Europe goes to knockout against Russian oil

“It is prohibited to purchase, import or transfer, directly or indirectly, crude oil and petroleum products, whether originating in Russia or exported from Russia. It is prohibited to provide, directly or indirectly, technical assistance, brokerage services, financing or financial assistance, or any other service related to the prohibition in paragraph 1.

It is prohibited to transport, including through ship-to-ship transfers, to third countries crude oil and petroleum products originating in Russia or exported from Russia, by any vessel registered under the flag of a Member State or owned, chartered, operated or otherwise controlled by a national of a Member State or by any body corporate, entity or body incorporated under the law of a Member State.

Europe dominates world oil trade, oil financing, shipping and oil insurance. If the legal text survives ongoing negotiations in Brussels and European companies interpret it strictly, as lawyers tend to do when it comes to sanctions, Russia will face significant hurdles in finding new markets for the oil that Europe will no longer buy. The impact would be nearly equal, in practical terms, to the secondary sanctions Washington has imposed in the past to expand the scope of its sentences. Brussels does not like the so-called extraterritoriality of US secondary sanctions, which the White House has used to great effect on Iran. But he hates even more the prospect of Russia selling the oil the continent once bought, at perhaps even higher prices, to subsidize its war machine in Ukraine. Talk to any energy diplomat in Brussels, and it’s clear that Europe is targeting oil revenues – not just oil flows – and for that, it needs to stop Russia from redirecting its crude. For Europe and the United States, the key is to prevent Putin from launching a diplomatic oil offensive against friends. Robert Habeck, Germany’s economy minister, explained the idea in a recent ZDF television interview: “Putin would come in and say, ‘You see what’s happening, the capitalist West is making you poor, I’ll help you and you can get a 20% discount from me. I just want you to be my ally. “Since the start of the war, I have argued that a Western oil embargo on Russia was a matter of when, rather than if. Now I believe the United States and Europe will use secondary sanctions-like tools, plus diplomatic pressure, to drive down Russian oil production, rather than passively seeing all the Russian oil they’ve bought once go somewhere else. For now, the goal is to convince allies of two goals: not to buy more Russian oil than in 2021, and if you buy a little more, only do so on the condition of asking for huge discounts. This is the message that India has received, for example. Publicly and privately, Western diplomats are telling allies: Don’t undermine our sanctions. Can the policy work? It’s unclear. Western oil trading companies will stop trading Russian oil, but as Iran has demonstrated, new trading companies operating in the shadows would replace them. However, the longer the war lasts, the more pressure Washington, London and Brussels will exert on Russian oil. Yet as oil prices continue to climb, Brussels and Washington may have to accept more Russian oil entering Asia. So far, Moscow has seen its output fall nearly 1.1 million barrels per day, or 10%, from its February level, to an average of 10.05 million barrels per day in April. Another big drop is likely in May. Russian state media are reporting that production is actually on the rise, but rumors among Russian oil traders indicate otherwise. If you believe them, production, which was 11.1 million barrels per day in February, is down to less than 9.5 million barrels per day right now. Oil prices are not much higher thanks to the covid epidemic in China and Beijing’s heavy covid – zero policy. The increasingly palpable fear of a recession in Europe and the United States by the end of the year is also holding prices back. But many seem to underestimate Russia’s supply losses and their effect on the country’s economy: they are real and they are getting worse.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He was previously the Commodities Editor at the Financial Times and is the co-author of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”

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