Ukraine: the case for an oil embargo

How would the West react in a worst-case scenario of new escalation in the ongoing war in eastern Ukraine? What will Brussels and Washington do if Russia continues to expand there? Often various military options (such as the delivery defensive weapons to the Ukrainian army) are discussed. What is sometimes forgotten is that the West is still by far the largest trading and investment partner of Russia. Its current sanctions only limit the export of a limited amount of services and technology to Russia. They leave much of the current Russian-western economic interaction intact, and do not touch directly the EU’s large energy imports from Russia.

By far the biggest issue is crude oil — not natural gas, as some assume. Approximately 40% of the Russian state budget consists of revenues from crude oil export tariffs. While Russian and western estimates — both private and governmental — vary, the share of income from natural gas exports in the Russian state’s revenues is, by most accounts, less than 10%. Moreover, the large private income generated from oil exploration, excavation and transportation makes up a large part of Russian industry; this is important for the functioning of Russia’s economy as a whole. Most of these exports go via pipelines to the European Union. Russia has only a relatively small tanker fleet of its own, and currently lacks the infrastructure to export large amounts of oil by sea.

Unlike another sanction that is also sometimes discussed — Russia’s exclusion from the SWIFT payment system — an EU oil embargo would touch on a material problem that the Kremlin cannot easily solve. While Moscow may already have a plan B in case Russia is prevented from using SWIFT, Russian oil trade routes cannot be redirected overnight as they largely rely on pipelines to the West. However, the EU is not as dependent on Russian oil as many assume. Being fungible, crude oil from Russia could be replaced with oil delivered via tankers and other outlets from other regions of the world. To be sure, Russia would look for, and manage to find, ways to export its oil elsewhere. Yet, for a substantial transition period at least, Moscow would encounter significant logistic, infrastructural, legal and financial challenges in delivering its oil to clients in other parts of the world.

While a small number of EU installations are reliant on Russian oil delivered via pipelines, the EU economy as a whole is not dependent on oil imports from Russia, which can be replaced by other exporters. To be sure, the EU’s financial losses would not be insignificant, as part of its oil-refining industry is geared towards large raw material deliveries from Russia. Even so, the EU should be able to limit these losses through targeted support for those EU member states and oil refineries that would lose most from new sanctions.

While the EU would have to compensate a number of western companies and incur considerable losses, a temporary Russian oil imports embargo would send a powerful signal to Moscow, and demonstrate Russia’s dependency on EU cooperation. Moreover, the US Congress could coordinate its own reaction to new Russian expansionism with Brussels. Washington could support European sanctions by simultaneously lifting its own oil export ban for as long as EU sanctions are in place. US oil on the world market would both ease the burden of the embargo on the EU, and complicate Russia’s substitution of its current large European market with other importers, in Asia or elsewhere.

It would need considerable political will in the EU institutions and capitals to push through such a joint policy. So probably it will only be discussed in the event of a major new escalation in eastern Ukraine. The threat that further Russian military advances in Ukraine would pose to EU security could, however, prove grave. For instance, Europe’s largest nuclear power plant is located in the south-east Ukrainian region of Zaporizhiya. This is only roughly 250 km away from the current combat zone and in the heart of (what Russian nationalists like to call) Novorossiia (New Russia). Should the Ukrainian state collapse as a result of Russia’s hybrid war in the Donets Basin, the EU could face an influx of millions of refugees from Ukraine.

In view of such worrying prospects, joint action by the EU member states to impose a Russian oil import ban is not out of the question.

For sure, Russia could temporarily use its two reserve budgets and considerable gold reserves to compensate immediate income losses. During a short transition period, the Kremlin could have some freedom of action. It would try to undermine EU unity and/or may employ further force against such countries as Ukraine, Georgia and Moldova. So military escalation could increase before Moscow would be forced to seek accommodation with the West.

Some analysts point to the Kremlin’s potential pressure in regard to Russia’s large exports of natural gas to the EU. They argue that the Kremlin could exploit the EU’s considerable reliance on Russian gas and respond with its own energy sanctions. Yet exporting large volumes of gas is technologically more complicated than trading oil globally. The large East European gas pipeline system creates interdependence, rather than one-sided European dependence on Russia. Gazprom relies on the EU market as much as the EU does on Gazprom deliveries. While the EU would be hit hard by a Russian gas export ban, Gazprom would, for a long time, be unable to deliver equivalent amounts of gas elsewhere in the world. In the event of a western-Russian trade war, the Russian economy would already be in turmoil, without the large private and public revenues from oil exports to the EU. So it is unlikely that Russia would, in such a stressful situation, be able to forego its income from gas exports to the EU too. Considering such complications, it is surprising how frequently EU-Russia gas (rather than oil) trade is discussed in western mass media. One might even speculate that the weekly exchange of pseudo-arguments about Europe’s allegedly one-sided dependency on Russian gas deliveries is artificially induced.

The EU would have to get its act together to make an oil embargo work. That would cost money, energy and nerves. At the moment, such a measure looks prohibitively expensive and political unfeasible — if not an entire fantasy. Yet, the implications of a creation of “New Russia” in south-eastern Ukraine would mean a major war between Europe’s two largest countries; Ukraine’s collapse; hundreds of thousands, if not millions, of refugees heading towards the EU; Ukraine’s four nuclear power plants in unstable or even war zones; and other, not fully foreseeable repercussions within and outside Ukraine. The West would have to make sure its response matches the Russian challenge. A temporary EU embargo on Russian oil imports, combined with a lifting of US oil exports, could be decisive instruments to contain Kremlin adventurism.