The Kremlin has warned it has enough buyers for its energy resources outside of Western countries, as the European Union (EU) weighs up phasing out Russian oil imports.
Speaking at a conference in Muscat, Oman earlier today, the country’s foreign minister Sergei Lavrov said: “Let the West pay more than it used to pay to the Russian Federation, and let it explain to its population why they should become poorer.”
The trading bloc currently relies on Russia for around a quarter of its oil imports, but is looking to include an oil embargo in its sixth package of sanctions on the Kremlin following the invasion of Ukraine.
This follows similar measures brought in by the UK two months ago, and the US committing to a full-out ban on Kremlin-backed fossil fuels.
However, Hungary has withheld its support for oil restrictions, with its government pushing for an exemption with piped supplies to ensure can meet consumption demand this winter.
While all member states are committed to a medium-term shift from Kremlin-backed fossil fuels, pledging to cut oil and gas imports to zero by 2027, many member states are concerned about the escalating cost of living crisis, and potential supply shortages following Russia’s invasion of Ukraine.
The Kremlin has already halted gas flows to Poland and Bulgaria, while Russian President Vladimir Putin signed into law last month requirements for “unfriendly” overseas buyers to purchase gas in roubles.
However, oil restrictions would also greatly inconvenience the Kremlin, with Europe purchasing around half its supplies.
It is unclear how easily it would be able to reroute oil supplies, however it would find no shortage of buyers via shipping – despite port restrictions.
This includes India which has previously purchased Urals grade crude at a discount, and remains one of the world’s largest consumers.
Oil ban comes with costs as conflict continues in Ukraine
European think tank Bruegel has cautioned the EU against a six-month phase out of Russian oil, raising concerns over a further price spike across increasingly volatile benchmarks, that could drag on the global recovery after the pandemic.
It has suggested an immediate punitive tariff on all Russian exports of crude oil, oil products and possibly natural gas.
A tariff would be a flexible tool to increase or reduce the pressure on Russia, depending on the situation in Ukraine.
In an op-ed sent into Politico, Bruegel said: “It would immediately reduce Russian revenues, while still giving Moscow an incentive to sell to Western buyers. As oil and gas would continue to flow, global prices may well fall, reducing Russian profits further. Finally, it would also give Russia less reason to quickly build new infrastructure to export fossil fuels to third countries.”
Commenting on the prospect of a ban, Craig Erlam, senior analyst at OANDA, told City A.M.: “I think we are going to see a ban, the question is how it’s phased in and whether it will be particularly effective as a result. The longer they take to implement the ban, the more opportunity Russia will have to find alternative markets. That may come at a discount to begin with which will have a financial impact but considering the levels oil is trading at, that doesn’t really matter.”
“Other markets won’t be as convenient for Russia which is a problem but not as much as it would be for gas, for example. It’s important that Europe continues to transition away as quickly as possible so that maximum pressure can be imposed and they aren’t effectively facilitating the war in Ukraine with those funds.”
Ole Hansen, head of commodity stategy at Saxo Bank, said: “Russia is likely to find other buyers more easily than for Europe to find an alternative seller. Having spent recent decades building up a Russian energy dependency, a move to exclude Russian oil and products will likely take longer than planned.”
“With this in mind, a watered-down version or longer deadline may end up being the result. Not least considering Hungary has hardened its public stance against an EU embargo, saying it would withdraw its veto threat only if its imports via pipelines are excluded.”
Callum Macpherson, head of commodities at Investec, argued Russia would still find it very difficult to find new buyers prepared to take oil at the same volumes as European buyers, meaning oil supplies could exit the market -driving up prices.
He said: “If the ban is comprehensive and introduced quickly, it would be a real challenge for Russia to redirect it and, that being so, would take crude out of the global market leaving the EU to compete with existing consumers of other crude sources – that will inevitably mean higher prices as some consumption will need to be priced out of the market.”
Commenting on the likelihood of a ban, he said: “However, the signs so far are that a complete ban across the EU is going to be difficult because several member states are pushing back on it. The plan to stop EU vessels shipping Russian oil is encountering similar challenges.”
Meanwhile, Ukraine has announced it will halt the transport of gas through a Russian pipeline in Ukraine, after claims invading troops are raiding it to supply separatist forces.
The country’s natural gas grid operator said yesterday that it would suspend the flow through a transit point called Sokhranivka, which delivered almost a third of the gas piped from Russia to Europe through Ukraine.
This reflects the growing reality of commodity markets driven by escalating geopolitical factors.