The EU is banning almost 90% of Russian oil imports by 2023. But it stopped short of a total embargo because Hungary’s prime minister Viktor Orban objected. What impact will it have on Russia’s economy?
“These sanctions are designed to take a heavy toll on the Kremlin’s interests and their ability to finance war.”
Ursula von der Leyen, Bloomberg
That’s Ursula von Der Leyen, the president of the European Commission, speaking back in February, when Russia invaded Ukraine.
Members of the European Union and other Western countries responded by imposing a raft of sanctions on Russian business and trade.
The first round of sanctions targeted Russian coal.
The others have impacted everything from the banking system to the export of wood, steel and iron to the EU.
The aim is to hit Russia’s economy hard and limit the money President Vladimir Putin has to fund his war in Ukraine.
In the latest round of sanctions – the sixth – EU leaders agreed to block oil imports from Russia by the end of the year.
But it only happened because of a compromise.
***
The negotiations were held up for weeks because Hungary’s far-right leader Viktor Orban, an ally of President Putin, opposed a ban
“Talks over a possible embargo stalled on Sunday with Hungary the main opponent. It says any ban on imports of Russian oil would cross a red line.”
DW News
Hungary is a landlocked country so it relies on a pipeline from Russia to deliver oil.
Viktor Orban, who has been cautious about criticising Moscow since the war began, told a Hungarian news channel that cutting off Russian oil would damage his country’s energy security
[Clip of Orban speaking in Hungarian]
He said it would be like an “atomic bomb” hitting Hungary’s economy.
And blamed EU sanctions – not Russia’s war – for rapidly rising prices.
He said, quote, “The sanctions that we have introduced so far have caused more trouble for the European economy than for Russia. I don’t think they’re a good tool anyway.”
Hungary said it would need five years – and a lot of money – before it would be ready to phase out Russian oil imports.
But last week the EU finally came to an agreement:
“Yesterday in the middle of the night we decided then to have a ban now on de facto 90 of Russian oil imports to the European Union by the end of the year.”
Ursula von der Leyen, Sky News
The bloc will stop importing oil from Russia by sea by the end of 2022. That means around 90 per cent of Russian oil imports to the EU will stop.
About 10 per cent will keep flowing, mostly to landlocked countries like Hungary, as well as Slovakia and the Czech Republic.
But is a ban on oil imports – and a partial one at that – enough to hurt Russia’s economy?
***
“Now the sanctions already in place against Russia are starting to bite….and hard. Moscow is warning that inflation could hit 23 per cent this year and the economy is expected to sink into recession.”
DW News
Even before the EU announced the oil embargo, Russia’s economy was already feeling the pain of sanctions.
Inflation in Russia is currently at 18 per cent – the highest it has been in two decades.
But the decline in Russia’s economic fortunes hasn’t been as hard or as fast as expected.
Here’s Vasily Astrov, an economist, speaking to DW news:
“The collapse takes time. The thing is that the full impact of western sanctions has not been felt yet. Normally you would expect the immediate impact from financial sanctions but these are precisely the sanctions for which Russia was reasonably well prepared.”
Vasily Astrov, DW News
And experts say Russia won’t feel the immediate impact of this new oil embargo when it begins at the end of the year.
Mainly because, despite EU sanctions, there will still be a market for Russian oil elsewhere in the world.
Here’s former UK foreign secretary William Hague, talking to Times Radio:
“It won’t hurt the Russians that badly because they can still sell oil in China and India.”
William Hague, Times Radio
What the EU oil embargo will do is increase global oil prices and in the short term that could make up for the money Russia loses when sea exports to the EU stop.
What’s more, thanks to Viktor Orban, it’s not a total ban, part of the EU market will still be open to Russian oil for at least a few more years.
But, over time, experts say, Russia is going to feel the pinch.
***
Russia sends around 60 per cent of its oil to Europe’s richest countries.
It will be really difficult and time consuming to shift from selling the majority of its oil to Europe to selling most of it to other countries.
There are contracts to be negotiated and logistics to be sorted out.
And another part of the latest EU sanctions agreement will make that change even more difficult.
The EU decided to ban European companies from insuring ships that carry Russian crude oil.
European insurance firms dominate the global market for oil tanker insurance…so that ban will make it hard for Russia to ship oil to countries like India and China.
But there’s still one big lever that the EU hasn’t yet pulled when it comes to sanctions and embargoes on Russia.
Natural gas.
Estimates done before the invasion of Ukraine found that if the EU were to cut off Russian natural gas imports, Russia’s economy would shrink by around 3 per cent.
That would really bring it to its knees – but it would mean a big hit to Europe too – and that kind of economic pain isn’t going to play well with leaders like Viktor Orban.
***
Today’s episode was written and mixed by Ella Hill.
