How to implement an EU embargo on Russian oil

Anette Hosoi, Simon Johnson 20 April 2022

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The Russian war on Ukraine is financed in large part by the export of oil. The US, the EU, the UK, and other countries have intensified various sanctions on Putin’s leadership group and their economy (Berner et al. 2022), but Russian export revenues since the invasion on 24 February have risen: the volume of oil exported has not fallen, and the world price of oil is up.

Most notably, the EU buys 2.2 million barrels of oil and 1.2 million barrels of petroleum product from Russia every day (IEA 2022). According to press reports, much of Russia’s hard currency revenue is now being spent on re-equipping the Russian military and preparing for the next offensive.

There is also an unseemly and morally appalling scramble by some European and Asian countries to increase their purchases of Russian oil. According to publicly available data, as shown in Figure 1, some nations that claim to be fully in support of Ukrainians appear to have significantly increased their purchases of Russian oil since the invasion.

Figure 1 Countries importing Russian oil

In a new CEPR Policy Insight (Hosoi and Johnson 2022), we argue that if our objective is to reduce Western financing of the Russian military effort, the only logical next step is for the US, the EU, the UK, and others to prohibit all Russian oil and oil product exports, and to make it illegal to carry such cargo in European-owned tankers. This blanket provision would trigger force majeure clauses in most contracts for vessel owners, oil traders, insurance companies, and other providers of financial services – allowing them to break existing contracts without penalty.

The key point is to avoid a situation in which the EU imposes an embargo on the import of Russian oil, resulting only in more of that oil flowing to Asian markets. Given the large market share of EU-owned tanker fleets, a prohibition on those vessels carrying Russian oil and oil products is essential for sanctions to be meaningful.

An EU embargo and associated system of sanctions could be combined with a tightly controlled and centralised system of waivers. These waivers would allow limited purchases of Russian oil by designated countries and in specified tankers. The prices charged should be monitored and preferably set below the world price for oil. 

In addition, all payments for Russian oil under the waiver programme would go into supervised escrow accounts. The funds in these accounts should be available to Russia only once there is a ceasefire and, even in that case, should be used to buy food and medicine only – no weapons or industrial components that can be used to make weapons or military equipment of any kind. 

As an additional safeguard, all approved imports into Russia would also need to be supervised carefully to ensure that only humanitarian supplies are getting through. In addition to all standard border controls, Ukrainian-appointed inspectors should participate in checking every shipment of freight to Belarus or Russia. 

This would require hiring many inspectors, but there are currently more than two million adult Ukrainian refugees in European countries – so there is no shortage of people who need a job and who are willing to work. Their salaries should be paid from the Russian oil escrow accounts.

Any country that receives a permit to buy Russian oil should also publicly commit to reduce its consumption of fossil fuels over time. To facilitate these energy transitions, all forms of appropriate technology should be shared widely. As we discuss in the appendix to our Policy Insight, the development of offshore windfarms is among the most appealing ways to reduce oil consumption in the medium run.

Taking these factors and market conditions into consideration suggests the following general approach:

1. All Russian oil and oil products should be sanctioned by the US, the EU, the UK, and any other countries that are willing to stop Putin’s war on Ukraine. (Similar sanctions should be applied to Belarus.)

2. The carrying of Russian-origin oil and oil products in any US, European, British, and other vessel should also be prohibited.

3. The provision of financial services in any form to any entity involved in the Russian oil and gas value chain should also be prohibited.

4. The combination of 1, 2, and 3 would trigger force majeure in all commercial contracts for the buying, transportation, and financing of Russian oil cargo.

5. The EU should declare a complete embargo on all Russian oil and seek alternative suppliers of crude oil and refined products. The available spare capacity in Saudi Arabia and the United Arab Emirates is roughly equal to the amount of crude oil that the EU currently buys from Russia daily.

6. A system of waivers should be put in place to allow the controlled export of some Russian crude and refined products subject to centrally issued permits.

7. Administering this permit system will be costly, and appropriate fees should be charged. An initial user fee of $50 per barrel, paid for by Russia, seems plausible.

8. International permits would allow energy exports subject to the following conditions:

a. All proceeds from these transactions go into escrow accounts.

b. These accounts are frozen until Russian forces withdraw from Ukraine.

c. Once unfrozen, these accounts can be used to buy food, medicine, and other humanitarian supplies only.

d. The supplies purchased under license are shipped to Russia only through a few tightly controlled land crossings (vehicle and train), for example on the Poland-Belarus border and on the Finland-Russia border. In addition to local and EU border officials, there should also be Ukrainian inspectors present for every inspection of all cargo. All shipments need to be inspected, without exceptions.

9. Ukrainian refugees should be hired and trained as cargo inspectors. Their salaries should be paid out of the escrow accounts. In addition to assisting with the immediate task of ensuring no weapons or parts for weapons are smuggled into Russia, training these workers will help rebuild the Ukrainian customs service in line with EU best practices.

10. The central authority to provide licenses and authorise inspections could be administered by the International Energy Agency (IEA) acting under the authority of the governments involved.

11. To the extent that additional specialists are needed to staff any dimension of this effort, including monitoring tankers, determining whether sanctions are being violated, and assessing potentially questionable financial transaction, highly qualified Ukrainians are available. Given that the Russian invasion is estimated to have caused a nearly 50% decline in Ukraine’s GDP (Tsyrennikov 2022), employing these talented people in this fashion seems entirely appropriate. Again, their salaries can be paid from the escrow accounts.

12. In effect, the proposed structure would create an ‘Inverse OPEC’, comprised of countries that are willing to limit the ability of Russia to buy destructive weapons. This arrangement is obviously a violation of competitive market principles, but so is OPEC.

13. All participating countries should agree to taper their purchases of Russian fossil fuels as quickly as possible. Measures to reduce consumption of oil should be put in place everywhere, with sharing of all relevant technology. Industrial country governments should ensure that poorer countries have expedited access to any technology that would be helpful.

14. At the same time, all countries should work towards long-term solutions to reduce their dependence on oil (see the appendix in our Policy Insight). These efforts gain great urgency considering the national security implications that the Russian invasion of Ukraine highlights.

The current crisis emphasises that it is in the long-term interests of Europe to remove the vulnerability associated with energy production that EU countries cannot control. Although the EU, the US, and other countries have made great strides towards energy independence, Russia’s invasion of Ukraine illustrates that we need more flexibility to absorb large shocks to the system.

References

Berner, R, S Cecchetti and K Schoenholtz (2022), “Russian sanctions: Some questions and answers”, VoxEU.org, 21 March.

Hosoi, A E and S Johnson (2022), “How to implement an EU embargo on Russian oil”, CEPR Policy Insight 116.

IEA (2022), Oil Market Report, 16 March.

Tsyrennikov, V (2022), “A trillion-dollar question: What Russia owes Ukraine”, VoxEU.org, 6 April.

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Topics:  Energy Politics and economics

Tags:  Ukraine war, Russian oil embargo, sanctions, Russian oil

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