The EU’s economy commissioner Valdis Dombrovskis this week summed up the dilemma as the bloc struggles to agree on an embargo on Russian oil. “We are discussing massive financial support to Ukraine on one hand, and continue to provide financing for Russia’s war on the other hand,” he said. “It needs to be stopped.” A ban on Russian imports should remain the priority. But an interim measure designed to stem Moscow’s profits from energy sales more quickly — a punitive EU tariff on Russian oil, proposed by the US and others — is worth looking at too.
An embargo choking off the 3.4mn barrels a day of oil and oil products that Russia exports to the EU would be a stunning blow to its revenues. But an EU embargo is vigorously opposed by landlocked Hungary, which says it is less able than coastal states to source alternative oil, and its refineries are set up to process Russian crude so require costly conversion. Bringing Budapest round is likely to need financial support and a phase-in period for an embargo.
A phased-in ban would allow time for negotiations with other potential suppliers — and would be a sword of Damocles for Russia’s flagship industry. Limited domestic oil storage means Moscow would soon have to start shutting down fields, which would degrade and might never be viable to reopen. Some other oil exporters are betting that Russian oil displaced from EU markets would rapidly find its way to buyers such as China and India. Yet that would mean moving huge quantities of oil by ship, and there are serious capacity constraints.
The EU is rightly wary of secondary sanctions on buyers of Russian oil that would provoke a rift with Beijing and others. But it could curtail Moscow’s ability to divert exports elsewhere by banning EU-controlled tankers from carrying Russian oil, and EU financial groups from insuring cargoes.
The US and others fear a phased ban also risks causing an immediate price spike which would supercharge inflation — and enable Russia, paradoxically, to reap super-profits from oil in the meantime. US Treasury secretary Janet Yellen has proposed a value transfer mechanism, such as a price cap or tariff, which would enable Russian oil to continue flowing while depriving Moscow of much of the revenue. Mario Draghi, Italy’s premier, has mooted a “buyers’ cartel” that would refuse to purchase Russian energy above a certain price.
A price cap is undesirable. A buyers’ cartel, even if it could be organised, would create an awkward precedent. Making Russian oil artificially cheap would also create perverse incentives for consumers to buy more. Russia might temporarily increase its market share, though without reaping the profits, and consumers would have a disincentive to switch to alternative suppliers — which should be the aim.
An EU-wide tariff on Russian oil would instead compel buyers to demand an offsetting discount from Russian sellers, cutting Moscow’s profit, or go elsewhere. A tariff that successfully forced Russia to cut prices would in effect transfer tax revenues from Moscow’s coffers to the EU’s. Proceeds could go to rebuilding Ukraine. A tariff could gradually increase until an embargo was fully phased in, stepping up pressure on EU consumers to diversify and tightening the noose around Russia’s economy.
How president Vladimir Putin would respond to an embargo announcement, or an interim tariff, is unknowable. He might immediately halt Russian oil to the EU, and swallow the damage to his own economy. Most European capitals calculate this risk is worth running, given the need to support Ukraine. The more they squeeze Russia’s war funding, the more chance they have of changing Putin’s calculus too.