The US has given up buying oil and gas from Russia, but the European Union has not yet. Some say they don’t want to, others say they can’t. The fate of a partial or full oil embargo may become clear as early as this week. But gas is more difficult.

America is easier for Europe to live without Russian energy resources, since it is itself the world’s largest oil and gas producer, and Russian imports covered no more than 8% of consumption before the ban. Europe, on the other hand, has been tightly connected by oil and gas pipelines with neighboring Russia since Soviet times and buys about 40% of all gas and up to 30% of oil and oil products there.

Therefore, the European embargo is the most radical measure of the economic coercion of Vladimir Putin to peace that the West has left in reserve. Whether it will be used depends on the course of the war in Ukraine and on the readiness of the EU to make serious expenditures, fraught with an economic crisis and social upheaval.

The European Union has already pledged to give up Russian coal by autumn, and wants to cut Russian gas imports by two-thirds by the end of the year. And in general, the European Commission sketched out a plan for the future without Gazprom last year, although at that time it was concerned about global warming, and not the Kremlin’s tank rush to the eastern borders of the EU.

But even now, with climate threats exacerbated by the military, calls to immediately phase out oil and gas from Russia are falling on deaf ears in some of the 27 EU countries. And sanctions require unanimity.

The next, sixth in a row, EU sanctions package will begin to be discussed this week. It is unlikely to contain restrictions on gas imports, but an oil embargo is quite possible. However, as in the case of coal, it will not be total and instantaneous. So far, a gradual reduction in purchases and a whole range of possible tools to achieve this goal are being considered: from a direct ban to an additional duty or sanctions against the tanker fleet.

The goal is to deprive Russia of money for the war, but to avoid a sharp rise in oil prices, since it will harm the West itself and threaten shocks for poor countries, while Russia will be able to earn the same money on smaller volumes, which will deprive the restriction of sense.

“We banned all Russian imports, but unlike Europe, we bought very little,” said US Treasury Secretary Jeannette Yellen. “It’s worth being very careful about a total European embargo , say, on oil. and other regions. And, counterintuitively, it may have almost no effect on Russia, because although exports will decrease, the price will rise.”

For the EU, the embargo is especially painful, since it imports 57.5% of all energy resources consumed and Russia is a key supplier . Russian oil, oil products, gas and coal cover almost 25% of European consumption.

The situation is complicated by the fact that the EU depends on gas imports by 84%, from oil – by 97%.

Before the invasion, Russia was supplying world markets with almost 8 million barrels of oil and petroleum products per day, but due to sanctions and self-restraint by buyers, the global market has lost about 2 million barrels of Russian oil exports, according to S&P Global.

As a result, oil prices rose to over $100 a barrel and would have risen more, but the West stepped in with an intervention from strategic reserves, the largest in half a century since the Arab oil embargo of the early 1970s.

But even it will not help if Europe completely abandons Russian oil, Russia does not find other buyers for the same volumes, and other producers do not increase production. In this extreme case, Goldman Sachs expects prices to rise to $170 a barrel and Deutsche Bank to $140.

However, in reality, the blow is likely to be softened by the gradual nature of the restrictions and the rebalancing of supply and demand, economists say.

“While it will be difficult and expensive to completely abandon Russian gas, the EU will cope with a total ban on the import of coal and oil from Russia,” experts at the Bruegel research center believe. at an affordable price for Europe.

A general oil and gas embargo will cost the EU 0.2-0.3% of the economy, or about 100 euros per adult European , the French government’s Conseil d’Analyse Economique has calculated. And oil – even less.

Individual countries will have a hard time, and their losses will potentially reach 5% of GDP if the EU does not support them with money or make an exception for them from sanctions. Slovakia, Lithuania, Finland almost completely depend on Russian oil supplies, Hungary and Poland depend more than half. From the supply of petroleum products – Finland, Poland and Lithuania.

Germany, which is not only the leading EU economy, but also the largest buyer of Russian oil, covers a third of its needs through imports from Russia. The country’s authorities promise to almost completely abandon it by the end of the year, but are strongly opposed to a complete ban now.

Bruegel estimates that under a European oil embargo, developed countries will have to replace about 5 million barrels of Russian raw materials and oil products per day in the worst case, at current daily consumption of 45 million barrels.

Is it possible?

Quite. Members of the OECD club of rich countries now have 1.5 billion barrels in strategic reserves. Another 3 billion barrels are in private storage. There is also a chance to increase production: the existing free capacity allows Saudi Arabia to increase production by 1-2 million barrels per day, the UAE and Iraq can add more than 1 million, and if sanctions are lifted from Iran, this is another 1 million barrels.

Approximately 2.7 million barrels can be replaced by savings in the next four months, the International Energy Agency is confident. It drew up a 10-point demand reduction plan for the developed countries that established it. Among other things, the IEA has proposed limiting the speed on the roads, encouraging the use of public transport and working from home.

“Unlike oil, where the market is global, gas markets are local and it is hardly possible to quickly replace supplies there. A complete embargo on gas imports from Russia is unrealistic in the short term, especially given the high dependence of some countries,” she wrote in an open letter group of influential economists.

Oil is mainly transported by tankers and partly pumped through a pipe, while gas is mainly delivered through gas pipelines. The market for tanker-carried liquefied gas has only recently emerged and is small: to replace all Russian pipeline gas in Europe with liquefied gas would require a reallocation of almost a third of the world’s annual supply.

The situation is complicated by the fact that the countries do not have a strategic gas reserve, following the example of an oil one, just as there are no free capacities to increase production in the world.

The EU bought 155 billion cubic meters of gas from Russia last year and expects to replace these volumes by two-thirds this year.

