European Union to reduce purchasing of Russian oil by 90%
Biden: ‘we should consider putting a cap on the amount of money that we would pay for Russian oil’
President Joe Biden was pressed about his administration’s plans to temper rapidly rising oil prices during the U.S. NATO press conference at the Madrid NATO Summit June 30.
Oil prices have risen due to the war in Ukraine, with some analysts believing that prices may reach $200 a barrel.
When asked how long drivers in the U.S. could expect to face the rising prices, Biden answered “As long as it takes so Russia cannot, in fact, defeat Ukraine and move beyond Ukraine. This is a critical, critical position for the world.”
The European Union (EU) and the U.S. have already taken decisive steps to weaken Russia’s financial institutions, foremost among them sanctions against the country: for example, the U.S. and United Kingdom have announced total bans on Russian fossil fuels.
More conservative in its measures, the EU plans to cut oil imports from Russia by two-thirds, planning to ban all Russian oil imports arriving by sea by the end of the year. The EU also announced plans to halt Russian coal imports by August.
Russia is a critical supplier to European nations, supplying over 40% of the EU’s natural gas. EU negotiations for appropriate sanctions came to a compromise after significant deliberation. The EU continues to import over 800,000 barrels per day of Russian oil imports through pipeline, a “temporary measure” since countries like Hungary and Slovakia depend heavily on this resource.
Notably, Germany and Poland voluntarily halted pipeline imports, despite significant reliance on Russian gas. According to International Energy Agency Reports, in 2020, Germany made up 42.6% of Russia’s gas exports; in 2021, 58% of Poland’s total oil imports came from Russia.
Shipping insurance is critical to the sanctions the EU plans to implement. Following a phase in six month period, EU companies cannot provide “technical assistance, brokering services or financing or financial assistance, related to the transport, including through ship-to-ship transfers, to third countries of crude oil or petroleum products” from Russia, as dictated by a EU Council Regulation published June 3.
At the Madrid Summit, Biden said that the West “would not insure Russian ships carrying oil. We would not provide insurance for them, so they would have great difficulty getting customers.”
Taken together, the sanctions would reduce the amount of oil the EU buys from Russia by 90%.
Despite Western sanctions on Russian oil exports, Russia’s revenue from oil exports has risen as a function of increasing fuel prices felt across the world. U.S. Treasury Secretary Janet Yellen has been a key proponent of imposing a price cap on Russian oil sales to Europe; such a cap would allow Russian oil sales in the market, but at a lower revenue stream, especially as several of the EU’s sanctions are being phased in by the end of the year.
Supporters of the price cap include Sloan professor Simon Johnson PhD ’89, who serves as adviser to the Russian Tanker Tracking Group. Johnson said “There’s no other active idea that would impact Putin’s revenues from fossil fuels over the next five months” and that “the Russians have been quite cynically manipulating gas markets, so this would be a chance to turn the tables,” according to a New York Times article on June 26.
Critics of the approach worry that Russia could refuse to sell at too low of a price cap and utilize its market in India and China for a higher revenue stream.
Biden commented June 30 that “we should consider putting a cap on the amount of money that we would pay for Russian oil. We’re going to allow you to have a profit on what you make but not the exorbitant prices that you’re charging for the oil now. We think it can be done, and it would drive down the price of oil, and it would drive down the price of gasoline as well.”
Following the recent G-7 Summit — a meeting of the leaders of Canada, France, Germany, Italy, Japan, Britain, and the U.S. — the seven countries agreed on sanctions extending beyond oil regulations. All G-7 members announced a ban on imports of Russian gold.
Altogether, the sanctions imposed — from resources like natural gas to U.S. bans on debt payments using money held in U.S. banks — have dealt notable blows to Russia. For the first time since 1998, Russia defaulted on a debt, a $100 million payment, which sanctions made impossible to pay.
As Ukraine enters its fifth month of war, financial sanctions implemented by alliances in the EU and abroad seek to highlight solidarity with Ukraine and isolate Russia from the global market.