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EU imposes partial oil embargo but keeps funding Putin's war through gas payments

May 31, 2022 5:10 pmby Oleg Sukhov
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The sections of the second Nord Stream 2 pipeline laid from the German shore and Danish waters, connected in a so-called above water tie-in, on Sept. 10, 2021. (Nord Stream 2 / Axel Schmidt)

The European Union on May 30 finally agreed on a partial embargo on Russian oil after months of delays and disagreements.

However, the move was criticized by some Ukrainians and supporters of Ukraine as "too little and too late."

"If you ask me, I would say far too slow, far too late and definitely not enough," Ihor Zhovkva, a deputy chief of staff for President Volodymyr Zelensky, told Reuters.

Paradoxically, the very countries that support Ukraine have enabled Russian dictator Vladimir Putin to get billions of dollars in oil and gas revenue, financing his aggression against Ukraine. 

Since Putin launched his full-scale invasion of Ukraine on Feb. 24, there have been more and more calls in the European Union for an oil and gas embargo against Russia. The main goal of the embargo is to deprive Putin of the opportunity to fund the war.

The oil embargo will be less painful for the European economy, since it would be relatively easy to replace Russian oil. 

A gas embargo is more tricky since it will take more time and effort to entirely get rid of Russian gas. 

But analysts say that both of them are feasible, and the main issue at stake is political will. 

European governments will have to withstand pressure from vested interests, the business lobby and Russian agents of influence. 

While there has been progress on the oil embargo, a gas embargo is still opposed by the EU establishment. 

“Russia wants to see at such (EU) meetings not a unified EU but 27 individual states – fragments that can’t be put together,” Zelensky said on May 30. “Today we see simultaneously the Russian offensive in the Donbas destroying our cities and Europe’s unity running the risk of being shattered.”

Statistics 

On May 31, the EU agreed to impose an embargo on seaborne Russian crude oil within six months and seaborne Russian oil products within eight months. 

Pipeline oil will be "temporarily" exempt from the embargo during an indefinite period, with Hungary, Slovakia and the Czech Republic being able to import Russian oil via the Druzhba pipeline beyond the end of 2022. 

Seaborne deliveries of Russian oil, which are subject to the embargo, account for more than 60% of the EU's imports of Russian oil. Additionally, Poland and Germany have pledged to stop their imports of Russian oil by pipeline, which is expected to cut the EU's total imports of Russian oil to 90% by the end of 2022. 

Europe’s dependence on Russian energy is significant – a result of what critics see as the EU’s failure and reluctance to diversify its energy sources for many years. 

Russian gas accounts for about 40% of the EU’s consumption, and Russian oil and oil products account for around 30%. 

The EU has paid dozens of billions of euros for Russian oil and gas since the invasion began, allowing the Russian economy to withstand the sanctions and enabling Putin to continue his costly invasion of Ukraine. 

Russia’s dependence on the European oil and gas market is also immense, which will potentially lead to devastating effects for the aggressor country when the embargo is enforced.

Russia exports 70% of its gas and 60% of its oil and oil products to Europe. Moreover, oil and gas account for half of the Russian budget and half of its exports.

Redirecting oil supplies 

There is the opinion that the oil embargo will be useless because Russia will be able to divert exports to other countries – such as India and China. One of its proponents is German economist Jorg Schindler. 

Oleksandr Kharchenko, managing director of the Energy Industry Research Center, a Kyiv-based think tank, disagrees with this theory. He told the Kyiv Independent that there are no oil pipelines to ship this oil somewhere else and no possibility to transport most of this oil by tanker. There is also fierce competition on the oil market, and Russia would not be able to elbow its way there, he added. 

Kharchenko said that Russia would only be able to sell a minor part of the oil with huge discounts. 

Mikhail Krutikhin, a partner at Russian consulting company RusEnergy, and Oleg Buklemishev, head of Russia’s Association of Independent Economic Analysis Centers, agreed that Russia is unlikely to redirect most of its oil supplies to China, India and other markets, as cited by Deutsche Welle. 

They said that Russia does not have necessary oil pipelines and logistics and would have to compete with Saudi Arabia and the United Arab Emirates for new markets. 

Opposition to the embargo

The usual argument against the embargo is that the European economy will incur significant costs, and energy prices will skyrocket even more.

