Europe’s Partial Russian Oil Ban Is Flawed, But Necessary Bloomberg

European Union leaders have finally agreed to ban most Russian oil imports, paving the way for a sixth package of sanctions aimed at eroding the Kremlin’s capacity to fund its brutal war in Ukraine. It’s an imperfect solution that comes late, makes multiple concessions that draw out timing and caves to Hungary’s demands for exemptions. Sanctioning gas, where infrastructure ties Russia far more tightly to European purchases, remains off the table. It’s a vital step forward nonetheless.

...

None of this should take away from what is still a significant achievement, almost unthinkable just months ago. An energy embargo, even an imperfect one, is painful for the Kremlin immediately — and is an important signal of intent. This one, if pledges from Germany and Poland to wean themselves off pipeline oil are fulfilled, should cover 90% of Russian oil imports into Europe by the end of the year.

The effects on the markets for oil and, in particular, oil products could be dramatic. Russia is by some margin the largest net exporter of petroleum products in the world (the US, whose gross volumes are larger, derives much of its exports from refining other countries’ crude). European imports of Russian diesel account for about a fifth of global trade in that product. Almost all of that will be shut down in a matter of months. Futures contracts for European diesel, which averaged $630 a metric ton over the past decade, are currently changing hands at about twice that. Inventories in western Europe’s oil trading hub are at levels last seen in a sustained way in 2008, when Brent crude prices peaked at $146 a barrel.

A repeat isn’t impossible this time around. Brent is already trading at $123. In the event of an embargo similar to the one we’re now seeing, it could hit $150 by July, the Oxford Institute for Energy Studies estimated earlier this month. That’s likely to squeeze diesel-dependent European heavy industry that’s already struggling with high prices, as well driving further inflation and enhancing the appeal of electric and hybrid vehicles that now make up nearly half of the continent’s passenger car sales.

In the short term, it’s feasible that Europe will get hurt, while Russia benefits from higher prices. The long term picture, however, looks far more challenging for Moscow. It cannot simply turn off supply temporarily without consequences, and sanctions on maritime insurance will prove nearly impossible to circumvent, given specialists operate largely in Europe, the US and allied nations, choking oil trade.

Yes, gas is absent. Russia is the biggest exporter of gas and Europe is its biggest customer, and it’s true that other than shelving Nordstream 2 pipeline, Europe has shied away from restricting imports, which Russia would have found it harder to work around. It may still have to turn to Russia to fill underground gas storage before winter. All problematic, no question.

But there’s encouragement to be found here. The wider package includes other irritants, like removing more banks, including Sberbank, Russia's largest, from the SWIFT payments system. Sanctions have a patchy record of getting states to change their behavior — especially authoritarian governments involved in activities they perceive as core national interests — but the aim is now clearly to isolate and drain the Kremlin’s financial wellsprings. Despite a lofty ruble, propped up by capital controls, and a chunky current account surplus, measures imposed by Brussels, Washington and partners are already working.

VERSUS

EU Continues to Try to Hurt Russia by Shooting Itself in the Foot Naked Capitalism

For the details: this sixth package gets the EU its much-sought-after embargo of Russian oil, although it’s only a partial embargo, thanks to prime minister Viktor Orban acting like a bad Hungarian populist rather than a good European. Orban threatened to veto a full-bore embargo since all of Hungary’s oil comes via the Druzhba pipeline. By contrast, most of the EU’s oil comes by tanker, which as we’ve pointed out and Alexander Mercouris has confirmed, allows for Russian oil to still come to Europe via out and out laundering through cut-outs and mixing with non-Russian source product, albeit at a higher cost. So landlocked countries on a Russian pipeline can’t cheat while the others can. So after weeks of wrangling, the EU relented and voted through the Hungarian scheme.

...

If you think the EU will really, truly, will have cut its imports of Russian oil by 90% in a few months, I have a bridge I’d like to sell you. And yet more sanctioning of individuals is a sign that the EU is hitting the bottom of the barrel.

So how can the EU be so blind? Have they really convinced themselves that Russia is teetering on the verge of economic disaster despite evidence to the contrary, like the estimates of the GDP fall for 2022 being lowered slightly as export substitution is ahead of schedule, or the central bank again cutting interest rates? How about the fact that shops have plenty of food, food prices aren’t appreciating much, and ordinary Russians aren’t seeing signs of hardship (as in going without European goods and vacations do not make a crisis)? Yes, there may be some reductions in living standards in some sectors, but even to the extent that there are some costs, they are trivial compared to the 1990s…and here Russian overwhelmingly see their national survival at stake. Oh, and Putin just raised pensions by 10%. That arguably just represents an inflation catch-up but it’s a sign that the government has room to maintain social safety nets.

Maybe readers can make sense of the EU’s commitment to its self destruction, but I sure can’t. And given how long it take for governments to be voted out, it looks very likely that Europe will inflict permanent damage on itself and its citizens before regime chage takes place.