Insurance Is the Real Weapon in Europe’s Russian Oil Embargo

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The European Union’s partial embargo on Russian oil sounds impressive, but it is the bloc’s insurance ban on crude shipments that packs the most punch.

After weeks of political wrangling, all 27 countries in the bloc finally agreed to ban shipments of Russian crude and refined fuels overnight on Monday. Hungary’s Prime Minister

Viktor Orban

—an EU bugbear and pal of Russian President

Vladimir Putin

—had been the holdout. The phased-in embargo is forecast to affect about 90% of the bloc’s total Russian crude imports by the end of the year, with Hungary, Slovakia and the Czech Republic expected to use an exemption for pipeline supplies.

“We want to stop Russia’s war machine and cut the financing of Russia’s military capacity,” said European Council President

Charles Michel.

The import embargo sounds good, but alone it would reorient rather than reduce Russian oil deliveries. “An EU ban on crude, if it is just banning the crude import, basically lengthens supply lines,” says Alan Gelder of Wood Mackenzie.

The global energy supply map is already being redrawn, and the embargo will cement the changes. Before the conflict, Russia exported about 5 million barrels a day, mostly to Europe. Since its invasion of Ukraine, its exports have been relatively stable at around 4 million barrels a day, with more sent to India and Asia. Many independently sanctioning European buyers already pivoted to U.S. and African suppliers as contracts expired.

Crucially, though, the sanctions also include a phased-in ban on insuring European ships that carry Russian oil, according to Wall Street Journal reports on Tuesday. This detail will have a more meaningful impact on Russian exports as Moscow relies heavily on European insurers and shippers when transporting its oil around the world.

The move seems likely to reduce Russian exports. The rub is that it also will push up global prices, blunting the hit to Moscow’s cash flows and exacerbating consumers’ cost-of-living crisis. Extra deliveries from the oil-producing cartel could ease the pain, but are unlikely. Secondary sanctions, like those applied to Iran, entail a similar Catch-22.

Hungary, Slovakia and the Czech Republic are expected to use an exemption for pipeline supplies.



Photo:

Janos Kummer/Getty Images

Brent touched a two-month high of $120 a barrel on Tuesday, propelled by the EU ban and expected growth in demand as Covid-19 lockdowns ease in China. Since the invasion of Ukraine, uncertainty in an already tight market has lifted prices, cushioning Russia’s fall in volumes even as it sold at a discount of around $30 a barrel.

Academics, economists and some officials have mooted some kind of price cap or tariff to keep Russian oil supply in the market while limiting the revenue flowing back to Moscow. The details vary, but the basic idea is to create a coalition of buyers to purchase Russian crude at a below-market price. Creating and managing the coalition would be challenging. Also, Russia might choose not to participate, although shutting down its oil production would risk costly or even permanent damage to its oil reserves.

The most direct way to cut Moscow’s revenue would be to use less energy. That generally takes time, but some quick-to-implement changes could add up in a tight oil market. Reducing EU heating by 1 degree Celsius would cut gas use by 10 billion cubic meters, according to the European Commission. Lowering freeway speed limits by 10 kilometers an hour in advanced economies would save around 400,000 barrels of oil a day, according to the International Energy Agency.

In normal times, changing consumer behavior is hard, but there are precedents for collective action in national emergencies. In 1943, during World War II, grow-your-own “victory gardens” provided around 40% of the produce in the U.S. European households, squeezed by high energy bills and shocked by the war in Ukraine, might prove surprisingly fertile ground.

European Union leaders took a big step in the economic fight against Moscow over its invasion of Ukraine by agreeing to block 90% of Russian oil imports by year-end. The embargo faced opposition from countries highly dependent on Russian crude, especially Hungary. Photo: Olivier Matthys/Associated Press

Write to Rochelle Toplensky at [email protected]

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