EU leaders have agreed to a partial ban on Russian oil imports, while exempting a key supply route to win Hungary’s support, as they seek ways to punish Vladimir Putin for his war against Ukraine.
The embargo will include petroleum and petroleum products but will exempt crude delivered by pipeline to Hungary, Slovakia and the Czech Republic, diplomats said.
The deal, which was reached at a late-night summit in Brussels on Monday, is expected to pave the way for an EU agreement on a much-delayed sixth sanctions package that also includes measures hitting Russian banks and other individuals.
Charles Michel, President of the European Council of Member States, welcomed the deal in a tweet, saying it “cuts off a huge source of funding for [Russia’s] war machine” and would exert “maximum pressure on Russia to end the war”.
But the deal was only won after weeks of haggling between member states, and at the cost of significant concessions offered to Hungary and its neighbors, as capitals weighed the mounting economic costs of multiple rounds of sanctions. against Russia.
German Chancellor Olaf Scholz said the deal proved the EU was united. He added: “We have agreed on new far-reaching sanctions against Russia. There will be an embargo on the majority of Russian oil imports.
Capitals have not decided how long any exclusion of Russian oil supplied by pipeline will last.
The ban will include oil purchases by sea, which cover around two-thirds of European imports from Russia. In addition, promises from Germany and Poland to stop oil imports through the northern part of the Druzhba (Friendship) pipeline are expected to bring the ban coverage to 90% by the end of the year. ‘year.
Keeping the pipelines free of any embargo has been a key demand from Hungary, which has argued that a ban would put its economy at risk, given its dependence on Russian crude. Viktor Orbán, Hungarian Prime Minister, also obtained measures to ensure that Budapest can still obtain supplies of Russian oil from other sources in the event of an “accident” with Druzhba, which crosses Ukraine.
The partial ban risks distorting competition in the EU oil market, with refineries connected to pipelines from Russia enjoying a price advantage. The price of Russian oil has fallen to a huge discount as European traders have shunned the country’s maritime crude since the invasion of Ukraine.
If exports through Druzhba reach the pipeline’s maximum capacity of 750,000 barrels per day, it would help Russia earn around $2 billion a month from EU buyers.
Russian Urals crude is trading at around $93 a barrel, compared to $120 for Brent, the international oil benchmark. While Russian oil delivered via Druzhba may not be as heavily discounted, depending on how the contracts are structured, Hungarian oil group Mol said it was enjoying “skyrocketing” margins for its refineries since March due to the “widening Brent-Urals gap”.
EU diplomats have said there will be a ban on the resale of refined products made from Russian crude as part of efforts to minimize market distortions, with some countries given a longer transition period long. There will also be a ban on offering services, including financing oil shipments, diplomats said.
Volumes shipped through Druzhba have actually increased since Russia invaded Ukraine, with EU buyers taking advantage of deep discounts or to stock up before any embargo.
Argus, an energy pricing agency, said that while sea shipments from Russia to Europe fell by 500,000 bpd, shipments from Druzhba rose by 100,000 bpd in April compared to January and are expected to increase again in May. Hungary increased shipments by 65,000 bpd, while Poland imported an additional 130,000 bpd, more than offsetting declines elsewhere.
The sanctions package includes the ejection of Sberbank from the Swift messaging system as well as restrictions on more Russian state-owned broadcasters and a new round of asset freezes and travel bans for individuals.
Brussels proposed an embargo on the purchase of Russian oil in early May, highlighting the EU’s difficulties in finding a way to increase its punishment against Moscow for its war against Ukraine without harming parts of the European economy which depend on Russian energy. The EU has already banned Russian coal but exempted gas from sanctions.
However, Gazprom, Russia’s state-owned energy company, cut off deliveries to Poland, the Netherlands and Bulgaria for refusing to pay for gas in roubles.
Additional reporting by Victor Mallet in Brussels, Eleni Varvitsioti in Athens and David Sheppard in London