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Jun 3, 2022
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EU lays oil mine under itself

EU lays oil mine under itself

Photo: Egor Aleev / TASS

The European Union is considering measures aimed at the possibility of purchasing Russian oil at a price below the market price, while refusing to import it. The President of the United States told reporters Joe Biden.

The head of the White House noted that Europe is now deciding how to contain fuel prices and further limit oil purchases in Russia

“There are all sorts of questions being considered about what can be done. Maybe even buy oil at a limited price,” he said.

According to him, one of the options involves the preservation of Russia’s “irresistible need” to sell oil, but “at a significantly lower price than the one that is currently set on the market.”

Apparently, Biden was hinting at an idea that has been nurtured in Brussels for some time – in case the embargo fails, they propose to impose a duty on Russian oil, which will make it uncompetitive. For the leadership of the EU, initiatives are attractive in that a qualified majority is sufficient to introduce a duty, so Hungary will not be able to veto such a decision, unlike the situation with the embargo.

Another option for pressure is a ban on insurance for ships carrying oil from Russia. True, it has already raised objections from Greece, Cyprus and Malta.

“To allay their concerns, the ban will be phased in over six months, extending the original offer of one month,” the Wall Street Journal reported in late May.

At the same time, the publication noted that, according to traders and ship owners, the termination of insurance for tankers with Russian oil is one of the most powerful financial instruments of the EU.

The well-known Russophobe Prime Minister of Poland calls for even more radical steps Mateusz Morawiecki. He proposes to ban third countries from buying oil from Russia. That is, in fact, to introduce secondary sanctions.

“This is the possibility of imposing sanctions in such a way that Russian oil could not be sold also to third countries, to countries outside the European Union,” he said.

Even the head of European diplomacy has doubts about the reality of such a step Josep Borrellwho acknowledged that the EU cannot “prevent Russia from selling oil to other countries”.

Vyacheslav Kulagin, Head of the Department of the Institute for Energy Research of the Russian Academy of Sciences believes that each of the announced measures can also affect Russian supplies, and boomerang to the guardians of these measures.

– Secondary sanctions and attempts to ban other countries from buying Russian oil are actually sanctions not against Russia, but against these countries. This is a declaration of economic war on these countries. The question arises – are the EU countries ready to enter into open conflict with specific players in Asia?

This is a separate topic, but at the same time, at the very beginning of the whole history, both in the EU and the IEA (International Energy Agency) have repeatedly made statements that if Russian oil leaves the market, there will be a collapse, because no one is able to replace these volumes today . Moreover, even though Russian oil is now being supplied, albeit in a reduced volume, to European countries and, accordingly, supplies to the Asia-Pacific basin are expanding, just the other day the head of the IEA said that a rather scarce period of increased demand is expected, and especially a difficult situation will be in Europe, where there may be a shortage of diesel fuel and jet fuel. This is in the current situation, when deliveries from Russia have decreased by about 17% over the year, although the EU sanctions have not yet entered and there was a fairly good start to the year. Russia has not yet reduced production, and the world is already quite tense and in short supply.

If he talks about Russia leaving the market, then the question is – who will come? The statistics show that most of the countries are below the allowed quota. They simply do not have the capacity to additionally give to the market, although they are allowed to do so. The OPEC+ deal did not deter countries from increasing production. If they don’t do it even at good prices, then they don’t have the physical capacity to do so.

In this situation, any further restrictions on Russian oil will lead to even greater problems for the global market. Prices will rise. The situation is not the one that happens with a surplus.

“SP”: – According to the Financial Times, Saudi Arabia is ready to increase oil production if Russian production falls due to sanctions.

– Now, of all the players, only two countries are really able to increase oil production – Saudi Arabia and the United Arab Emirates. At the same time, the UAE has a limited volume, the CA has more opportunities, but it should be noted that Saudi Arabia honestly says “if Russia significantly reduces oil production.” There is OPEC monitoring, which lists the dynamics of production in all countries – there is no significant reduction from Russia. According to the data given by the Russian side, there was some failure, then the restructuring of supply chains and the restoration of volumes. There is no reduction of 30-50% and not even close.