The European Commission’s optimistic plan assumes that more than half of this reduction will come from alternatives – non-Russian gas (40%) and renewable energy (13%), the rest – through reduced consumption (minus 10% if all of Europe agrees to turn down heating by just 1°C ). The IEA has similar proposals and another 10 point plan .

However, the plans are still being shattered by the harsh reality.

After Russia’s invasion of Ukraine, Europe has not reduced, but increased purchases of Russian gas. On the one hand, Russia has ceased to restrict supplies, as before the war, and on the other hand, the EU is trying to fill the empty storage facilities by at least 80% by November, although until recently it expected to pump 90% by October.

Other suppliers of pipeline gas in the EU will not be able to quickly increase its supply. The European Commission hopes that Norway, Azerbaijan, Libya and Algeria will replace no more than 10 billion cubic meters, or just over 6% of Russian supplies.

The EU cannot increase its own production, and clean energy alternative to gas requires money and time. It takes at least three years to build an average wind turbine farm, decades and billions of euros to build a nuclear power plant.

Therefore, a sharp rejection of Russian gas frightens large industrial countries, primarily Germany. Economists under the German government estimated its losses from the full oil and gas embargo at 3% of the economy, and the Central Bank acted even more gloomily and estimated the damage from the gas embargo alone at 5% of GDP, or 180 billion euros.

The EU is looking primarily at oil restrictions, not gas restrictions, but the resulting mechanism of “smart sanctions” may turn out to be universal and later spread to gas.

Among the options is the introduction of restrictions gradually and not all at once. For example, the supply of raw materials via the Druzhba pipeline, on which refineries in the center of Europe depend, is likely to be restricted later than imports by sea. As well as for some types of oil products, primarily diesel fuel, since the EU covers half of its needs in it through Russian supplies.

But there is another school of thought: to refuse abruptly, but inappropriately, in order not to give the Kremlin time to adapt, to force them to mothball wells and thereby cause maximum damage to oil production in Russia.

Economists call the import duty on Russian energy carriers an alternative to a full or partial embargo. Conseil d’Analyse Economique advises setting it at 40% and believes that in this case, imports will be reduced by 80%, and the losses of the countries most dependent on it will be three to four times lower than under a total embargo.

“Duties are preferable to quotas, since rental income, albeit minimal, will go to the EU. While with quotas, raising prices, albeit for the minimum volume of the remaining imports, will allow Russia to keep the rent. Another option is to limit prices, but here the rent will go to wholesalers. Therefore, the best option is a duty , “the authors of the study conclude.

It is also attractive because duties can be collected on a separate account and even promised to be returned to Russia later – minus the costs of restoring Ukraine.

Two other options for restricting oil imports to the EU from Russia involve financial sanctions.

The first is against banks. Since Russia now receives payments for oil and gas through Gazprombank, which has not been sanctioned, it actually plays the role of the Central Bank, said Robin Brooks, an expert at the Institute of International Finance (IIF), a leading global financial industry association.

“As long as Russia is allowed to export energy resources, it will have a current account surplus, which means it will increase its foreign exchange reserves. In which bank this happens, frankly speaking, it does not really matter. All of them are controlled by Putin, and he doesn’t care, the Central Bank is or Gazprombank. It’s just that the account has changed, but the currency continues to flow – both for current expenses and for the war in Ukraine,” he writes .

Therefore, an alternative to a ban on oil imports could be sanctions against all Russian banks through which payments for it can pass.

The second option is to prohibit insuring tankers with Russian oil. Russia’s own fleet is small, and it transports significant volumes by European tankers, primarily Greek ones.

Oil and gas exports allow Russia to stabilize the economy in the face of sanctions. Even if half of the foreign exchange reserves are frozen, the Kremlin receives about $1 billion of new currency every day from the sale of energy resources, mainly to the West.

According to Bloomberg Economics, these revenues of Russia this year will grow by a third and may reach $320 billion. As a result, the current account surplus will double even from last year’s record of $120 billion, primarily due to record gas prices, the IIF predicts.

Such a strong foreign exchange inflow will allow the Central Bank to relax capital controls, and help the government finance current spending in the face of a declining economy and non-oil budget revenues.

In other words, without a European oil and gas embargo, Western sanctions will not bring the desired result.

Will Russia be able to redirect oil and gas exports to other markets, primarily to China?

Gas – no, since the resource base of gas pipelines to Europe, the fields of Western Siberia are not connected to China. For this, the Power of Siberia-2 gas pipeline was conceived, but it is long and expensive to build it. And the existing pipeline to China starts 2000 km from Yamal and is connected to the East Siberian fields.

Oil is easier to bring in, since it is mainly supplied by sea, but tankers are needed for this. And not only new ones, in order to redirect the current European supplies via the Druzhba oil pipeline to Asia.

Even a reversal of existing maritime exports to Asia instead of the EU is unlikely, since the path to the Asian market is 10 times longer than to the nearest Mediterranean and North European ones. To transport such a volume over such distances, two hundred large-tonnage tankers, or a quarter of the world’s fleet of such vessels, will need to be continuously driven back and forth, empty half of the time.

“It is doubtful that Russia will be able to charter such a volume at an economically viable price,” said Craig Kennedy of the Davis Center at Harvard University.

Russia is already facing falling demand and prices for its energy resources as sanctions scare away buyers. The discount on Russian Urals oil exceeds a record $30 per barrel compared to the benchmark Brent, while before the war the discount was two or three dollars.

Following the fall in demand, Russia is forced to cut production. According to IEA estimates, in the coming months, even without a European embargo, it may lose up to a quarter of its production and more than a third of its exports of oil and oil products.

And the embargo will have even more serious consequences for the Russian economy, which is already predicted to contract by 10 percent this year. According to various estimates by economists, it will increase the impact by one and a half to two times and plunge Russia into the deepest crisis in all 22 years of Putin’s rule.