they can revise their previous decisions if the situation in the world changes.

4. What will happen to the oil market in the event of an embargo?

“Black gold” will definitely go up in price. This is already happening, because stock quotes do not react to facts, but to rumors and plans. Oil prices in just one week rose almost 10% to $114 a barrel of Brent. If a real reduction in supplies begins, they will continue to grow.

– The introduction of a complete embargo on the supply of Russian petroleum products to EU countries will only accelerate the rise in prices. According to our forecasts, by the end of 2022, Brent oil prices will reach $130-140 per barrel, analysts at Freedom Finance Investment Company estimate.

At the same time, OPEC countries do not plan to increase production sharply. First, because there is no free capacity of such volume. Russia is one of the largest exporters in the world. Second, because the world is on the verge of an economic crisis. And during these periods, the demand for raw materials decreases. There is no point in rushing to increase production if it is to be reduced in the near future anyway. Third, current prices are quite suitable for other exporters. Oil producers are making almost forgotten windfall profits over the past decade.

5. How will this affect Russian income?

It is difficult to give an accurate forecast, but it is likely that they will not change. The decrease in actual supplies will be offset by their higher cost. In addition, Russia will be able to redirect part of the oil produced to other buyers. For example, India took advantage of the situation and started buying our “black gold” at a discount. Increased volumes several times.

In addition, the gradual implementation of the embargo will prepare for a reduction in supplies and minimize the negative effect on the industry. Russia had a similar experience just two years ago. Then, along with other exporters, domestic companies had to hastily cut production due to the coronavirus pandemic. The reduction in production amounted to approximately 20%. Serious losses were avoided.

6. What losses can Europe sustain?

The introduction of an oil embargo is one of the extreme measures that the EU is reluctant to take. The implications are clear to many local economists. First, rising fuel prices. They have already grown by a third. And they hit not only motorists, but also all EU residents. The more expensive fuel is passed on to all retail prices and leads to an inflationary spiral. For the first time in 40 years, inflation in the euro zone could hit double digits.

Second, local industry is suffering. Oil is not just fuel. Petroleum products are used in many fields. The closure of the pipe will lead to a shortage of major raw materials, production stoppages, increased unemployment and other negative consequences. The desire to punish Russia can promise big trouble, the negative effect of which is not yet calculable. This is why some EU countries are taking a tough stance in the negotiations. They don’t want to harm their own economy.

– Greece insists on the possibility of transporting Russian cargoes with its tanker fleet. In other words, the prospect of the 6th package remains unclear and the probable 7th package becomes completely vague,” says Andrey Kochetkov, leading analyst at Otkritie Investments.

7. Will the Chinese and Indians help us?

It is already happening. We are already redirecting part of the tanker deliveries to the East. It is more complicated and more expensive than running oil through an already laid pipe. But at today’s prices, it’s still worth it.

– Reuters sources claim that Rosneft chartered 7 tankers with a displacement of 100,000 tons for the supply of Ural oil to the Indian Oil Corporation from May 15 to May 31 from the Baltic ports of Primorsky and Ust- Luga. This is Rosneft’s first direct delivery from the Baltic ports, – comments Andrey Kochetkov.

China does not refuse Russian oil either. As reported in PetroChina, they continue to buy it under previously concluded contracts. Will Asian consumers be able to replace European consumers? Completely unlikely. But in part, that’s for sure. It’s a matter of time and specific price agreements with each country.

ONLY NUMBERS

Where Russia supplies oil: top 10 countries in the world

China 30.5%

Netherlands 16%

Germany 8%

Belarus 6.5%

South Korea 6%

Poland 5%

Italy 4%

United States 3.5%

Finland 3%

Slovakia 2.5%

According to the Federal Customs Service of Russia for 2021.

PS The physical volume of exports amounted to 230 tons of crude oil43 for a total amount of 110 billion dollars.

Russian Oil and Gas in Europe: Both Desirable and Challenging

The European Commission cannot decide what to do with the energy of the Russian Federation (continued)

Source: KP

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