EU Sanctions on Russia Oil Will Sustain Inflationary Pressures

EU Sanctions on Russia Oil Will Sustain Inflationary Pressures
The EU's sixth sanctions package on Russia, combined with existing plans, implies an end to over 90 percent of Russian oil sales to the EU by the end of 2022.

EU sanctions on Russian oil will sustain current inflationary pressures, though exemptions and the potential for piecemeal enforcement could weaken their impact.

That’s according to a report from Fitch Solutions Country Risk & Industry research sent to Rigzone earlier this month, which outlined that the EU’s sixth sanctions package on Russia, combined with existing plans, implies an end to over 90 percent of Russian oil sales to the EU by the end of 2022.

The report noted that this will further constrain energy supply, sustaining inflationary pressures in Europe. It added however, that the latest sanctions include multiple exemptions, grace periods, and caveats.

“For example, Hungary will still be permitted to purchase Russian oil via tankers in the event that its pipeline exports via Ukraine are disrupted,” the report stated.

“While these are designed to shield the more vulnerable European economies in Central and Eastern Europe from a sudden supply shock, they also create space for national authorities seeking to effectively circumvent some of the sanctions,” the report added.

The report also warned that divisions over further sanctions will grow, adding that the partial oil ban “brings the political willingness of the EU to sanction Russia close to its apex”.

“While some EU officials said they will seek to expand the oil embargo to pipeline exports as well, this continues to be resisted by the Hungarian, Slovak, and Czech governments (each of which wields a veto power),” the report stated.

“Similarly, calls for an additional sanctions package to ban Russian gas imports by more hardline states such as Estonia were met with pushback from most other states. This suggests that the EU will increasingly struggle to pass any significant new sanctions, and will instead focus on enforcement of existing sanctions,” the report added.

Fitch Solutions’ report highlighted that the risk of Russian retaliation via gas cut-offs will increase somewhat but added that Germany, Italy, and other large and/or dependent economies will likely maintain their supplies.

“The oil embargo will prove financially painful for Russia over the medium term, given that Moscow depends on oil revenues for a significant share of government finances,” the report stated.

“This will lead the Russian government to seek to ease sanctions pressure, potentially by threatening to disrupt gas exports to Europe,” the report continued.

“Russia could be forced into economically damaging shut-ins of its gas wells in the event of a full-scale stoppage of gas exports to Europe, making it unlikely,” the report went on to state.

In her opening remarks at a joint press conference with European Council President Michel on May 31, European Commission President von der Leyen confirmed that leaders had agreed in principle on the sixth sanctions package. On June 3, the European Commission announced the adoption of a sixth package of sanctions against Russia. On April 8, the EU announced that it had agreed a fifth package of restrictive measures against Russia.

To contact the author, email andreas.exarheas@rigzone.com


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