The Oil War: Facing EU Embargo, Russia Targeted Ukraine’s Supplies
By Maksym Bugriy, EDM 20/5/22 https://jamestown.org/program/the-oil-war-facing-eu-embargo-russia-targeted-ukraines-supplies/
May 20, 2022 - 1:09:31 PM

Ukrainian President Volodymyr Zelenskyy strongly advocates for an embargo on Russian oil imports to the European Union: “Now the priority is the oil embargo. No matter how hard Moscow tries to disrupt this decision…” (President.gov.ua, May 15). His economic advisor Oleg Ustenko has further admonished compromise deals to adopt a phased approach to such an import ban: “Russia is receiving $1 billion per day for its energy exports. You can imagine how many missiles, weapons, and bombs they can buy in the six months before the embargo is fully implemented” (President.gov.ua, May 14).

Yet there is opposition even to the EU initiative (currently under negotiation) to adopt a delayed, piecemeal embargo that would cut out Russian crude oil after six months and refined oil products by the end of the year. Hungary, Slovakia, Bulgaria and Czechia (the Czech Republic) have either opposed the policy outright or are demanding special accommodations. Hungary itself consumes less than 5 percent of all the Russian oil imported by the bloc yearly (Ec.europa.eu/eurostat, accessed on May 16), although Hungarian MOL is additionally a majority owner of major Slovak fuel company Slovnaft (Facebook.com/vladislavl.inozemtsev, May 8). That said, in 2021, more than 75 percent of petroleum oils imported by Bulgaria, Slovakia, Hungary and Finland came from Russia (Ec.europa.eu/eurostat, accessed on May 16). Budapest has argued it will need €500 million–€550 million in replacement costs to adjust Hungary’s oil refineries, currently tuned to processing Russian blends of crude; and an additional €200 million in investment would be required to expand the Adria oil pipeline, which passes through Croatia (About Hungary, May 16). On the other hand, Germany, which takes in 10–20 percent of the total Russian crude oil and 25–50 percent of Russian petroleum oils imported by the EU annually (Ec.europa.eu/eurostat, accessed on May 16), reportedly plans to stop buying from Russia by the end of the year, even if the European Union fails to agree on a bloc-wide ban (Der Fonds, May 16).

Analysts in Russia have emphasized that, in February 2022 alone, their country sent half of its overall oil exports to the EU (Vedomosti, March 3). Consequently, Moscow has been vehemently trying to derail European considerations of a Russian oil embargo. “The rejection of Russian oil would cause catastrophic consequences for the world market,” Deputy Prime Minister Alexander Novak warned back in March (RIA Novosti, March 8). And Russia is helped by the fact that because of the ongoing green energy transition, some major oil production projects around the world have struggled to attract sufficient investment (Energy Analytics, March 7)

Following the start of Russia’s full-scale aggression against Ukraine on February 24, Moscow has had mixed success defending its oil sales in the face of international rebuke and isolation. Indian and some other Asian companies have been speculatively buying up sizeable Russian volumes from traders. But Russian crude accounts for only a small portion of India’s total imports because of its high transit costs. Out of an overall total of 175.9 million metric tons (MMT) of crude petroleum imports in fiscal year 2022, only 0.419 MMT reportedly came from Russia (India Times, April 19). Nevertheless, thanks to positive pricing momentum, Moscow earned around $20 billion a month throughout 2022 from sales of crude and refined products (amounting to about 8 million barrels a day), according to the International Energy Agency (Bloomberg, May 12).

Some Western analysts estimate that Russia spends roughly $1 billion per day on its war against Ukraine (Focus.de, May 5), bolstering the argument that cutting off Moscow from oil revenues will starve the Russian war machine of financial resources. Yet Russian economist Vladislav Inozemtsev disagrees with this view, asserting that Putin does not understand economic arguments. Even if Russia is blocked from selling hydrocarbons, it is likely to raise the money domestically or tighten the belts of the population to fund its military, Inozemtsev told French news outlet RFI. He recommended that, instead of an oil embargo, the West concentrate on banning exports of goods Russia needs to sustain its war effort (RFI, April 17).

However, other Russian macro analysts tend to agree that in the absence of a full oil embargo, the Kremlin will likely be able to continue the war for 1.5–2 years (The Bell, April 23). So far, the government has been successful in supporting the ruble and curbing capital controls. And with the oil price for the Urals blend remaining at least at $60 per barrel, combined with contracted imports, Russia’s Central Bank predicts a record-high $145 billion current account surplus in 2022 (Interfax, April 29). The Institute of International Finance’s estimates are even higher: “at $250bn […] more than double the $120bn recorded in 2021” (The Economist, May 13). Economists Sergei Guriev and Oleg Itskhoki write that they “can confidently argue that a European embargo on Russian oil and gas is the right economic [emphasis in the original] decision and the fastest way to stop Putin’s ability to finance his war in Europe” (IntelliNews, March 24).

At the same time, Russia has used oil as a weapon against Ukraine. It launched missile strikes against Ukraine’s oil infrastructure in late March, destroying multiple fuel depots countrywide. Moreover, on April 2 and May 12, Russian forces attacked and destroyed the Kremenchuk oil refinery, which supplied over a third of the domestic fuel market (Radio Svoboda, May 13).

Those strikes on Ukrainian energy infrastructure combined with Russia’s blockade of Black Sea ports and were augmented by issues in domestic pricing regulations. Taken together, Russia’s oil warfare resulted in severe fuel shortages that, by the end of April, reached even the Ukrainian capital city of Kyiv, causing miles-long lines at gas stations. The authorities instituted rationing, giving priority for military and emergency vehicles. President Zelenskyy and the government have been working ever since to restructure the supply network. Currently, oil and petroleum products can only be delivered from Ukraine’s western neighbors via land routes, requiring complex negotiations with European suppliers, ports and logistics companies (Nv.ua, May 10).

Russian military scholar Alexandr Svechin wrote in his seminal work Strategy, “Economic weapons acquire special importance” in the strategy of attrition (Svechin, Strategiya: Iskusstvo Politiki i Voyny, Moscow, Veche, 2021, p.72). Failing to agree on a full oil embargo, EU member states risk prolonging Putin’s war. And in the meantime, the Kremlin has been quite skilled in weaponizing petroleum against both Ukraine and the collective West.

Source: Ocnus.net 2022