The upcoming European sanctions on Russian oil… may turn against it!

The upcoming European sanctions on Russian oil… may turn against it!
The upcoming European sanctions on Russian oil… may turn against it!
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The campaign of Western countries to defund the Kremlin and force President Vladimir Putin to abandon his war in Ukraine has reached a sensitive stage, according to a report prepared by Bloomberg Agency, which was seen by Al Arabiya.net.

From February 5, the European Union will join the United Kingdom and the United States in banning seaborne imports of Russian diesel and other oil products.

This measure is coupled with a price cap on Russian fuel exports, which is designed to blow a huge hole in Moscow’s energy revenues.

On the flip side, if European buyers cannot find alternative supplies, sanctions risk adding new costs to diesel-dependent industries such as agriculture and road transport and making it harder for governments to rein in inflation.

In light of this scenario, 6 questions arise to try to understand the full picture of the sanctions and their impact on both Russia and the West.

1. Isn’t Russian oil already subject to European sanctions?

Western sanctions so far apply to unrefined crude oil, which is subject to the European embargo and the $60-per-barrel cap imposed on entities still buying from Russia.

But the new sanctions will affect Russian refined fuel transported by sea, according to Bloomberg.

The country is also a major exporter of naphtha — which can be used to make gasoline and plastics — and fuel oil, which is often used in power generation and shipping.

It also ships jet fuel, vacuum gas oil and other petroleum products.

Altogether, Russia accounted for 9.3% of global oil product shipments by volume in 2022, about 0.5 percentage point more than its share of the crude oil market, so the recent EU sanctions are just as important.

2. How will the price cap work?

In the same way as countries like the G7 and the European Union impose caps on crude oil, anyone who pays more than the cap for products shipped from Russia will not be able to get insurance and financing from the main participating countries.

This is a major problem, given that more than 95% of the world’s sea carriers are insured via London.

The idea is that, even if buyers in Africa and elsewhere are willing to buy Russian diesel at a price above the cap, the bulk of the world’s tankers will not be able to ship it there.

The prices of petroleum products vary, and the Group of Seven Industrialized Countries (G7) aims to set two maximum prices, with levels not yet determined.

It is possible that some of the Russian fuel will be shipped at unspecified rates via a “shadow” tanker fleet that does not depend on Western services.

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3. How will buyers in the European Union replace Russian fuel?

One of the toughest challenges will be replacing the diesel products that power cars, trucks, agricultural machinery, ships, and manufacturing and construction equipment.

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It is reported that about 220 million barrels were shipped to the European Union from Russian ports in 2022, which is enough to fill about 14,000 Olympic-sized swimming pools.

Suppliers in the Middle East are an obvious alternative, and India and the US could also help bridge the gap.

4. Are alternative solutions sufficient?

Part of that depends on whether companies in China use increased export quotas to make more oil products available to the global market, as that should free up extra barrels to ship to the EU.

A higher share does not necessarily mean that all potential exports will occur, especially as the Chinese economy opens up again after Beijing abandoned its strict “zero Covid” policy.

Another danger is related to the extent to which Russia can continue to export diesel.

And if that happens, the destination of global trade flows will be fundamentally changed, while there will still be the same amount of Russian fuel in the world, which will only be shipped to different places.

However, if Russia cannot find enough buyers and is eventually forced to cut production, it could drain global availability.

The French oil sector strikes further complicate the picture, given the possibility of refinery disruptions that could reduce EU production.

5. What is the ideal outcome for the European Union?

European Union leaders hope the new sanctions will affect Russia’s finances without causing an energy supply shock that disrupts key industries and makes it difficult for governments to control inflation.

If the price ceiling is too low, Russian companies may refuse to sell, or work hard to find ways around it.

If it was too high, they would have just experienced the inconvenience of having to find new buyers. Potential customers for Russian fuel as an alternative include Turkey as well as countries in Africa and Latin America.

6. Could there be unintended consequences?

Some countries could be in for a windfall if they mainly buy Russian diesel at a discount to cover their domestic requirements and sell the fuel from their refineries to buyers in the EU at a much higher price.

Nor is there much to prevent non-EU buyers like India from buying Russian crude, processing it at their own refineries to produce fuel, and then legitimately selling those barrels to EU buyers.

Traders willing to flout the rules entirely could ship Russian fuel into one country, mix it with another fuel (or just rename it) and send it back to the EU, in which case it can be very difficult to prove the true origin of such shipments.

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