The European Union’s Ban On Russian Oil : Daily Current Affairs

Relevance: GS-2: Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora

Key Phrases: European Union (EU), cost-of-living crisis, (the Society for Worldwide Interbank Financial Telecommunications )SWIFT, sixth package of sanctions, harsh sanctions.

Context:

As part of the sixth package of sanctions since Russia’s invasion of Ukraine, the European Union member states recently reached an agreement to ban 90% of Russian crude oil imports by the end of the year.

European Union (EU)

The European Union (EU) is a political and economic union of 27 member states that are located primarily in Europe.
An internal single market has been established through a standardised system of laws that apply in all member states in those matters, and only those matters, where the states have agreed to act as one.
EU policies aim to ensure the free movement of people, goods, services and capital within the internal market
There are 24 official languages in the European Union.
The main currency in the EU is the Euro, but not every country has adopted it.
Member countries aren’t forced to remain in the European Union. Any country is allowed to leave if they so choose, but they obviously must notify the EU of that decision.
By surface area, France is the largest EU country and Malta the smallest.

The Rationale behind such a Move:

The Russian economy is heavily dependent on energy exports, with the EU paying billions of dollars every month to Russia for its crude and refined products.
The EU wants to block this massive revenue inflow which, is akin to Europeans bankrolling Russia’s war.
The EU has been attempting, ever since the Ukraine invasion, to build consensus on ways to hurt Russia economically so that it is forced to roll back its military offensive.
The most obvious route was to stop buying Russian energy, which isn’t easy, given European households’ dependence on Russian oil and gas.

Why was exemption given for pipeline imports?

Landlocked countries (Hungary, Czech Republic and Slovakia) that are heavily dependent on Russian pipeline oil do not have a ready option to switch to alternative sources in the absence of ports.
While Hungary imports 65% of its oil via pipeline from Russia, 50% of the Czech Republic’s oil imports are Russian, while Slovakia gets 100% of its oil from Russia.
Bulgaria, which gets 60% of its oil from Russia, is not landlocked. But its refineries at present are only equipped to process Russian crude.

Sanctions Effect On Russia:

Analysts calculate that a two-thirds cut in Europe’s imports of Russian oil would mean a reduction of 1.2-1.5 million barrels a day in oil, and one million barrels in refined products, which might cause Russia an annual loss in revenue of $10 billion.
Given Russia’s limited storage infrastructure, the cutback in demand would force Russia to find other markets. Since that won’t be easy, Russia might have to cut production by 20-30%, say, industry experts.

Sanctions Effect On Europe:

Further fuel inflation: It is likely to further fuel inflation in Europe, where many countries are already facing a cost-of-living crisis.
EU leaders have tried to balance contradictory pressures — of having to take decisive action against a military aggressor on European soil, but without causing too much pain to its citizens.
But European lifestyles have tended to take cheap Russian energy for granted, and if inflation peaks further, the EU runs the risk of losing public support for harsh sanctions.

Import of Russian gas:

Compared to Russian oil, Europe’s dependence on Russian gas is much greater, and this embargo leaves the import of Russian gas — which accounts of 40% of Europe’s natural gas imports — untouched.
In other words, Europe will continue to pay Russia for gas imports.
But since crude is more expensive than natural gas, the oil ban is expected to hurt Russian revenues.

India’s Response to these Developments

India ramped up purchases of Russian crude at discounted prices in the months following the Russian invasion, and this policy is expected to continue.
The announcement of the EU ban caused an immediate surge in oil prices, and as Europe seeks alternate sources – from West Asia, Africa and elsewhere — for its oil needs, prices are expected to stay high.
In this context, with Russia reportedly offering discounts of $30-35 per barrel, India has found it convenient to make the most of the cheap Russian crude on offer.

What Next?

Apart from the oil embargo, the sixth package of sanctions also contains other tough measures against Russia.
- These include cutting off Sberbank, Russia’s largest bank that holds one-third of Russian banking assets, from the SWIFT messaging system.
- A ban on three Russian-owned broadcasting networks from the EU.
- Sanctions on individuals responsible for war crimes in Ukraine.
- And a ban on EU-based firms offering insurance, financing, brokering or any other technical services related to the transport of oil to Russian ships — a measure aimed at curbing Russia’s ability to divert its oil to non-EU destinations.

Note:

The (the Society for Worldwide Interbank Financial Telecommunications) SWIFT messaging network is a component of the global payments system.
SWIFT acts as a carrier of the messages containing the payment instructions between financial institutions involved in a transaction.

Conclusion:

Russia will look for new markets, but in terms of oil that's not a quick fix. The infrastructure isn't in place to reorient oil exports from Europe to Asia, for example. And if it does sell to Asia - it will have to do so at a discounted price.

Source: The Hindu

Mains Question:

Q. Why is the EU planning to phase out its dependence on Russian crude oil? Will this round of sanctions be the final nail in the coffin for Russia? (250 words).