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European Union Ban Russian Oil

Context:

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

Relevance:

GS II- International Relations

Dimensions of the Article:

  1. Original proposal of the oil embargo
  2. Rationale behind such a move
  3. What are the terms of the ‘compromise deal’ that has been agreed upon?
  4. Why was exemption given for pipeline imports?
  5. How will the sanctions affect Russia?
  6. How will the sanctions affect Europe?
  7. Indian response

Original proposal of the oil embargo

  • The proposal to completely phase out Russian crude and refined products from EU territory within a time frame of six to eight months.
    • Complete import ban on all Russian oil, seaborne and pipeline crude and refined.
  • It needed the agreement of all the 27 EU member states in order to be implemented.

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, as repeatedly pointed out by Ukrainian President , 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.

Two long term EU objectives:

  • Reducing fossil fuel dependence in favour of renewables.
  • Eliminating dependence on Russian energy for greater strategic autonomy and energy security

So, Member states agreed to make a start by phasing out Russian oil.

What are the terms of the ‘compromise deal’ that has been agreed upon?

  • The main departure from the original proposal is the “temporary exemption” from the oil embargo for countries that import Russian crude via pipeline.
    • In other words, EU leaders have, in principle, agreed to ban all seaborne imports of Russian crude, which account for two-thirds of EU’s oil imports from Russia.
  • However, with Germany and Poland pledging to phase out even their pipeline imports from Russia by the end of the year, the embargo would eliminate 90% of Russian oil imports.

Hungary:

  • The remaining 10% that’s been allowed represents a free pass for Hungary, the Czech Republic, Slovakia, and Bulgaria to continue imports via the Druzhba pipeline, the world’s largest oil pipeline network.
  • Additionally, Hungary has obtained a guarantee that it could even import seaborne Russian oil in case of a disruption to their pipeline supplies.
  • This was deemed a legitimate concession since the pipelines do pass through the war zone in Ukraine.

Why was exemption given for pipeline imports?

  • The exemption for pipeline imports was made on the logic that 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.
    • 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.

How will the sanctions affect 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%.
  • So far, Asian importers, especially India, have absorbed some of the excess inventory at discounted prices.

How will the sanctions affect Europe?

  • 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.
What about 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.

Indian response

  • 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.

-Source: The Hindu


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