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EU hits end of the line on Russian energy sanctions

EU hits end of the line on Russian energy sanctions

by host

Brussels is putting the finishing touches on a new package of penalties meant to put the brakes on Moscow’s brutal war on Ukraine. Top of the list is banning trade in diamonds and new measures to crack down on sanctions evasion. But what’s not on the table is far more telling. 

According to the latest draft documents seen by POLITICO, there will be no new measures to target Russia’s liquified natural gas — an export that earned the Kremlin €6.1 billion this year from EU purchases alone. And the proposals won’t halt the global sale of fuel refined from Russian crude by third countries, nor will they stand in the way of Moscow’s lucrative nuclear power deals.

Also absent is any attempt to lower a $60-per-barrel oil price cap — those talks stalled weeks ago, insiders say. 

Even what’s in the package is far from enough to squeeze Russia’s earnings. Instead of slashing the oil price cap, negotiators have suggested new ways to strengthen enforcement. But experts say these tweaks will just create more paperwork that can easily be forged. And the products set for restrictions — precious stones, pig iron, copper — contribute little to the country’s state budget. 

The light-touch measures highlight the challenges Brussels faces in hammering the lucrative energy revenues that flow directly into the Kremlin’s war chest. And that’s unlikely to change soon. Hungary has long blocked tighter energy sanctions, and shows little sign of relenting. Worse still, some negotiators fear more dramatic steps would simply harm European industry and consumers too much.

“We’ve reached the capacity of what we can do without shooting [ourselves] in the foot and harming our competitiveness,” said one EU diplomat, granted anonymity to discuss the confidential negotiations.

Oil for one

The latest sanctions package’s biggest attempt to cut into Russia’s oil sales are measures to tighten evasion of the existing $60-per-barrel price cap — a step the G7 wealthy countries agreed last year along with the EU and Australia. 

The package, the EU’s 12th targeting Moscow since last year, would introduce new requirements for buyers to show they aren’t purchasing Russian oil above the price cap and then hiding the extra costs as insurance or transport fees.

That alone is likely to do little to stop the vast majority of Russian oil cargoes from selling for well above the price cap, said Viktor Katona, lead crude analyst at intelligence firm Kpler, with Russian barrels consistently trading for closer to $80.

“On paper it looks good, but in real life it’s not going to impact anything because people lie — shippers have no way to check whether these declarations are legitimate or not,” he said.

Moscow has also benefited from a ”shadow fleet” of aging tankers willing to ferry its fuel around the world in contravention of the bans. And global demand for oil means there is no shortage of traders willing to take a chance on their cargo, with only limited enforcement of the rules.

Another part of the problem is that, while EU and U.K. firms are largely careful not to trade in Russian crude sold above the price cap, Turkish, Chinese and Indian industry is doing a roaring trade by buying the oil at any cost and refining it into petrol, diesel, jet fuel and other products that can be sold on to Europe without restrictions. Ukraine has previously urged Brussels and London to end this practice, to no avail.

Kyiv wants to see the oil price cap knocked down to just $30 a barrel, in order to further cut Russia’s budget for weaponry, drones and soldiers’ salaries. However, in September, five diplomats from EU countries confirmed to POLITICO that talks on a comprehensive review of the cap had ground to a halt, with Poland and the Baltic countries struggling to get larger economies like Germany and France on board, amid fears gas prices would hurt industry.

Pain in the gas

EU countries have also continued to import huge volumes of Russian liquefied natural gas — a practice that shows no sign of abating. European purchases of its LNG have remained virtually unaffected since the beginning of last year, while Spain and Belgium have even boosted their imports by a startling 50 percent in 2023, compared to 2022.

Capitalizing on this, President Vladimir Putin has touted plans to triple Russia’s gas production, flying in the face of both Western sanctions and climate change policies, tapping vast reserves in the Arctic to plug holes left in the national budget by the war.

A second EU diplomat said there was a general understanding among officials developing the new sanctions that “the only thing you can sanction is gas and LNG [but] there are member states that’d never agree to this.” 

The EU’s approach stands in contrast to recent U.S. actions. 

Earlier this month, the Biden administration issued new sanctions aimed at the colossal LNG-2 project in the Russian Arctic. The multibillion dollar venture, backed by Western firms like France’s TotalEnergies and a Japanese consortium, has flown under the radar of European regulators despite the fact its main owner is Novatek, a Russian energy firm whose top shareholders are close to Putin.

The new measures mean any company involved in LNG-2, even European ones, could be blacklisted by the U.S.

Tough talks

It’s not just economic worries preventing the EU from doing more.

Hungary has previously held up discussions around tighter energy sanctions, while simultaneously prolonging its own dependency on Russia. Budapest is even ramping up Russian gas purchases ahead of the winter. 

In a rare broadside against an EU country, Kadri Simson, the bloc’s energy commissioner, told POLITICO earlier this month that Hungarian Prime Minister Viktor Orbán had been “shaking hands with [a] war criminal” when he flew to Beijing for talks with Putin in October. “Even Hungary knows that by continuing this activity, they grant Russia the right to manipulate their market,” she added.

Orbán has also threatened to veto any restrictions on Russia’s civil nuclear industry, given that Hungary is entirely dependent on Russia to fuel its own atomic reactors. Hungary is also expanding its Paks nuclear station with the support of Russian state firm Rosatom.

While the draft sanctions agreement introduces an ambition to impose restrictions on Russian liquefied petroleum gas (LPG), with the EU only buying relatively small amounts without a substantial economic benefit for Moscow, Hungary is again dragging its feet and requesting a 12 month transition period, according to one diplomat with knowledge of the talks.

Call to action

Without LNG and nuclear fuel restrictions — and no clear plan to tackle oil loopholes — there is little expectation that the upcoming EU sanctions package will put a serious dent in Russia’s revenues.

“The energy sector could be being hit much harder than it is right now,” said Maria Shagina, who researches economic sanctions at the International Institute for Strategic Studies. “But there’s still this very cautious approach.”

EU fears about antagonizing Russia with harsher energy penalties are misplaced because, Shagina said, Russia has “lost this weaponization game — they don’t have other markets to go to, and that’s a fundamental flaw in misreading Russia from the European side.”

Yet memories of last winter, when energy prices spiked and panic set in across Europe about whether countries could replace Russian supplies, still linger as temperatures drop this year. Once winter passes, the EU’s thinking may change.

“Maybe next summer,” Shagina added. 

One senior EU official, granted anonymity to discuss the details of the sanctions regime, insisted that Russian energy revenues were falling overall by many metrics.

“We will see [at] the autopsy, as the Belgians say,” the official said, arguing that the effectiveness of existing rules will only become clearer as time goes on.

However, according to Oleg Ustenko, economic advisor to Ukrainian President Volodymyr Zelenskyy, now is not the time to get complacent. 

“Yes people are tired, but that doesn’t mean they are not willing to deal with the issue,” he said. 

“At the end of the day,” he added, “we have to resolve the current issues and the proper way to do so from an economic point of view is to make sure they don’t have money, they don’t have financing, to continue doing all the terrible things they’re doing in Ukraine and in other parts of the world.”

Barbara Moens, Jacopo Barigazzi and Giorgio Leali contributed reporting.

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