[La chronique de Gérard Bérubé] Difficult break with Moscow

There was talk at the end of the week of unconfirmed information that the European Union is taking a new step in its sanctions by subjecting Russian oil to an embargo. The question is whether Russia or Europe needs the other’s resources more.

The European Union (EU) refuses to pay for its gas purchases from Russia in rubles and must prepare for a disruption in its supplies, the European Commission and the French Presidency of the Council warned on Monday after a meeting meeting of the energy ministers of the 27 in Brussels. Moscow’s request to pay for purchases in rubles is “a unilateral and unwarranted change to the contracts — 97% denominated in US dollars or euros — and it is legitimate to reject it”, the energy commissioner said, Kadri Simson.

She was careful to add that “there are no immediate risks to supplies” while warning that “we can manage the replacement of two-thirds of Russian gas supplies, but we will not be able to replace the 150 billion m3 of gas purchased from Russia by other sources. It is not tenable, ”we read in the text of Agence France-Presse (AFP).

Gradual embargo

The reunited ministers also had an exchange on a gradual cessation of purchases of Russian oil and petroleum products in order to dry up European funding for the war launched by Vladimir Putin against Ukraine. But no decision has been made. If the 27 agree, the cessation of purchases of oil and petroleum products will be gradual, over 6 to 8 months, but with measures with immediate effect, a European official told AFP.

The EU has already imposed a coal embargo, due to come into force in August, and is aiming for a two-thirds cut in Russian gas supplies by the end of the year, counting on an immediate increase in deliveries of liquefied natural gas, notably from the United States. And the main objective remains the elimination of Europe’s dependence on Russian fossil energy “before 2030”.

With such an oil embargo, the EU is playing the card of asymmetrical reciprocal dependence. According to figures from The gallery, Russia accounts for 40 to 50% of European gas and coal imports, 20 to 30% of European oil imports and 15% of petroleum products. Conversely, Russia exports two-thirds of its oil to the European Union. Before the sanctions, hydrocarbons could provide up to 45% of federal budget revenue and two-thirds of the country’s foreign currency, adds The world. Of the total, oil exports account for a third of its public revenues and budgets.

The EU’s High Representative for Foreign Affairs, Josep Borell, has already calculated that Russia’s oil import bill will be four times larger than that of gas in 2021, at US$80 billion and US$20 billion respectively.

Difficult substitution

According to simulations by the Center for Economic Research and its Applications, the average annual per capita cost of an oil embargo is equivalent to a 0.7% reduction in gross national expenditure in the EU. This cost would be almost four times higher for Russia with a loss of 2.3% of its national expenditure. In its calculations, the macroeconomics observatory is based on the substitution effect that this sanction would trigger, with Russia having to rely on other outlets and the EU working to secure its supply by resorting to resources alternatives.

But this game of substitution is not perfect and is not homogeneous within the EU, going from an average annual cost per inhabitant of 5.3% in Lithuania to a gain of 0.2% in Luxembourg.

The impact on energy prices also feeds into the unknown. A strict embargo would be counterproductive, causing a new surge in world prices, warned US Treasury Secretary Janet Yellen. Already, many major oil traders expect oil prices to exceed US$200 a barrel by the end of the year, reports the FinancialTimes. Bank of America Chief Economist Ethan Harris has written that if the majority of Russian oil exports were halted, the result would be a shortfall of at least 5 million barrels per day in the market and 2. 8 million barrels per day of refined products, which would redraw the world energy map and have the potential to push the price per barrel to US$200. At JPMorgan Chase & Co, Brent is believed to end the year at US$185 if Russian supplies continue to be disrupted.

It has already been written that Russia, the world’s second largest exporter, is not a producer whose extractions can easily be offset. The substitution effect is also hampered by the difficulties of finding short-term substitutes due to constraints on physical infrastructure and transport. Also by the general increase in the prices of basic materials exerting pressure on the cost of infrastructure and renewable energy technologies, which are already exacerbating the persistent distortions in supply chains.

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