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EU agrees oil embargo to hit Russian 'war machine,' but exceptions remain

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The PCK refinery in Schwedt, Germany. The plant is majority-owned by Russian oil giant Rosneft and relies exclusively on pipeline oil from Russia.
Source: Sean Gallup/Getty Images Europe via Getty Images

After weeks of wrangling, the European Union agreed May 30 to an embargo on Russian oil and oil product imports in response to the country's invasion of Ukraine. The agreement represents a compromise, as some Eastern European nations balked at a complete end to all Russian oil flows.

The ban, first floated in early May, will effectively stop almost 90% of imports by the end of the year, European Commission President Ursula von der Leyen said May 30. The remaining 10% of pipeline oil will be subject to further discussions, von der Leyen added.

European Council President Charles Michel said the move is "cutting a huge source of financing for [Russia's] war machine." The agreement in principle is expected to be turned into legislation June 1.

As the ban will be phased in over months, the immediate impact on the Russian economy is limited, possibly even positive as oil prices rise, according to Georg Zachmann, senior fellow at Brussels-based think tank Bruegel. In the longer term, however, it will hit Russia's coffers because infrastructure limitations will prevent it from sending all European volumes elsewhere.

"I am quite confident that Russia will not be able to move the majority of this oil to other markets," Zachmann said in an interview.

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'Not only talking'

Exemptions to pipeline deliveries in the agreement were a nod particularly to Slovakia, Hungary and the Czech Republic, which draw oil from the southern leg of the Druzhba pipeline from Russia.

Europe's biggest buyer of Russian oil by volume is Germany, which imports 28 million tonnes of oil from Russia per year, according to Eurostat. Neighboring Poland is the second-largest buyer by volume and is among the nations most dependent on Russian oil, receiving 72% of its imports from Russia.

Still, Germany and Poland, which could benefit from the pipeline exemption, have committed themselves to a de facto shutdown of the northern Druzhba pipeline used for supply. "That is a strong signal from Germany," Zachmann said. "It is not only talking but essentially also taking some cost in this effort."

Two refineries in eastern Germany are drawing all their crude oil via the northern leg of the Druzha pipeline. Druzbha, the Russian word for friendship, is the longest pipeline in the world and has been operating since the 1960s.

In the early days of the war, TotalEnergies SE, the owner of the Leuna refinery, arranged to source alternative supplies through a pipeline from the Polish seaport of Gdańsk by the end of 2022.

Payback for Russian foothold in Germany

Another German refinery, PCK Schwedt near Berlin, is majority-owned by Rosneft Deutschland GmbH, an arm of the Russian state-owned oil giant PJSC Rosneft Oil Co. So far, the refinery has not announced contingency plans, but the German energy ministry said it is working on alternatives.

"Step by step, we are freeing our energy supply from the shackles of Russian imports," German Parliamentary State Secretary Michael Kellner said May 30. "For the Schwedt location, things continue to be complex. This is payback for the fact that a Russian energy company has gained so much control of Germany's supply situation in recent years, despite the war in Crimea." Rosneft started operating in Germany in 2017.

At some point in recent years, German policy discourse on energy converged around the notion that mutual economic dependence on Russia would also preserve a stable political climate. This has proven to be a mistake, according to Zachmann.

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Tightening the screws

One of the most vocal critics of a full embargo on Russian oil was Hungary. The country will continue to receive crude oil through its arm of the Druzhba pipeline for now, in what Prime Minister Viktor Orbán described as a victory in a late-night statement in Brussels. Hungary is heavily dependent on Russian oil, and Orbán said higher oil prices would have been "the equivalent of a nuclear bomb" for Hungary's economy.

Expanding the scope of sanctions much further will be difficult in light of such opposition. "What we have now is good," Zachmann said. "My hope is that there might be appetite to tighten the screws on an oil embargo" by introducing tariffs on Russian oil, the researcher said.

Separate from the oil embargo, the EU plans to end Russian gas imports by 2027 and has proposed the sweeping REPowerEU plan to shore up alternative supplies and accelerate renewables deployment to stem the shortfall.

According to think tank Transport & Environment, such a plan needs to be drafted for oil, too. "Relying on [oil] leaves Europeans dangerously exposed to rising prices in an increasingly uncertain world. Any energy security strategy that ignores oil isn't worth the paper it is written on," William Todts, executive director at Transport & Environment, said in a statement in March.

Other new sanctions announced alongside the oil ban are the removal of Sberbank of Russia from the Swift financial messaging system, broadcasting bans on more Russian TV channels in the EU and the provision of further business services.

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