GP Short Notes

GP Short Notes # 635, 8 May 2022

EU: New sanctions on Russia
Rishma Banerjee

What happened?
On 4 May, the European Commission president, Ursula von der Leyen, addressed the European Parliament in Strasbourg, France. While the EU has been contemplating a ban on oil from Russia for some time now, this meeting consolidated the arguments and was presented by Von der Leyen as a proposal. She proposed a new set of sanctions against Russia, which would enable the 27 member states to phase out their usage of Russian oil completely. She also suggested including Patriarch Kiril, the head of the Russian Orthodox Church, in the draft blacklist for people who are to face a travel ban and an asset freeze. 

On the same day, the Czech Republic's prime minister said that they would seek an exemption from the EU's proposed embargo. 

On 03 May, Hungary and Slovakia said that they would not support the sanctions against Russian oil, as they are too dependent on it and have no other immediate alternatives to switch to. 

What is the background?
First, the war in Ukraine and Zelenskyy's repeated requests. President Zelenskyy has been pleading for an embargo on Russian oil and gas to stop Putin's war machine that is funding the war. 

Second, the EU's energy dependency on Russia. According to the International Energy Agency (IEA), the EU imported 2.2 million barrels per day (bpd) of crude oil from Russia and 1.2 million bpd of refined oil products before Russia invaded Ukraine. According to a Reuters report, Russia exports 26 per cent of the EU's oil.

Third, the existing sanctions. The new sanctions are the sixth in the EU efforts against Russia. These sanctions have targeted individuals, banks, businesses and major state-owned enterprises, and exports, among others. Russia's central bank assets have been frozen to stop it from using its USD 630 billion of foreign currency reserves. 

What does it mean?
First, the new proposal. It remains to be accepted by the member states. Most EU countries have to stop buying Russian crude oil six months after adopting these measures, and halt imports of refined oil products from Russia by the end of the year. To ensure that none of the 17 member states veto the proposal, some have been allowed an exemption period, during which they will figure out other sources of supply. However, this oil ban will be more difficult for the EU than Russia, as the latter can still export oil to the Commonwealth of the Independent States.

Second, Russia's response. Though Moscow has not issued a statement, it has banned exports of 200 plus products until the end of 2022; this ban includes telecoms, medical, vehicle, agricultural, electrical equipment and timber. Besides, it is blocking interest payments to foreign investors who hold government bonds, and banning Russian firms from paying overseas shareholders. But, sending the oil to India and China, who are willing to buy it and have been negotiating a discounted price, might prove to be logistically costly and a mammoth task. It remains to be seen if the oil that would head to Europe finds a home. If it does not, then Russia's biggest geopolitical lever may be facing a risk.

Third, options for the EU. If the proposal gets passed, the EU will have to find ways to address the deficit. The EU is looking at global LNG imports from the US, Qatar and Algeria. An LNG import terminal is to start operation near the port city of Alexandropoulos, to boost the new Trans Adriatic Pipeline running from Azerbaijan to Italy. A new interconnector pipeline connecting the networks of Greece and Bulgaria is also set to launch next month. Poland and the Czech Republic are set to restart their talks on building the Stork II gas pipeline. Czech Republic has also been looking to increase the capacity of the TAL pipeline which runs from the Trans Adriatic Pipeline running from Azerbaijan to Italy. There are options for the EU, but they would be ready only in the long term.

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