EU sanctions: How an oil embargo would hit Russia

Enlarge image

A large part of the Russian oil arrives in the EU via the Druzhba pipeline

: an oil embargo would force Russia to transport it by sea – that is time-consuming and expensive

Photo: Patrick Pleul/dpa

Increase the pressure on the Putin regime: After the coal embargo that has already been passed, the EU states are examining an embargo on Russian oil.

The United States was the first country to ban oil imports in response to Russia's war of aggression.

US President Joe Biden announced on March 8 that he would no longer accept oil supplies from Russia to the US.

Great Britain will also say goodbye to Russian oil completely by the end of the year.

As France's finance minister announced on Tuesday, an EU oil embargo is in the works.

Should the EU states actually bring themselves to stop buying Russian oil, Russia would have to start looking for willing buyers outside the West.

There are already indications that Asian traders are likely to step in.

While buyers in north-west Europe are sanctioning themselves and cutting trade with Russia accordingly, buyers in Asia are increasing their Russian oil imports, the International Energy Agency (IEA) reports.

Buyers in Asia ramp up Russian oil imports

The focus is on India and China.

Both states continued their trade relations despite the war with Russia.

India in particular increased its oil purchases in order to benefit from discounts on Russian crude oil.

Analysts expect China to be the next country to expand imports, filling some of the West's gap.

With 1.6 million barrels per day, the People's Republic is the largest buyer of Russian crude oil.

Although the country's zero-Covid strategy is currently depressing oil demand, the country could use the additional imports to fill its strategic reserves.

Instead of going to Europe, Russia would then have to transport large quantities of its oil to Asia.

But the oil cannot simply be diverted to the East that easily.

A large proportion of EU imports of Russian oil arrive via the Druzhba pipeline.

An oil embargo would therefore force Russia to use significantly longer and more expensive transport routes for its crude oil exports.

Russia needs giant tankers - and suitable ports

Without a new pipeline to China, Russia would have to divert its oil to Russian ports and ship it from there.

This requires giant tankers, so-called Very Large Crude Carriers (VLCC), which can transport two million barrels per trip and are therefore more efficient than smaller tankers over long distances.

However, the giant tankers cannot land directly at the Russian Black Sea and Baltic Sea ports.

According to Credit Suisse analyst Zoltan Pozsar, this is the first logistical problem when Russia sells its oil to China instead of Europe.

The ports of Primorsk and Ust Luga on the Baltic Sea are not deep enough for VLCCs to dock.

New trade routes have a high demand for ships

Accordingly, the oil first has to be reloaded from smaller ships, so-called Aframax, to the large tankers in other ports before they can set course for Asia.

According to analyst Pozsar, the transfer from the smaller to the larger ships alone takes several weeks, and the subsequent journey to the east takes another two months.

For comparison: Aframax ships are on the road for about one to two weeks to transport the oil from the Russian Baltic Sea ports to Europe.

According to Pozsar, another problem is the availability of ships.

Many ships will be necessary for transport on the new trade routes, as these not only transport a product that was previously transported by pipeline, but also because the oil has to be transhipped en route.

The result: a shortage of ships that drives up freight rates.

From a small ship to a supertanker: oil transshipment point in the Mediterranean

Since the Ukraine war, according to the Bloomberg agency, more and more giant tankers are loading Russian crude oil from smaller vessels in the Mediterranean Sea and elsewhere, with the Mediterranean Sea likely to become the preferred place for transhipment of Russian crude oil cargoes for transport to Asia.

A VLCC can hold the charges of three smaller Aframax.

Freight rates for Aframax in the Mediterranean increased by more than 70 percent in March compared to January, according to an analysis by OPEC.

Russia will probably not be able to simply pass on the high transport and logistics costs that arise from this to Asian buyers.

"China is aware of Russia's problematic situation and will massively depress the price of oil," Artem Kochnev from the Vienna Institute for International Economic Studies told the editorial network Germany.

If Russia still wants to sell oil, it can only do so well below the market price.

Russia already has to sell its Ural crude oil much cheaper

Even without a European oil embargo, the Kremlin is already having to accept high discounts on its Ural crude oil.

While the difference between a barrel of Brent crude and the Russian Urals in the pre-Ukraine war was often no more than a few dollars a day, the Urals discount widened to around $35 in mid-April.

How great the pressure is on Russia to find buyers was already evident last week.

Russia wants to sell its oil and oil products to friendly countries in any price range, Russian Energy Minister Nikolai Shulginov said.

In principle, crude oil prices in the range of 80 to 150 dollars per barrel are possible.

Moscow is currently focused on ensuring the oil industry continues to function, Interfax said.

Rising freight rates and a domino effect

Experts, on the other hand, consider the consequences of an oil embargo for the EU to be manageable.

They expect a certain domino effect: If Russian exporters redirect their oil supplies to China, quantities would be freed up in other parts of the world, which in turn could be diverted to Europe.

In addition, oil-producing countries such as the USA or Saudi Arabia could expand their production to replace missing volumes from Russia.

The western partners would also have various options to dampen a further possible rise in oil prices, even in the event of an embargo.

This includes the release of oil reserves, energy savings or restrictions on price speculation on the commodity exchanges.

However, Western countries are likely to feel the effects of increased freight rates, which are likely to result from Russia's increased demand for ships.

But these will be costs that will also hit Russian oil companies hard.