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Jun 6, 2022
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Why You Shouldn’t Underestimate Western Sanctions

On June 3, the European Union introduced the sixth package of sanctions, which became possible after agreeing on the key issue of an embargo on Russian oil. The embargo will be partial and will only affect maritime transport of oil. Pipeline oil (via the southern branch of Druzhba) will continue to flow to Hungary, as well as to the Czech Republic and Slovakia. Restrictions will be introduced gradually: it was decided to abandon Russian oil within six months, and oil products – within eight months. According to Ch. Michel, by the end of 2022, the EU will refuse to import oil and oil products from Russia by 90%.

The process of negotiating the oil embargo was a real challenge for Brussels, which spent more than a month negotiating with Budapest and the governments of several other countries before reaching an agreement. Some European politicians have already announced the need for a respite in the sanctions war, as well as the red lines of sanctions. In particular, Belgian Prime Minister Alexander De Croo proposed to “pause” the issue of introducing new sanctions, giving an opportunity to assess the effect of existing ones. And Austrian Chancellor Karl Nehammer said that the issue of gas supplies cannot be the subject of discussion of new sanctions packages.

By all indications, sanctions do not come easy to the EU. Their introduction accelerates the already record inflation since the Second World War, reducing the quality of life of Europeans. New challenges are ahead – in the foreseeable future, a food crisis will most likely be added to the energy crisis. And even if it does not lead to famine in Europe itself, it can affect the countries of North Africa and the Middle East, provoking a new wave of migration unprecedented before. Ukrainian, as well as some European and American media, frankly call the new package of sanctions toothless.

Yet Russia, for all the resilience of its economy, should not underestimate the consequences of artificial restrictions. By imposing sanctions, the EU is shooting itself in the foot, but they will also be painful for Russia. Now the decline in oil and gas exports to the European continent is more than offset by rising prices for them. Even according to Bloomberg estimates, Russian energy export revenues will increase by at least 20% in 2022. However, the delayed effect of sanctions will sooner rather than later make itself felt.

There is no doubt that the EU has indeed begun to phase out Russian oil and oil products, replacing them with supplies from the Middle East, North Africa and Latin America. The necessary reorientation of export flows to Asian markets will require significant infrastructure investments from Russia (new pipelines, tankers, etc.) and logistical costs. The likely introduction of a ban on insurance of ships flying the Russian flag and a ban on entering the ports of the EU, the US and their dependent states in the short term may significantly complicate shipping for the Russian tanker fleet.

The unbalancing of the market will be accompanied by increased competition among oil sellers. Relations within OPEC+ are under threat. The oil-producing countries of the Middle East region, primarily Saudi Arabia, will probably want to take advantage of the pressure exerted on Russia in order to push it out of traditional markets not only in Europe but also beyond its borders. As early as this summer, the cartel may agree on an increase in oil production without taking into account Russia’s interests, returning to the traditional decision-making format within OPEC. The gradual lifting of US sanctions on Venezuela and Iran may also play a role. Now, from Washington’s point of view, it is Russia that is the most dangerous link in the traditional “axis of evil”, which means that all means are good to strike at it.

Sanction gaps will gradually be eliminated, for example, allowing the supply of Russian oil in mixtures. Now, as the American press reports, the main instigator of anti-Russian sanctions, the United States, does not disdain such mixtures. The “institutionalization” of discounts on Russian oil may also become a problem. Now China and India are buying Urals with a $30-35 discount to Brent. Such a discount is not a big problem at current prices in the region of $115-120 per barrel. But a decline in quotes to $90 and below – which cannot be ruled out – while maintaining such discounts, may already harm the Russian budget. And the new dependence on China and India, as the largest consumers of Russian oil, narrows the possibilities for price negotiations.

We should not forget that the already introduced packages of sanctions in March-April also have a delayed effect in many respects. For example, the ban on the export of Russian coal to the EU comes into force only in August. And problems with the supply of Russian steel products have affected the companies – Severstal, Magnitogorsk and the Novolipetsk Iron and Steel Works – only now, provoking a fall in their quotations and requests for tax revisions to the state.

The huge resource potential of Russia allowed it to easily survive the first sanctions strikes. But behind the apparent “Teflon” nature of the sanctions, one should not forget that the sanctions war is a war of attrition, the condition for victory in which is sustainability in the long term. The construction of new pipelines, debottlenecking of the Eastern Railway Range, accelerated import substitution and intensification of interaction within the framework of the EAEU, BRICS and other large integration associations should replace local economic victories and the opportunistic favor of oil prices.

Gleb Prostakov

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