The European Union’s approval of a sixth package of sanctions against Russia, including the phase-out of Russian crude oil and petroleum products, has sparked a fierce debate between politicians, business leaders, economists and market experts about what’s more likely: the draining of Moscow’s “war chest” or Europe plunging into a recession complete with new energy price shocks and more inflation.
Europeans should expect “the worst possible scenario” from the new restrictions, Guntram Wolff, director of Bruegel, a Brussels-based economics think tank, told Spiegel. The economist predicts that businesses and consumers alike will feel the pinch of higher energy prices.
Wolff expects Brussels’ latest measures to lead to a “considerable loss of purchasing power,” forcing politicians to act via fuel rebates, tax cuts or income support, in turn driving up national debt levels.
The economist also predicted that the European Central Bank would be caught in a bind between tackling inflation by raising interest rates and trying to ensure that rates don’t rise too high for heavily-indebted bloc members like Italy and Greece.
Steffen Bukold, an oil and gas market expert and chief of the Hamburg-based research and consulting office EnergyComment, suggested that in the short-term at least, “the new decisions will not have any major consequences,” with Russia reorienting to other markets and the EU nixing expiring energy contracts.
Spiegel recalled that the EU’s attempt to ban the shipment of Russian oil via tankers owned by European companies failed to gain traction, with Greece and Cyprus putting up resistance to the idea. Brussels did agree to prohibit insuring Russian oil deliveries, but the outlet predicted that Moscow will “probably find insurers from other regions” to step in.
Moreover, the outlet pointed out that Russia could sell refined oil products back to the Europeans, at increased prices, by sending crude to a massive Indian refinery in which Russian oil giant Rosneft has a stake, turning it into petrol, diesel, or kerosene whose origins are difficult to determine, and sending these supplies back to Europe.
Similar tricks have already been implemented. In April, Bloomberg reported on a technique by UK-Dutch energy giant Shell to create a “Latvian blend” diesel fuel by mixing 49.99 percent Russian diesel with 50.01 percent non-Russian oil in the Baltic nation, marking supplies non-Russian and send them west. According to Bloomberg, Shell is just one of “many” oil companies and commodity traders applying the trick to satisfy Europe’s energy demand while assuring the public they were not “subsidizing Vladimir Putin’s war machine.”
Industry leaders in Germany, the European industrial powerhouse which relied on Russia for nearly 40 percent of its oil needs, 55 percent of its gas and 53 percent of its coal for steelmaking and power generation in 2021, have expressed serious concerns about the economic impact of attempts to sever these ties.
Last month, Federal Network Agency chairman Klaus Muller warned Germans of possible gas shortages, while Economy Minister Robert Habeck said he could not rule out a deficit of gasoline supplies. In April, the Julich Research Center, a German state-sponsored interdisciplinary institution, warned that cutting down Russian gas deliveries by two thirds (as recommended by Brussels) would force industrial enterprises to shut down for months on end to fill up the country’s gas storage sites, since there are simply no available alternative sources of supply. At the same time, the government has advised ordinary citizens to stay warm by putting on sweaters, wash less to penny pinch on hot water, and ride bicycles more to save gasoline.
Friday’s new sanctions ban the “purchase, import or transfer of crude oil and certain petroleum products from Russia into the EU,” with the “phase out” expected to take six months to implement for crude, and eight for refined products. A “temporary exemption” is also provided for pipeline-delivered oil to landlocked European states which have “no viable alternative options” to Russian energy, with the carve-out added after Hungary threatened to block the restrictions indefinitely. “Moreover, Bulgaria and Croatia will also benefit from temporary derogations concerning the import of Russian seaborne crude oil and vacuum gas oil, respectively,” the EU directive indicated.
Last month, President Putin said that Moscow could not stop Europe from committing “economic suicide,” and must “proceed pragmatically and primarily from our own economic interests” in reacting to the “ill-conceived and chaotic” decisions taken by Russia’s Western partners.