The risk of the latest sanction against Russia is that diesel prices will skyrocket

Europe again imposes heavy economic sanctions against Russia. Since last Sunday, EU countries have been boycotting all Russian so-called oil products, such as diesel and fuel oil. This sanction is also intended as punishment for the Russian invasion of Ukraine. But there are fears that the measure could also hit European countries hard. Eight questions about the latest boycott.

1What exactly does the measure entail?

The import by sea of all products that Russia makes in its refineries has been banned since Sunday. Products such as diesel, kerosene, fuel oil, gas oil and naphtha may no longer be imported. European companies or individuals who do buy these products and are caught risk criminal prosecution. The ban on the import of diesel is particularly far-reaching. The fuel is essential for, among other things, freight transport throughout Europe. Russia has supplied half of all diesel imported into the EU in recent years.

In fact, the sanctions are the culmination of the EU’s energy measures against Russia since the invasion of Ukraine. Imports of coal and crude oil have already been restricted. The EU countries have also agreed that they will stop buying Russian gas by 2027 at the latest.

2An insurance ban is also being introduced, right?

Yes, just like the previous boycott of Russian crude oil. In order to increase the ‘reach’ of the sanction, insurance policies may no longer be sold for it in European countries transport of Russian oil products. Because almost all insurers for this type of transport are based in Europe, it is also becoming more difficult for non-EU countries to obtain diesel from Russia. There is one way out: if buyers promise to only purchase the products at a maximum price, they can still get insurance.

For example, countries that do not participate in the sanctions can still continue to buy Russian diesel – which is seen as essential. Because if Russia can no longer sell its products anywhere and removes them from the market, there will be a major market disruption. At the same time, the Kremlin’s income will be squeezed, is the idea. Last weekend, just before the deadline, after weeks of pleading, the EU countries finally agreed agree about what that maximum price should be. For diesel it is $100 per barrel. Eastern European countries in particular find this maximum price too high. They would have wanted to hurt Russia (much) more.

3What do EU countries hope to achieve with this sanction?

The intention is to hit the Kremlin’s revenues, so that President Putin has less money to finance his war against Ukraine. Russia is one of the world’s largest exporters of fossil fuels, and the Kremlin’s budget relies heavily on tax revenue from that activity. The EU itself has been one of Russia’s biggest customers for decades. In 2021, before the war against Ukraine, EU countries jointly imported about 23 billion euros worth of oil products from Russia. If those purchases disappear, so be it “to bite”think the EU countries.

4And, is that so?

Researchers at the Helsinki-based think tank Center for Research on Energy and Clean Air estimated last month that the Russian government will lose about $ 120 million in revenue every day due to the new European boycott. That is a substantial impact: it amounts to a drop of almost 20 percent compared to what the Kremlin now receives per day thanks to energy trading, the researchers suspect. But that still leaves about $520 million in revenue (only from energy) per day, the think tank also estimates. And that is enough for the Kremlin to sustain its war for now. The point, of course, is that Russia manages to find alternative customers for a significant part of its products. Although it earns considerably less because those customers (especially China, India) demand hefty discounts.

5How does Russia react?

The Kremlin has repeatedly said in recent months that the sanctions make little impression, and that they will mainly hurt Europe itself. Last week Russia threatened that ‘third’ countries that want to pay the maximum price set by Europe will not get anything at all. Those countries will boycott Russia itself. For now, however, that seems like an empty threat. The price of Russian diesel is currently below the ceiling, so countries can simply buy it without officially participating in the ceiling.

6Should EU countries indeed fear the consequences of their own sanctions? Will diesel become (even) more expensive?

In any case, it will be a delicate period. Especially since there is one important difference with the boycott of crude oil that went into effect two months ago. China and India then bought up a large part of the Russian oil that Europe no longer wanted. But India and China are themselves major diesel producers and Russia should not rely on those countries this time. If it becomes difficult for Russia to find alternative customers, and it therefore decides to produce less, prices will skyrocket. After all, the global supply is shrinking, but the demand for it is not.

Shell’s new boss, Wael Sawan, also warned of this risk last week. When asked at the presentation of the annual figures whether he fears diesel shortages, he replied: “We will have to see how this turns out. Fortunately, the oil boycott did not cause serious market disruption, but the diesel market is much more complex.” The boss of the International Energy Agency showed up earlier not quite sure eitherdue to the lack of “this safety valve” this time.

7Should shortages be taken into account?

In the Netherlands, among others, the sector association for transport companies TLN has this concerns expressed. The interest group of petrol station operators, BETA, said earlier that it did not expect major problems, but does think that there will be “local dryers” can arise: pumping stations where temporarily nothing is available. A good thing for the Netherlands is that it has its own number of refineries.

8Have precautions been taken?

European countries have been in recent weeks hoarding a lot beaten. Minister Jetten (Energy, D66) has had extra ‘strategic’ stocks built up, so that the Netherlands can go ahead for ninety days in the event of shortages. Ships full of diesel are currently floating off the coast of Europe that seem to be waiting for an attractive moment to unload their cargo – if prices continue to rise, for example.

Last Friday, the cabinet issued a emergency plan presented in case things go wrong, something that industry association TLN has been insisting on since the spring of 2022. This plan describes measures to limit the damage. The government can decide to give certain business sectors priority for deliveries. What they are is still a mystery. Emergency services must not run out of fuel anyway. As well as transport companies that supply supermarkets.