In a few short weeks, assumptions have been dramatically overturned on how far Russia was prepared to go in its war against Ukraine — and how far western countries would go in response. The EU is edging towards a phased embargo on Russian oil exports, on top of similar US and UK moves. This is a momentous but risky move. The US has worried that moving too fast could drive up global oil prices; Germany has warned of the economic hit even while signalling it will back an embargo. Handled carefully, however, the costs can be contained. And the pain for Russia is ultimately far greater.
Though Russia’s gas exports often attract more attention, Moscow earns much more from selling oil and oil products — the biggest single source of economic rents to Vladimir Putin’s regime and war machine. Rystad Energy, a research group, estimates that higher prices mean the Kremlin is set to generate $180bn in oil tax revenues this year, despite traders refusing to take some Russian crude — equivalent to 60 per cent of Moscow’s 2022 federal budget.
The conundrum for democracies has been how to stop Russian oil flows without driving crude prices so high that they crash the world economy — so, alternatives such as punitive tariffs or a price cap have been examined. Spare oil is scarce; Saudi Arabia and the United Arab Emirates are estimated to have enough capacity to replace nearly all the crude the EU buys from Russia, but it is not clear Opec and US shale producers are ready to increase output as fast as needed. Western capitals have been anxious too to ensure higher global prices and an ability to divert some exports elsewhere do not enable Russia to keep its oil income steady.
An EU embargo phased in by the year end allows more time to engage in intensive diplomacy to secure alternative supplies and sort out logistics. Russia’s president, meanwhile, has instructed his ministers to draw up plans for new export infrastructure to serve “friendly markets”. Yet diverting supplies to new buyers will be harder for Moscow than many have assumed.
Oil is much less reliant on pipeline deliveries than gas. But the west buys 70 per cent of Russia’s oil and oil product exports, and the great bulk of Moscow’s oil pipeline and maritime export routes point west. Moscow’s one oil pipeline to China — which buys only a fifth of its oil exports — is at full capacity.
Redirecting oil by sea to big Asian importers such as China and India would require scores of supertankers making weeks-long journeys from Russian Baltic and Black Sea ports. Many shipping companies may shy away from handling cargoes for fear of being hit by sanctions — and rival suppliers will fight to preserve market share.
The tricky geology of Russia’s oilfields also means it cannot turn off supplies as easily as, say, Saudi Arabia. If Russian wells are capped as there are no buyers, many may be difficult or unviable ever to reopen. Some analysts argue this gives western capitals considerable potential clout with a Russian leader facing the loss of oil export markets in months and lasting damage to an economic flagship.
They could offer — in exchange for a ceasefire in Ukraine — to allow Russian exports to continue, but with customers paying into an escrow account from which Moscow can withdraw money only for essential purchases. Or a punitive tax on oil sales could be imposed, with proceeds going to rebuilding Ukraine. The idea of Russia’s leader ever conceding to such arrangements may seem fanciful; indeed, the more his forces struggle in Ukraine, the more Putin is escalating his threats, requiring careful calculation by western counterparts. But only weeks ago an oil embargo seemed unthinkable too.