Analysis | Europe Goes for the Knockout on Russian Oil

“It shall be prohibited to purchase, import or transfer, directly or indirectly, crude oil and petroleum products, if they originate in Russia or are exported from Russia. It shall be prohibited to provide, directly or indirectly, technical assistance, brokering services, financing or financial assistance, or any other services related to the prohibition in paragraph 1.

It shall be prohibited to transport, including through ship-to-ship transfers, to third countries crude oil and petroleum products which originate in Russia or have been exported from Russia, by any vessel registered under the flag of a Member State or owned, chartered, operated or otherwise controlled by a national of a Member State or any legal person, entity or body incorporated or constituted under the law of a Member State.”

Europe dominates global oil trading, oil financing, oil shipping, and oil insurance.  If the legal text survives the current negotiations in Brussels, and European companies interpret it strictly, as lawyers tend to do when sanctions are involved, Russia will face significant obstacles to finding new markets for the oil that Europe won’t be buying anymore. The impact would almost equal, in practical terms, the secondary sanctions Washington has imposed in the past to extend the reach of its penalties. Brussels dislikes the so-called extra territoriality of U.S. secondary sanctions, which the White House used with great effect on Iran. But it dislikes even more the prospect of Russia selling the oil the continent once bought, at perhaps even higher prices, to subsidize its war machine in Ukraine. Talk to any energy diplomat in Brussels, and it’s clear that Europe is targeting oil revenue – not merely oil flows – and for that it needs to prevent Russia from redirecting its crude.  For Europe and the U.S., the key is stopping Putin from launching an oil-for-friends diplomatic offensive. Robert Habeck, the German economic minister, explained the thinking in a recent interview with ZDF television: “Putin would come along and say: `you see what happens, the capitalist West is making you poor, I’ll help you out and you can get a 20% discount from me. I just want you to be my ally.’”Since the war started, I have argued that a Western oil embargo on Russia was a question of when, rather than if. Now, I believe that the U.S. and Europe will use tools akin to secondary sanctions, plus diplomatic pressure, to force Russian oil production down, rather than passively witness all the Russian oil they once bought going elsewhere.For now, the aim is to convince allies of two objectives: do not buy more Russian oil than you did in 2021, and if you buy a little extra, do so only on condition of asking for huge discounts. That’s the message that India has gotten, for example. In public and private, Western diplomats are saying to allies: do not undermine our sanctions.  Can the policy work? It’s unclear. The Western oil trading houses will stop handling Russian oil, but as Iran demonstrated, new trading outfits operating in the shadows, would replace them. Still, the longer the war goes, the more pressure Washington, London and Brussels will put on Russian oil. Yet, as oil prices climb further, Brussels and Washington may have to accept more Russian oil flowing into Asia.So far, Moscow has seen its production drop by nearly 1.1 million barrels a day, or 10%, from its February level, to an average of 10.05 million barrels a day in April. Another big drop is likely in May. Russian official media report that output is actually rising, but the whispers among Russian oil traders point to the opposite. If you believe them, production, which was 11.1 million barrels a day in February, has dropped to less than 9.5 million barrels a day right now.Oil prices aren’t much higher thanks to the covid outbreak in China and Beijing’s heavy-handed covid-zero policy. The fear, every day more palpable, of recession in both Europe and the U.S. by late this year is also restraining prices. But many appear to be underestimating Russia’s supply losses and their effect on the country’s economy: they are real, and they are deepening.

More From Bloomberg Opinion:

• Sanctions Haven’t Made Clear What ‘Russian Oil’ Is: Julian Lee

• The Second Wave of Russia’s Oil Shock Is Starting: Javier Blas

• Solar Power Is Winning From the Energy Crisis: David Fickling

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”