European Union leaders have agreed to embargo most Russian crude imports into the 27-member bloc by the end of the year as sanctions are ramped up following Moscow’s invasion of Ukraine.
The embargo covers Russian oil delivered on tankers but allows a temporary exemption for imports delivered by pipeline, a move that was crucial to bring landlocked Hungary on board a decision that required consensus.
Poland and Germany, located on the northern leg of the so-called Friendship pipeline, have committed to wind down purchases of Russian oil by end of the year as they are capable of setting alternative import routes, mostly via their seaports.
Slovakia, the Czech Republic and Hungary, which receive Russian oil via the southern leg, may take longer to disconnect because of their landlocked status.
Ursula Von der Leyen, president of the EU’s executive branch, the European Commission, said the punitive move would “effectively cut around 90% of oil imports from Russia to the EU by the end of the year”.
EU Council President Charles Michel said the agreement covers more than two-thirds of oil imports from Russia, reported Associated Press.
Hailing the deal on Twitter, he said it would cut “a huge source of financing for [Russia’s] war machine” and would deliver maximum “pressure on Russia to end the war”.
“More than ever it's important to show that we are able to be strong, that we are able to be firm, that we are able to be tough," Michel said.
EU leaders also agreed to provide Ukraine with a €9 billion ($9.7 billion) tranche of assistance to support the war-torn nation’s economy, Michel wrote.
The new package of sanctions will also include a freeze on assets and travel bans on named individuals, while Russia's biggest bank, Sberbank, will be excluded from SWIFT, the major global system for financial transfers from which the EU previously banned several smaller Russian banks in its territory.
Michel said the new sanctions, which needed the support of all 27 member countries, are to be legally endorsed by Wednesday.
Both Michel and von der Leyen said leaders will soon return to the issue of Russian oil imports, seeking to guarantee that pipeline volumes to the EU are banned outright at a later date.
Hungarian Prime Minister Viktor Orban had stressed that he could only support the new sanctions if his country’s oil supply security was guaranteed.
Hungary receives more than 60% of its oil from Russia and depends on crude imported via the Soviet-era Friendship pipeline.
He also secured measures to ensure that Budapest could still obtain Russian oil from other sources if there was an “accident” with the pipeline which crosses Ukraine, the Financial Times reported on its website.
Orban had been adamant on arriving at the summit in Brussels that a deal was not in sight, stressing that Hungary needed its energy supply secured.
Hungary reportedly also relies on Russia for 85% of its natural gas demand.
Russian exports to Asia untouched
According to April estimates of Russian oil exports published by Moscow based industry journal InfoTEK, country’s oil producers shipped about 2 million barrels per day of oil to international markets from three key ports in the west of the country — Primorsk, Ust-Luga and Novorossiysk.
Poland and Germany imported a total of 492,000 bpd in April via the northern leg of the Friendship pipeline. On the southern leg, Hungary topped the list, buying some 128,000 bpd of Russian oil, followed by Slovakia with imports of 122,000 bpd and the Czech Republic with 72,000 bpd.
However, the approved embargo is not expected to directly impact Russian oil exports to Asia that are running via two major outlets — a direct pipeline link from East Siberia to China, and the Kozmino marine terminal in the country’s far east.
In April, according to estimates, Russia sent about 785,000 bpd via this link to China, and another 750,000 bpd via Kozmino to destinations in Asia.
The EU deal to cut most of Russian oil imports would force Moscow to offer its crude at a lower price to others, EU High Representative for Foreign Affairs & Security Policy Josep Borrell said on Tuesday.
“We are the most important client for Russia,” Borrell told Reuters said on arriving to the second day of EU talks about the latest in Russia’s war against Ukraine.
Energy prices jump
The late night announcement on the Russian oil embargo moved oil prices up in early trading on Tuesday, although the rally soon ran out of steam.
According to the ICE commodity exchange in London, front month August contract for deliveries of Brent blend rose by 2% to about $120 per barrel, but subsequently dropped back through that floor.
As contracts for Brent deliveries between September and December are priced lower against August supplies, market players expect just a potential short-term shortage of supplies, with global availability of oil to improve in the second half of this year.
However, according to the ICE data, a different scenario is seen at the gas market, with deficit of gas possibly becoming more acute later this year.
The September gas delivery contract has moved up by over 4% to trade at over €97 ($105) per megawatt in early trading on Tuesday.
September and October gas supply contracts are now traded higher than the front month July contract.
Russian gas giant Gazprom has indicated that it will continue to disconnect European customers that do not accept its unilaterally changed payment terms, despite possible international arbitration claims.
Gazprom said that it halted deliveries to Dutch gas player GasTerra on 31 May that contracted to receive about 2 billion cubic metres of Russian gas between June and October.
An earlier statement from the company said that it had decided not to switch to new payment terms that Gazprom had demanded, which involved the setting up of accounts with Gazprombank in Moscow that would be paid in euros and then swapped for rubles.
Denmark's gas trader Orsted has warned that Gazprom could also halt its supply soon but assured that the halt would not immediately put Denmark's gas supplies at risk.
Gazprom had already stopped pipeline gas supplies to Bulgaria, Poland and Finland citing their refusal to adopt the payment scheme.