EU sanctions 'minefield' seen curbing more Russian oil trade next month

EU sanctions on Russia are expected to further crimp purchases of its oil and gas next month, as traders shy away from deals due to ambiguous wording and growing unease over sourcing Russian commodities, according to traders and legal experts.

Although the EU has avoided direct sanctions on imports of Russian energy so far, its existing rules have left lawyers unpicking potential legal pitfalls in wording that seems aimed at restricting trade in Russian commodities.

The European Commission's fourth sanctions package against Russia published on March 15, prohibits direct or indirect deals with majority state-run Russian companies including oil major Rosneft, the oil arm of gas giant Gazprom, and pipeline operator Transneft. Although the rules carve out imports of Russian fossil fuels to the EU, the exemptions only allow for "transactions which are strictly necessary".

The EU has not yet provided guidance on which "transactions" are covered by the rules or when they could be considered "strictly necessary".

In addition, the sanctions package allows for traders with the Russian listed entities under pre-existing contracts in place prior to March 16 but only until May 15, creating further anxiety among commodities traders over their existing supply contracts with Russia.

Tough criminal penalties in the EU and the UK for any deals which could be seen as circumventing sanctions add further pressure to avoid energy deals with Moscow, according to experts.

"It's a minefield, that's why everything has slowed up. There is a huge long tail of transactions that are subject to legal reviews," said Tom Stocker, a partner and sanctions specialist at law firm Pinsent Masons. "I can understand why oil traders are being very cautious and the clients we are advising are adopting a cautious approach."

Oil trade

Europe is particularly dependent on Russian oil and was importing about 2.7 million b/d of crude and another 1.5 million b/d products, mostly diesel, before the invasion of Ukraine.

Russia's key export-grade crude shipped to Europe and the US is medium sour Urals. The crude is mainly sourced from fields in European Russia and West Siberia and is priced against S&P Global Platts Dated Brent.

While the EU has yet to target imports of Russian energy, refiners, insurers, banks and shipping companies are also 'self-sanctioning' due to concern over breaching sanctions and wider reputational damage over ongoing dealings with Russia.

"It's a mess, there is nothing that is factual or logical about [the EU sanctions]," a trader of CPC crude blend exports from Kazakstan said.

Self-sanctioning by European refiners and independent traders has already slashed seaborne flows of Russia's Urals crude, heavy fuel oil, VGO, and naphtha into the region. As a result, Russian crude production shut-ins will likely reach 2.8 million b/d in the second half of 2022, S&P Global Commodity Insights estimates, despite record-high refining margins for processing heavily discounted Ural crude.

Compared to January levels, total Russian seaborne oil exports to northwest Europe and the Mediterranean region fell by around 500,000 b/d to 2.29 million b/d in March, according to Kpler shipping data. Fuel oil and feedstocks represented two-thirds of the declines in product exports while naphtha, followed by gasoil, made up most of the rest, according to the International Energy Agency.

Closing shutters

Commodity traders Trafigura and Vitol have long-term deals with state-run Russian oil giant Rosneft signed before Russia's Feb. 24 invasion of Ukraine.

The companies have halted new spot trades of Russian oil since the war but said they would continue to honor their long-term deals.

Russian oil volumes handled by Vitol will fall sharply in the second quarter of 2022 as current term contracts expire, a source close to the company said. The trading house also plans to end all Russian energy imports under supply deals by year-end, the source said.

A spokesperson for Trafigura said the company expects its Russian traded volumes will be "further reduced from May 15", adding that it will comply in full with all applicable sanctions.

"As it's so unclear, it's difficult to navigate for companies, particularly conservative [oil] majors," one Urals crude trader told S&P Global.

Pinsent Masons' Stocker said -- interpreted cautiously-- the EU's current sanctions will likely sideline more Russian oil next month.

"As of May 15, the shutter comes down completely and no transactions with the listed counterparties or their non-EU subsidiaries can proceed," he said.

Miner and commodity trader Glencore declined to comment on the impact of existing EU sanctions on its outstanding supply deals with Russian oil majors.

A five-year deal with Rosneft to supply up to 55 million mt -- around 403 million barrels -- of oil to QHG Trading, the joint venture between Glencore and the Qatar Investment Authority, expired at the end of last year.