Why is the EU embargo necessary but not enough to end the war in Ukraine?

A European embargo on seaborne Russian crude oil and a ban on shipping insurance designed to prevent Russian oil from reaching non-European buyers is set to be enacted in December.

Despite Russia's falling oil export volumes to the EU, which fell below exports to China, its export revenue has increased due to global oil prices pushed higher by its war in Ukraine. Moscow is on track for a 38% year-on-year rise in energy export earnings in 2022.

In fact, exports of Russian fossil fuels carried by EU-registered ships using European insurance and other services are also working against EU foreign policy goals and undermine efforts to isolate Russia. Every time a Greek ship offloads Russian fuel in a port in an Asian or African country, the bonds between those countries and Russia are strengthened. After the EU embargo was announced, Russia has been able to ramp up alternative exports to such countries as India, China, Turkey, Egypt and UAE.

Source: www.russiafossiltracker.com, CREA

Financially, militarily, economically, and geopolitically, the phenomenon of European ships carrying Russian fuel exports to global markets makes a clear case for sanction policy action. A report from the Centre for Research on Energy and Clean Air (CREA), shows that out of ship capacity carrying Russian fossil fuels in July, 62% was owned by EU shipping companies and 73% was insured in the UK and Norway.

Oil exports are the Kremlin’s main pillar of financial revenue that is keeping the Russian economy afloat, despite a wide range of sanctions and the freezing of the central bank assets.

CREA estimates that EU's fossil fuel imports from Russia since the start of the full-scale invasion crossed EUR 100 bln on October 4th. The EU's imports have dropped notably but still averaged approximately EUR 260 million a day in September, and the EU as a bloc remained the largest importer of fossil fuels from Russia.

As the imports reached this symbolic milestone, CREA released an analysis finding that price caps on Russian fossil fuels, even at very conservative levels, could have cut Russia's export earnings by EUR 14 billion in the past three months (July-September). The price caps were first discussed at a high level at the G7 summit at the end of June. We hope the price caps can be implemented swiftly.

Source: CREA

CREA also published a monthly update on trends in Russia’s fossil fuel exports and revenue for September. This update finds that Russia's coal exports have started to recover after an initial drop-off caused by the EU's coal ban. The reason is that the ban on using European ships to carry coal to third countries was never enforced, not even before the Commission waived the ban. The main trade flow is Greek ships carrying Russian coal to Turkey. This finding obviously exposes the need for better sanctions enforcement. Key findings by CREA are summarized in a tweet here.

Global oil price cap: essential tool for reining in Putin’s petro-dictatorship

The price cap plan agreed by G7 nations on 2 September calls for participating countries to deny insurance, finance, brokering, navigation and other services to oil cargoes priced above a yet-to-be-determined price cap on crude and oil products. Oleg Ustenko, Chief Economic Adviser to Ukraine’s President, Volodymyr Zelensky, was praising the move and is urging the EU to introduce a price cap on Russian oil as soon as possible. 

Following the G7 Finance Ministers Meeting, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) on the September 9th issued preliminary guidance on implementation of the policy banning the provision of services related to the maritime transportation of (i) Russian-origin crude oil and (ii) Russian-origin petroleum products (together “seaborne Russian oil”). Now it is referred to as the “Maritime Services Policy”.

US Treasury officials and leading economists express confidence that the plan will work — and already is working. In September they argued that the global price cap will work even if many buyers don’t officially join the coalition (for political reasons – like China, India and Turkey), as they could still use the system for leverage in contract negotiations with Moscow to negotiate lower prices.

While China and India won’t be part of an official coalition on the price cap, lower prices paid to Russia by these nations would help accomplish the coalition’s goal, getting more oil on the market with less revenue for the Kremlin. Already, Russia is locking in long-term contracts to limit the loss of potential oil revenues.

According to S&P Global Commodity Insights data, discounts that Russia is providing for long-term contracts are rising, which signals the Kremlin's fears and potential effectiveness of the global price cap suggested by the “Maritime Services Policy”.

Doubled urgency of oil demand reduction in the EU

While a price cap is essential, it is not sufficient over the long term to resolve the global crisis that emerged from addiction to Russian fossil fuels. Another major factor is supercharging the need to reduce oil demand - the climate emergency.

According to the United Nations Environment Program (UNEP) Emissions Gap Report 2021, to keep warming within 1.5 °C, global fossil fuel production must decline by an average of at least 6% per year this decade.

New data released by the Carbon Tracker Initiative on 19 September shows that the production and burning of the world's explored and commercially listed fossil fuel reserves will release more than 3.5 trillion tonnes of greenhouse gases, seven times the residual carbon budget for keeping warming to 1.5°C and more than all the emissions created by mankind since the beginning of the industrial revolution. 

In the view of these facts, to be a real climate and environmental leader, the EU should showcase rapid oil demand destruction and use the current crisis and policy response to Russian aggression as an opportunity for showing leadership. 

Prioritizing the construction of additional fossil fuel infrastructure and alternative sources of imports, while ignoring the existing and massive potential to reduce the wasteful consumption of oil and gas could be a strategic and very costly mistake, with deadly impacts in the near future as the climate emergency escalates.

Phasing out fossil fuel intensive production of non-essential goods, many of which should have been banned long ago for the sake of public health and the environment, is one of the key sources of oil demand destruction for EU member states. Another key source is electrification and reduction of fossil fuel consumption in the transport sector. Both sources should be immediately addressed by policy action.