But Ukraine’s supporters argue that extraordinary times require extraordinary decisions, and Europe has to endure some hardship if it wants to stop Russia’s aggression. Moreover, analysts say that eventually the market is likely to adapt, and the hardships will not be as drastic if the embargo is gradual.

Hungary has been the most vehement opponent of the oil embargo. The country is headed by Victor Orban, a long-time friend of Putin. 

Other countries that have been lukewarm about the embargo inlcude Germany, Slovakia, Austria, and the Czech Republic. 

However, countries like Slovakia depend a lot on Russian oil but they do not have relations with Putin similar to Hungary, according to Ukrainian political analyst Volodymyr Fesenko. 

Germany was initially against an embargo on Russian oil but then changed its stance. 

Fesenko argued that delays with the embargo had been due both to the business lobby and Russian political influence. 

“Economic interests dominate, and politics is an additional factor,” he told the Kyiv Independent. “Putin has corrupted part of European elites and mass media.”

There is a strong Russian lobby in Greece, Germany, Austria, France, and Italy, Fesenko added. Moreover, France and Germany are currently trying to negotiate with Putin, which may also explain their delays with the embargo, he said. 

“They support Ukraine morally but when it comes to decisions, they start to vacillate and maneuver,” he added.

Gas embargo 

The situation with the gas embargo is more difficult than with oil. While oil can be transported both by tanker and pipeline, gas is mostly transported via pipelines. The alternative option - shipping liquified natural gas by sea - is less widespread and less developed. 

Economists agree that it will be impossible to replace all of the Russian gas quickly. Kharchenko said that it is unlikely to happen within several weeks or months. 

The EU still mostly opposes a gas embargo. Austrian Chancellor Karl Nehammer said on May 31 that a gas embargo would not be included in the EU's next package of sanctions against Russia.

However, analysts say that a gradual reduction in Russian gas supplies to zero is feasible. Kharchenko said that it’s possible to get rid of Russian gas in one and a half years. 

There are analysts who are trying to prove that it’s impossible but they are mostly ones backed by Russian gas giant Gazprom, he added. 

The EU has considered compensating for the lost Russian supplies by increasing liquified natural gas (LNG) imports, boosting energy efficiency and developing nuclear power and other alternative sources of energy. 

Europe can gradually create infrastructure, including pipelines, for transporting gas from Russia’s competitors, Kharchenko said.

Some countries have already started to move in this direction.

During the invasion, Germany has cut the share of Russian gas in its consumption from 35% to 12%. 

Russian blackmail

As Europe considered the oil and gas embargo, Putin resorted to blackmail.

In March Putin demanded that European consumers pay for gas in rubles in an effort to strengthen the Russian currency amid its depreciation due to the sanctions. This was a violation of the gas supply contracts, which stipulated payment in dollars and euros, as well as of the European sanctions against Russia.

Eventually the European Union refused to pay in rubles. As a result, the Kremlin has come up with a scheme under which buyers are obliged to deposit euros or dollars into an account at Russia’s Gazprombank, which has to convert them into rubles and transfer the payment to Russian gas giant Gazprom.

But Tim McPhee, a spokesman for the European Commission, said on May 12 that the scheme would breach EU sanctions because it involves Russia’s central bank, which has been sanctioned by the European Union.

Some companies have opened accounts with Gazprombank under this scheme but its legality is still being considered by the European Commission.

Kharchenko argued that the new scheme is just a face-saving gesture for Putin. It does not actually help the Russian economy or strengthen the ruble, he added. 

In April Russia resorted to blackmail again, halting gas supplies to Poland and Bulgaria due to their refusal to pay for the gas in rubles. Russia also stopped gas exports to Finland on May 21 and to the Netherlands on May 31.

The move was seen as payback for the countries’ support for Ukraine, as well as for Finland’s intention to join NATO.

“The worse the blackmail by Russia, the faster they will reject Russian gas,” Kharchenko said.

Oleg Sukhov
Author: Oleg Sukhov

Oleg Sukhov is a political reporter at the Kyiv Independent. He is a former editor and reporter at the Moscow Times. He has a master's degree in history from the Moscow State University. He moved to Ukraine in 2014 due to the crackdown on independent media in Russia and covered war, corruption, reforms and law enforcement for the Kyiv Post.

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