How the EU ban on Russian oil could benefit Russia

Russian oil tankers may need to give steep discounts to customers in China and India because of EU sanctions.
Russian oil tankers may need to give steep discounts to customers in China and India because of EU sanctions.
Image: REUTERS/Stringer
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The European Union will halt all imports of crude and refined oil from Russia by the end of 2022, European Commission president Ursula von der Leyen said on May 4. Europe as a whole currently gets one-quarter of its oil from Russia, with a wide range between countries—Germany gets just 12% of its oil from Russia, while for Slovakia it’s 96%.

Oil is one of the main sources of funding for Russia’s war in Ukraine—to the tune of $285 million per day. Up to now, sanctions imposed by the US and other buyers on Russian oil have cut exports by about one-eighth; that could climb to one-quarter over the next month as new sanctions begin to take effect, Bernard Looney, CEO of BP, predicted to Reuters. The price of oil jumped nearly 4% in response and could reach far higher as Europe’s cuts to Russian imports deepen.

Rising prices could offset the loss of trading volume

In the short term, the European embargo will likely benefit Russia. Depending on other factors—like how much additional oil Saudi Arabia is willing to put on the market, which so far has been not very much—the increase in prices could offset the decrease in the number of barrels sold. Even with a drop in sales to the EU, Russia could garner $180 billion from oil exports in 2022, 45% higher than in 2021, according to energy intelligence firm Rystad Energy.

Other winners will be India and China, which are already negotiating with Russia for discounts on crude oil imports. Political pressure from the US, and financial obstacles—like insurers refusing to cover ships carrying Russian oil—have added costs that importers in India and China want to see discounted.

Longer-term, that advantage could dissipate, as there’s a chance that the EU and US could impose secondary sanctions that would penalize anyone who buys Russian oil, as they have done in the past with Iran and Venezuela, said Salih Yilmaz, senior oil analyst for Bloomberg Intelligence.

Russia’s advantage from oil-price spikes will also fade once EU imports go to zero. A bigger pivot to customers in Asia will be challenging because, without an existing pipeline network, more Russian oil would need to be transported by sea, where sellers in the Middle East have a cost advantage.