Seven Theses on How Sanctions Against Russia Work

29 December 2022, 11:59 AM
Markus Spiske/Unsplash

Markus Spiske/Unsplash

The EU and the G7 took two ambitious steps in the direction of reducing dependence on Russian energy carriers

This December, two events took place whose full consequences for the world and Ukraine will be fully realized only later. The EU and the G7 took two ambitious steps towards reducing dependence on Russian energy and strengthening their own energy security.

The first event. On December 5, 2022, the EU embargo on the supply of Russian oil by sea came into effect. At the same time, the G7 and Australia introduced a price ceiling for crude oil at the level of 60 USD per barrel. This price restriction applies to crude oil, petroleum oils, and oils derived from bituminous minerals originating in or exported from Russia. Earlier, EU countries refused to buy Russian oil, so this step concerns third countries.

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If this ceiling is exceeded, exporters will not be able to provide insurance for its transport by tanker, which is dominated by European companies. According to some estimates, during April-May 2022, 68% of deliveries of Russian crude oil were carried out by ships owned by companies from the EU, Great Britain and Norway, of which Greek tankers alone accounted for 43% of transportation. The share of carriers from these countries in deliveries to India and the Middle East was80%. At the same time, 97% of tankers were insured in only three countries — Great Britain, Norway, and Sweden.

And from February 5, 2023, this embargo will also apply to oil by products. Thus, the European Union has started the implementation of sanctions decisions set forth in its sixth sanctions package from June.

According to Bloomberg, during the first full week of the embargo on Russian crude oil exports to the EU, its volumes fell by 1.86 million barrels per day to 1.6 million barrels. This fall had reasons in addition to the embargo, so the effectiveness of the embargo itself can be assessed only later.

Event two. On December 19, 2022, after long discussions lasting many months, the energy ministers of the EU countries decided to introduce a gas price ceiling under which contracts can be concluded by the EU countries. The mechanism will enter into force on February 15, 2023 and will continue for a year. It is noteworthy that the final value of the price ceiling turned out to be significantly lower than the initial EC proposal (275 euros).

This decision paves the way for the implementation of the EU solidarity policy to meet the needs of member countries in natural gas. We are talking about the joint purchase of gas on world markets and the redistribution of gas between EU countries as needed. In addition, the decision to accelerate the transition to renewable energy sources has been green-lighted. Projects in this area will be designated "extremely important for society," and the process of issuing necessary permit documentation will be accelerated.

These decisions indicate radical changes in the attitude of the West in general and the EU in particular towards energy cooperation with Russia. In 300 days, our partners went from perceiving Russia as an "eternal" basic supplier of energy to abandoning Russian gas and oil.

Today, the debate on energy carriers is mainly focused on the effectiveness of the policy of restrictions on the oil and gas trade, although their importance goes beyond the scope of the sanctions policy. Ukraine must also take into account new realities in its policy. What exactly does this mean?

First of all, these measures are, in one way or another, a response to Russia's aggression. Oil sanctions are aimed at limiting Russia's economic ability to pursue aggression. At the same time, under certain conditions, the oil price ceiling can also play an anti-inflationary role.

The gas price ceiling is part of the so-called market adjustment mechanism. Its purpose is to counteract the excessive growth of gas prices and, accordingly, inflationary pressure. At the same time, the corresponding Decision of the European Council begins with the statement that the reason for the increase in gas prices in the EU countries is Russia’s military aggression against Ukraine, the unprecedented reduction of natural gas supplies from Russia to the EU, and Russia's conversion of gas supplies into weapons.

Secondly, the introduction of price ceilings for oil and gas can be considered a certain step towards creating a kind of global cartel of buyers of Russian oil and gas. In the case of oil, maintaining price discipline allows exporting companies to obtain appropriate insurance and logistics services. Should the maximum gas price be exceeded within three days, the price restriction comes into force.

Thirdly, the success of price restrictions will stimulate the search for similar collective response mechanisms to future price shocks. In addition, the complex and controversial process of harmonizing national positions on sanctions and restrictions on the energy trade with Russia contains many lessons for improving decision-making mechanisms within the EU. We are talking about the development and implementation of EU decisions in crisis situations.

Fourth, these measures are considered as a temporary forced reaction to the extraordinary security and economic challenges caused by Russian aggression against Ukraine.

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At the same time, there is a question about future EU policy in relation to Russian energy carriers, depending on how the war ends. It is one thing if a Ukrainian victory were to lead to the collapse of the Putin regime. It would be another if Russia were to be defeated, but the regime as such were to remain preserved as a whole. This policy will also be determined by the results of replacing Russian energy sources with supplies from other countries and the pace and scale of the green transition within the European Union.

Fifth, the EU's introduction of a price ceiling for gas was the first attempt in the history of the bloc to regulate the prices of critical goods. This move will stimulate discussion on at least three issues.

The first issue is what should be the EU’s sanctions policy in times of globalization. The second issue is what should be the EU’s anti-inflationary European Union as a community under current conditions. And the third issue is the ability to effectively influence the markets for globally-traded goods.

Sixth, the effectiveness of the proposed restrictions directly depends on the ability of the initiators to minimize opportunities to circumvent them. Therefore, in December, the EC prepared a draft directive on liability for violations of EU sanctions. It aims to unify the level of punishment for violation of the sanctions regime among member countries. In particular, they proposed punishing offending individuals with imprisonment for a term of at least 5 years, and offending companies with a fine in the amount of at least 5% of the total turnover for the year preceding the decision on the fine.

Seventh, various options for action were proposed in the process of discussing price ceilings for gas and oil. In particular, the idea of introducing a special tax on exports by Russian energy carriers was raised. Funds received from these exports must be transferred to Ukraine, and the tax itself could go hand in hand with a price limit.

The general conclusion is very simple: current restrictions must be effectively implemented. And the national ability to withstand price shocks is increasing.

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