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..Bringing Russia’s oil exports to zero isn’t going to happen — and it wouldn’t be all that desirable either.

The European Union is working toward a ban on imports of oil from Russia, as well as targeting the country’s wider trade through sanctions on shipping insurance. But it needs to realize that reducing Russia’s oil exports to zero is neither achievable nor desirable.

DCO Global News
Published on May 9, 2022
By Odoh Dominic Chukwuemeka

Hungary, Slovakia and Croatia are already threatening the bloc’s unity over a proposal to phase out imports of Russian crude over the next six months and purchases of refined products by the end of the year. They need to be taken seriously, even if their arguments aren’t accepted in full.

All three countries sit astride the southern leg of the Druzhba pipeline system — more than 3,000 miles of pipes that carry Siberian crude deep into Europe. Their refineries were built specifically to process the particular blend of crude pumped from Russia. And they will all struggle if they are forced to find alternatives by the fall.

It’s true that alternatives are available. The characteristics of the Russian Export Blend Crude Oil, more commonly referred to as Urals crude, can be matched by blending crudes from other places — but it will be more costly. So it’s not that the refineries in Hungary, Slovakia and Croatia won’t be able to operate; rather, they won’t be able to operate as efficiently or as profitably.

Granting them delays won’t derail sanctions, but it will give them a huge financial boost as they continue processing cheap Russian crude, while their competitors are forced to find costlier substitutes.

Of course, that’s no reason to abandon the aim of ending Europe’s purchases of Russian crude. While the bloc should extend the deadline for those countries, it should also require a sequential reduction in the volumes of Russian oil they process over that period — just like the Obama-era sanctions on Iranian crude did for selected Asian customers.

While the volumes involved aren’t insignificant, they’re not huge. Data from Russia’s oil-pipeline monopoly, Transneft PJSC, show combined deliveries of crude to the three countries of about 240,000 barrels a day in 2021.

That’s about 10% of the total exports of Russian crude Transneft handled going west last year and less than 7% of total shipments to “far abroad” — countries beyond the borders of the former Soviet Union.

It’s better for the EU to accept the gradual reduction in those volumes than to risk the entire sanctions package.

Imposing sanctions on Russia’s refined products exports, however, raises a different set of challenges.

Special pleading should hold less sway. Every European country is going to face the issue of securing alternative supplies. Because refined products are made to meet the regulatory standards of customers, there is much less chemical variation than there is among naturally occurring crude oils. Those standards vary in different parts of the world, but diesel fuel produced to meet EU specifications in a Middle Eastern refinery can substitute for a similar product from Russia.

So, prices are going to go up, but they will go up for everyone. The real questions are: What do we actually mean by Russian refined products? And can we cope without them?

In terms of definition, Shell Plc Chief Executive Officer Ben van Beurden has now answered the question I posed last week: Is diesel that’s produced in an Indian refinery that processes Russian crude considered to be Indian or Russian?

During the company’s first-quarter results presentation last week, Beurden said, “we do not have systems in the world to trace back whether that particular molecule originated from a geological formation in Russia.” In defining what is sanctioned, he added, if a product is “substantially treated, reformed, changed it actually loses its origin.” In other words, diesel exported from an Indian refinery processing Russian crude should be considered Indian diesel.

The alternative would be to impose sanctions on all the products from every refinery that processes Russian crude. In a global market where supply is already tight, particularly for diesel-type fuels, that would be economic suicide.

Russian oil will continue to find its way onto the market. But real costs will be inflicted on the country’s oil industry and government revenue. Sanctions on direct refined products exports will hit the refining sector in Russia, and that will reverberate along the oil supply chain to production operations in Siberia and elsewhere. Self-sanctions are already having that effect.

Shutting off the European market, which is Russia’s closest and most profitable, will force exports to be shipped longer distances. And then sanctions on shipping will add to the cost of delivery. A next step could be the sort of secondary sanctions imposed on Iranian and Venezuelan crude by the U.S., designed to squeeze Russia’s markets in Asia.

Perhaps it won’t come to that. After all, the purpose of the sanctions is not to inflict economic damage on Russia for its own sake — whatever the Kremlin may say to the contrary — but to persuade Vladimir Putin to end his invasion of Ukraine. I’m not convinced it’ll work, but that’s no reason not to try.

By Odoh Dominic Chukwuemeka

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