Last year, our production was 524 million tons, and this year, according to estimates announced Alexander Novaksomewhere around 480-500 will be. This is a few percent (reduction in production – ed.). With such a volume of production, there is no withdrawal of Russia from the market. There are sensible people in Saudi Arabia who are well aware that if they start throwing out additional volumes, this can collapse the market and prices. Why do they need it? Therefore, they clearly stated that two conditions are needed for them to increase production: 1. Russia significantly reduces production volumes and 2. If this is agreed as part of the OPEC+ deal. If you take the OPEC+ members (even without Russia) and the fact that they are at the maximum production, it is beneficial for them that the market is a little scarce and prices are higher. For them, it is not attractive for someone to increase production and bring down prices. Saudi Arabia is well aware of this.

“SP”: – There is also an idea with special duties for Russia. How will it affect? Will oil prices rise?

— Our prices are tied to world quotes. If a duty appears in some direction, then these are additional costs for buyers and suppliers. This is not an automatic price increase. If Russian oil was the main for the Brent marker and formed it, and duties were imposed on it, then this would automatically translate into a rise in prices. We are in a different configuration, so the impact on prices will be negligible.

You can at least introduce a 100 percent duty. The question is that they wanted to limit the supply of oil through pipelines from Russia. There are EU members who do not agree with this. We came to a compromise solution – it is possible through pipelines, but restrictions by sea. The duty can be set without the consent of all countries, but then it turns out that there was a certain agreement at the EU level, and here it is violated in a roundabout way. This is already a serious issue in terms of the unity of the EU and the mechanism of its work.

This is a time bomb that raises a question for EU members – “if our opinion is ignored, it is bypassed and we are deceived, how optimal is this union for us?” The EU has already been shocked by the UK’s exit, but this will be a concrete example of a violation of the agreements reached within the EU, and means that the opinion of specific countries that are members of it can be ignored. This is a mine under the EU, with which one must be more careful, because today they will ignore the interests of one side, tomorrow the other, and then they will be surprised. Why countries ignore EU interests or decide to live their own lives.

Traditionally, in Brussels, this was treated with caution. Political statements can be made, even physically pushed through, but there are problems.

In addition, if they introduce a large duty on Russian oil, Russia will say that it is unprofitable for it to supply and stop deliveries. Not to mention the violation of many violations of WTO rules. Deliveries are carried out under certain agreements and regulatory framework, including duties. They just can’t be set or uninstalled.

“SP”: – And what about insurance, which they are also trying to limit?

There is a problem and it needs to be taken seriously. The scheme of insurance and reinsurance is quite cunning. Deliveries worth billions of dollars usually require reinsurance.

The vessel can theoretically sail without insurance, but many of the world’s carriers still prefer to insure. In addition, not all ports are ready to accept uninsured ships, because the ship is insured, the goods are insured and the ship’s liability for damage to third parties is insured. If, for example, a ship catches fire in the port, everything should be covered by the insurance company. If not, questions arise.

The problem is that it is not clear who to impose sanctions on insurance. With regard to ships flying the Russian flag? But the flags are quietly changing, under which they just do not swim. Regarding registration? But in some very small states, more maritime transport is registered than, for example, in the United States. Less taxes. What is transporting Russian oil? How do you know what is being transported? There are also mixing options. etc. These sanctions are not easy to impose, but they are sensitive.

As with the dominance of the dollar in the global financial system, the global maritime insurance system is dominated by companies based primarily in London. And if so, you need to look for alternatives. In Russia, I think, appropriate solutions will be found for domestic shipping companies. But, for example, a ship insured in Asia can sail everywhere, but if a shipowner insures a ship in Europe, it turns out that it cannot enter Russian ports, there are some restrictions. Why, then, does the shipowner need an insurance company that, for various political reasons, can suddenly restrict his ship’s movement without asking him to do so?

I think the same European insurers will inform the management that they will start losing customers. And not even Russian, but world ones, due to the fact that it is not clear what insurance coverage now applies to, they can be withdrawn etc. It will be more convenient to insure in other countries.

For Asian players, this is good enough news to transfer the insurance base to their financial institutions, at least when servicing their market, because this is a lot of money.

These sanctions may pose a threat to the established and very convenient system for the Europeans. You have to be very careful and take into account the long-term consequences.

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