Victory Day was touted as a turning point in Russia’s war against Ukraine. But President Vladimir Putin revealed no new steps on Monday. Nor did Brussels announce new sanctions, despite pushing for an agreement ahead of Moscow’s military parade. Even so, the EU is getting very close to joining the G7 in enacting a historic ban on Russian oil. Its effects will be felt across the world.
Holdouts are demanding carve-outs and delays. Hungary in particular is reliant on Russian supplies. Budapest-based multinational energy group MOL says it does not have the technology to refine crude from elsewhere. Retooling its refineries could take years and cost about $500mn.
But Hungary, Slovakia and the Czech Republic account for less than a tenth of the EU’s Russian imports total. Even if they secured exemptions, an EU ban would have clout. It imported 4mn b/d of crude oil and products, making it Russia’s main market, according to UBS. Last year Russia exported two-thirds of its 10.8mn b/d production.
The ban’s effectiveness will depend on whether Russia can shift to other customers. Transport is a constraint. There is just 300,000 b/d of spare capacity on the ESPO pipeline to Asia, and just 200,000 b/d by rail, says Rystad Energy. A proposed EU ban on insuring tankers carrying Russian oil would make it difficult to move enough oil by ship.
True, higher oil prices could ease some of Russia’s pain. Energy Aspects expects Brent crude to average about $120 a barrel in the second half of the year. But even if it can find buyers elsewhere, they want a discount. Since the invasion Russia’s Urals crude has traded on average $21 below Brent, against perhaps a dollar over the five previous years.
The impact of reduced Russian supplies on western governments would be blunted if other supplies increased or demand fell sharply. Currently the former is unlikely: Opec and US shale producers have shown few signs of stepping up.
Yet, crude demand will not hold steady when world economies begin creaking with fatigue, even with some oil inventory rebuilding. High US pump prices and a rapid export slowdown in China hint at penny-pinching by consumers to come. Together the two countries account for 35 per cent of world demand. A tepid reaction in oil markets in recent days says something.
World oil consumers will suffer if an oil embargo goes through. But later this year Russia will surely share that pain.