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The embargo on the supply of oil from Russia to the European Union and the maximum price set by the G7 come into force on December 5. They will further undermine the Kremlin’s revenue in response to the invasion of Ukraine. Cooperation between Poland and Germany can determine their effectiveness – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.
Maritime and German-Polish embargo
On December 5, the European Union imposed an embargo on the supply of oil by sea, excluding countries without access to the sea, such as Bulgaria, the Czech Republic, Slovakia and Hungary. This means no Russian oil is allowed to arrive to Europe by sea. Such mode of delivery was popular especially in Western Europe. In addition, Poland and Germany have to abandon land deliveries via the Druzhba Pipeline by the end of the year. There is no resolution on the EU embargo on the northern leg of the Druzhba, which Berlin and Warsaw are discussing. BiznesAlert.pl was the first news outlet to report this. Non-Russian deliveries through the naftoport in Gdańsk will come from Asia: mainly Saudi Arabia, which will eventually be responsible for 45 percent of deliveries to the Orlen Group with refineries in the Czech Republic, Slovakia, Lithuania and Poland. Another source is Kazakhstan, and Germans have ensured BiznesAlert.pl that the country would not be used for the supply of oil from Russia under a false flag, as I warned in the autumn. “Our goal is to provide additional supplies to East German refineries through Poland and Kazakhstan, so that the PCK refinery (Schwedt refinery- ed.) can be used as much as possible,” said German Deputy Minister of Economy and Climate Michael Kellner in response to questions from BiznesAlert.pl. “It is possible to verify whether it is Kazakh or Russian oil,” he added. Successful cooperation between Poland and Germany on abandoning oil from Russia will open the door to depriving the Russians of shares in the Schwedt refinery, its derusification and the potential involvement of PKN Orlen as a replacement for the kicked out Rosneft Deutschland. Interestingly, Russia’s possible redirection of oil from Europe to Asia could push out some of the Middle East contracts from there and increase their supply on the European market, but more on that later.
Maximum price can be sidestepped, but just slightly
The maximum price of oil from Russia introduced by the G7, Australia and the European Union also comes into force on December 5. It will make it difficult for the Russians to supply oil by tankers with the help of Western companies, among which the leaders were those from Cyprus and Greece, because they will not get insurance and freight if they are not offered at a maximum price of USD 60 per barrel. The price is to be adjusted periodically to a level of five percent below the market. Currently, the Urals blend is going down to around USD 63, so the maximum price is about 5 percent lower. The first review is due in mid-January. Bloomberg estimated in November that the spectre of Western sanctions alone had removed 85 percent of Russia’s oil sales in Europe. The agency WoodMackenzie estimated in the spring that the Russians would not be able to replace the European market with clients in Asia. In addition, redirecting the oil to the East will mean greater availability of Middle Eastern oil in Europe. Kommersant reports that the Russians now have to sell outside the West about a million barrels a day, and this risks having to limit production in case of failure, as the Russian energy ministry itself admits. The Russians do not meet the OPEC+ target, because it stayed at 1.47 million tons a day in October. At the same time, supplies by sea from Russia fell by two percent compared to September to about 640,000 barrels per day.
Oil from Russia is becoming untouchable
Russia will not be able to redirect all of its oil to Asia, as investors are afraid of secondary sanctions, which is apparent as Chinese and Indian clients started buying less, and are waiting for the impact of the limitations introduced on the 5th of December. Chinese customers waited with December orders on the exchange before the restrictions came into force. Some ship owners refused to recognize Russians’ insurance documents. Russia, like Iran, will be able to circumvent sanctions to some extent, but it will not do without a reduction in production, and therefore a decline in revenues for a long time, because once a deposit is shut down, it is difficult to reopen it, sometimes even impossible. It is worth adding that the Russians are forced to sell oil at a discount at a price of about USD 50, and therefore also lose even more due to the sanctions. The support of OPEC+ countries, especially Saudi Arabia, is uncertain. It fears a recession and that, coupled with the zero-COVID policy in China it could collapse the demand and cause a new oil price crisis, which means the country does not want to lower supply. This policy was not reviewed at the OPEC+ meeting on 4 December, even though the Kremlin would like to tighten the cuts. The Russians can therefore submit to the G7 maximum price and make less money from oil, which means less money for the war in Ukraine, but at the same time they may maintain the supply on the market or go against the interests of their own companies – turn off the tap to the West to cause a short-term price jump. But in the long-term this will speed up the diversification and prop up the increase of supply in the competition in North America and Middle East. Although an economic approach would prompt one to minimize loses it is apparent in Gazprom’s actions, as it is leaving Europe at its own wish, that Russians do not care about economic losses and are ready to bear them in order to achieve their overarching goal, which may be victory in Ukraine. If they go all the way, they will only give the West an incentive to add more sanctions, and the fact that the embargo is not complete, and the maximum price is still high, gives scope for escalation.
Polish-German friendship
A maritime embargo in the European Union would probably not have been possible if Poland had not offered the refineries in East Germany (Leuna and Schwedt) an alternative through the naftoport in Gdańsk. From this point of view the success of the Berlin-Warsaw talks will be decisive for the effectiveness of this type of sanctions, preventing Russia from selling its own oil under a different flag, and preparing for the possible, further escalation in the West. This is important, due to the fact that the topic will return as early as mid-December as the G7 decision on the maximum price will have to be revised. Tomasz Włostowski, partner at EU STRATEGIES law firm, talked about this with BiznesAlert.pl. The cap would not enter into force without a deal with Poland, which initially demanded that it should be set at USD 30 per barrel. The USD 60 level is high, but it will still limit the Kremlin’s revenues, and there was no consensus for more. So this agreement is not very ambitious, but the alternative is no deal. In exchange for consent, the Poles won a revision of the maximum price so that it always stays below the Urals market. “The negotiations took longer than expected. Let’s remember that already on Monday – that is, on December 5 – the EU embargo on oil will enter into force, including a complete ban on aiding (e.g. financing or insuring) transactions on third markets by EU entities. One of the goals behind the last-minute cap is limiting this ban to transactions above the limit,” Włostowski explained in an interview with BiznesAlert.pl. “As we can see, the negotiations on an acceptable price ceiling lasted until the last moment. Despite receiving the target target (65-70 dollars) from the G7 at the beginning of the week, the final agreement was reached only two days before the new rules come into force. The main role here was played by Poland, which – supported by, among others, Lithuania and Estonia – fought for a price as low as possible. In the end, we stood our ground, because the price of USD 60 per barrel is well below the original ceiling. We also have a transitional period in the regulations, so transactions that are already in progress (e.g. when the tanker with oil is already at sea) will not be covered by the limit, provided that they unload oil by January 19,” Włostowski explains. It is worth adding that Germany’s energy diplomacy can support these efforts. Germany’s FM Annalena Baerbock is travelling to India. Before departing, she told the media that she would urge Germany’s partners, including the Indians, to respect the cap on Russia’s oil. She recalled that this solution was introduced especially so that oil from Russia could continue to flow to third countries, because the alternative was a full Western embargo. Another key moment is the possible EU sanctions on the Northern strand of the Druzhba Oil Pipeline, giving Orlen the right to terminate contracts with Rosneft and Tatneft without penalties, and then a revision of the maximum price with the key role of Poland and Germany in the European Union. This means that good cooperation between Poland and Germany for the derusification of the oil sector in the West can ensure the effectiveness of the Western sanctions imposed on Russia for its attack on Ukraine. But if the ritualistic disputes between our politicians undermine cooperation between Berlin and Warsaw, only the Kremlin will benefit.
