Starved of fossil fuel income, Russia’s depleted army will be forced into a humiliating retreat.
CHIEF CITY COMMENTATOR
Ben Marlow is The Telegraph’s Chief City Commentator
May 5, 2022
The speed of the EU’s U-turn over Russian energy supplies has been breathtaking CREDIT: Inquam Photos/Octav Ganea via REUTERS
Five rounds of sanctions have failed to halt Vladimir Putin’s relentless and indiscriminate war machine. The Russian economy has not crashed. Indeed, there are signs it is recovering, having learnt to adjust to international counter-measures.
A sixth package of restrictions with a Russian oil embargoat its heart has the capacity to deal the decisive blow, cutting off Moscow’s ability to fund its illegal invasion while cruelly exposing the extent of Putin’s catalogue of miscalculations.
Among the Russian president’s costliest blunders was the expectation that Western unity would quickly fracture in the face of the Kremlin’s aggression.
Despite hints from Hungary that it might break with consensus, so far the opposite has largely proved true. A proposed end to all oil imports within six months is a powerful sign of just how much the international community is united in its condemnation of the war in Ukraine, and the collective determination to bring about its end as quickly as possible.
Even as recently as last month, an outright ban still seemed unthinkable. An embargo could crater the world economy and even help the Kremlin by boosting crude prices, Washington was loudly telling European allies.
In Germany, the predictions were positively apocalyptic in some circles. Martin Brudermüller, boss of chemicals giant BASF, warned of Germany’s “worst crisis since the Second World War”, while Chancellor Olaf Scholz repeatedly told allies that such a move would trigger a recession, not just at home but across the entire continent.
Economic minister Robert Habeck insisted it would take years to end Germany’s reliance on the Kremlin’s fossil fuels.
The speed of the U-turn has been breathtaking. Having reduced dependence from 35pc to 12pc of total imports, Germany expects to reach zero by the summer. “Germany is now all-in and willing to take the pain it involves,” Bjarne Schieldrop, analyst at SEB, said.
The sense of sheer outrage and horror at the actions of the Russian army has forced the establishment into a climbdown. The flattening of Volnovakha; the siege of Mariupol, including an air strike on a theatre that killed an estimated 600 civilians and the bombardment of the Azovstal steel plant; alleged war crimes in Bucha and other towns; and many more atrocities, has prompted a shift in public opinion.
Slovakia and Hungary, which depend heavily on Russian oil, may yet seek to stop further sanctions. But it is likely a compromise will be reached that will squeeze the Kremlin hard. And in any case, the direction of travel is clear.
Sceptics who questioned the willingness of the West to endure personal hardship in order to protect our liberal values will be forced to eat their words as voters demand a more emphatic response.
A ban on Russian oil will “not be easy” for European consumers, EU president Ursula von der Leyen acknowledged. Oil prices were $90 a barrel before the Ukraine invasion. The EU’s announcement sparked a 3pc rise to $109 but that is a long way off the highs of early March when prices shot up to $130 a barrel. Global markets have not panicked in the way they might have expected following a shock of this scale.
Brent crude price change since invasion
Traders will be waiting for more detail and for the plan to be signed off by the 27-member bloc but they will also be reassured by the EU’s decision to adopt a six-month window for Russian imports to be phased out, rather than an instant embargo. As those countries most tied to Russian crude, further time will need to be granted to Hungary, Slovakia, and the Czech Republic, to secure their backing.
Critics will argue a delay reduces the effectiveness of a ban because it affords the Kremlin time to find buyers in other parts of the world. By the same token it also minimises the shock to European households by allowing EU states room to line-up alternative supplies.
But ultimately whatever the timeframe, the West’s pain will be relatively minor compared to the economic shock that is set to be inflicted on Moscow. What is most striking is how far the EU is now willing to go to exact maximum damage. In proposing “a complete import ban on all Russian oil, seaborne and pipeline, crude and refined”, as Von der Leyen described it, the embargo is about as comprehensive as any commentators had envisaged.
And yet, it is reportedly preparing to go even further by also targeting the Kremlin’s ability to sell oil and refined products outside of the EU.
A ban on European vessels and companies from providing services – including insurance – linked to the transportation of Russian oil around the world, including technical assistance, brokering and financing, is under consideration, while the transportation of Russian oil to third countries is also set to be outlawed, according to Bloomberg.
It threatens to deliver a hammer blow to Russian attempts to divert exports to new markets, rendering it untouchable. Schieldrop calls it a new energy war composed of “good oil” versus the Kremlin’s “bad oil”.
Some analysts expect China and India to leap into the void but Europe gets 5m barrels a day from Russia, too much even for a Sino-Indo coalition to absorb.
The logistics don’t allow it anyway. With much of Moscow’s infrastructure, including pipelines and ports facing West, an army of tankers would be required to make the arduous journey either through the Black Sea or via the Baltics to Asia, assuming sanctions aren’t flouted along the way.
Russia’s reliance on energy exports, together with the sheer scale of its dependency on the European market, is what makes an EU embargo so powerful. Oil and gas revenues accounted for 45pc of Russia’s federal budget in 2021 and more than half the oil it produced last year ended up in Europe. If oil products are included the proportion leaps to 70pc.
As of last week, European states had spent an estimated €44bn ($46bn) on Russian oil and gas since the invasion began at the end of February. Starved of the bulk of its fossil fuel income, Putin’s depleted army will be forced into a hasty and humiliating retreat.