The Western campaign to deprive the Kremlin of resources and force President Vladimir Putin to abandon the war in Ukraine is reaching a sensitive phase, reports Bloomberg.

From February 5, the European Union will join the UK and the US in banning seaborne imports of Russian diesel fuel and other petroleum products. This measure, combined with a price cap on Russian fuel exports, is intended to create a significant hole in Moscow’s energy revenues.

The downside: If European buyers can’t find alternative supplies, sanctions risk hitting new diesel-dependent industries like agriculture and road transport and making it harder for governments to contain inflation.

1. Isn’t Russian oil already under European sanctions?

Yes, but they refer to crude oil, which is subject to European bans and a $60 per barrel price cap set for companies still buying from Russia. The new sanctions will affect marine Russian oil refining fuels. The country is also a major exporter of naphtha, which can be used to make gasoline and plastics, and fuel oil, which is often used for power generation and shipping. It also carries jet fuel, gasoline and other petroleum products. Overall, Russia accounted for 9.3% of global oil product cargo by volume in 2022, about 0.5 percentage points more than its share of the crude oil market, so these latest EU sanctions are equally important.

2. How will the price cap work?

Just like the restrictions on crude oil imposed by countries such as the G7 and the EU. Anyone who pays more than the limit for goods shipped from Russia will not be able to receive insurance and funding from key member states. This is a big deal considering that over 95% of the world’s offshore oil tankers are insured through London. The idea is that even if buyers in Africa and elsewhere are willing to buy Russian diesel above the marginal price, most of the world’s tankers will not be able to ship it. Oil product prices fluctuate, and the G7 is seeking to set two price ceilings, the levels of which have yet to be determined. It is possible that part of the Russian fuel is supplied at unlimited prices through a fleet of “shadow” tankers that do not depend on Western services.

3. How will EU buyers replace Russian fuel?

One of the biggest challenges will be replacing diesel-type products that are used in cars, trucks, agricultural machinery, ships, etc. In 2022, about 220 million barrels were transported from Russian ports to the Union – enough to fill about 14,000 Olympic pools. The obvious alternative is suppliers in the Middle East, where new refineries are being built. India and the US could also help fill this gap.

4. Will this be enough?

In part, this depends on whether Chinese companies use increased export quotas to supply more oil products to the world market. This will free up additional barrels to ship to the EU. A higher quota doesn’t necessarily mean all potential exports will take place, especially as China’s economy reopens after Beijing abandons its strict zero-case policy. There is also the question of whether Russia will continue to export diesel fuel. If this happens, global trade flows will be significantly disrupted. There would be the same amount of Russian fuel in the world, only sent to different places. However, if Russia fails to find enough buyers and is eventually forced to cut production, this could deplete global availability. Strikes in the French oil sector further complicate the picture, given the possibility of disruptions to refineries that could lead to a reduction in the EU’s own production.

5. What is the ideal outcome for the EU?

EU leaders. they hope the new sanctions will affect the Russian economy without hitting energy supplies, undermining key industries and making it harder for governments to control inflation. If the price ceiling is too low, Russian companies may refuse to sell or work harder to find ways around it. If it’s too high, they’ll just have to go through the hassle of finding new buyers. Potential replacement consumers of Russian fuel include Turkey, as well as countries in Africa and Latin America.

6. Could there be unintended consequences?

Some states could expect windfall profits if they actually buy Russian diesel fuel at peak prices to meet their domestic needs and sell the fuel from their refineries to EU buyers. at a much higher price. There is also nothing stopping non-EU buyers such as India from buying Russian oil, processing it at their own refineries to make fuel, and then legally selling those barrels to buyers in the EU. Traders who want to bypass the rules entirely can ship Russian fuel into the country, mix it with other fuels, and send it to the EU. It can become very difficult to prove the true origin of such loads.

Source: Bloomberg.