As calls for a complete embargo of Russian energy products sweep across the world and throughout Europe, we are increasingly asked: “How exactly would that work”?
There are many ways to make such an embargo operational, but we propose to start with a two-pronged approach: a complete EU embargo on physical deliveries of oil and gas by ship, as the US has already done; and a financial embargo under which European customers would pay for gas, but those proceeds could not be currently used by any Russian entity for any purpose.
At its foundation, imposing a Russian energy embargo is a moral question, not a matter for economics. We can, of course, use economics to guide us regarding how to make this embargo effective, but really there is only one goal that matters: Make Vladimir Putin stop killing Ukrainians.
As you know from press reports, Ukrainian forces have inflicted severe damage on the neo-fascist invaders. Putin is now reportedly shopping for military supplies of all kinds and, unfortunately, some countries may sell to him, including China. But as Russia could be on the verge of a major military defeat, no one will extend credit to Putin’s regime on reasonable terms, so Putin needs cash – preferably US dollars, euros, pounds, or Swiss francs.
Our key objective, and what we are requesting of governments everywhere, is to prevent any such hard currency from coming to Russia in any form that can be used to make purchases elsewhere in the world.
Oil and petroleum products are Russia’s most important exports, with a value of $190bn in 2019 (the last year for there is complete data). Gas is third, at around $50bn per year. Coal exports are in fourth place at $16bn in 2019, and all other exports combined are only around $32bn.
Most Russian oil moves by ship, and this requires a huge daily sealift operation: four million barrels of crude are exported in ships and another two-three million barrels of derivatives also travel mostly by ship. More than one million barrels of crude oil travels by pipeline. About half of all these deliveries are to the EU.
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Most of Russian gas goes by pipeline, with more than 60 per cent sold to the EU on long-term delivery contracts. The UK buys another 4.5 per cent of Russian gas exports.
The physical embargo we propose is straightforward to implement. US ships will (hopefully) soon be prohibited from lifting any Russian oil or liquified natural gas (LNG). The large north European bulk carriers have already voluntarily stood back, indicating they will not lift from Russian ports for the duration of this war. This is commendable, and these companies will have our eternal gratitude.
Unfortunately, some Greek-owned shipping fleets are still lifting Russian oil in the Black Sea and elsewhere. We have communicated the precise details of these vessels to the Greek government. These fleets have a large carrying capacity and, without their help, Russia would have a major problem.
The Greek government could prohibit Greek-owned tankers from lifting Russian oil. Unfortunately, they have declined to help. We are today requesting that the US government impose primary sanctions on all Greek shipowners who lift Russian oil. Our maritime intelligence service is providing to the American authorities all details of every ship and all the commercial parties involved, including insurance companies. We will name all the individuals.
Sanctions are appropriate because these Greek shipowners are financing the Russian regime. If these shipowners continue to lift from Russia in face of those sanctions, there is no company or bank in the world that will agree to do business with them. End customers, to whom Greek tankers deliver, may also find their assets immobilised or forfeited.
In addition, we are calling on the German government to lead the EU to a physical oil boycott. We are providing Chancellor Olaf Scholz and both the Green Party ministers with hour-by-hour updates on the shipping of Russian oil and gas to Germany, and we will do the same for all other European countries.
Europeans have opened their hearts to our plight and their homes to our refugees. The outpouring of support is amazing. Recent polls in France and Germany have shown strong support for tougher sanctions, and suggest that a growing number of Germans support a complete Russian oil and gas ban. Europeans stand with Ukraine and have taken millions of Ukrainians into their homes. Surely many of those same generous people are willing to walk to work – or take the tram or ride a bike or share a car ride in order to stop Putin.
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As for gas, we are deeply puzzled as to why European governments think this is a hard problem. The pipeline operators are Russian companies. They are paid in euros, primarily into accounts held with European banks. Those euros are then remitted back to Russia or, potentially, used in some offshore transaction.
We propose that the Europeans continue to pay for pipeline-delivered gas and oil, but that the euro-denominated accounts of those Russian pipeline operators be frozen in terms of withdrawals. If properly implemented and enforced, this would mean that all gas customers continue to meet their contractual obligations, while through force majeure the EU creates what would be effectively escrow accounts for the duration of the war.
Russia has already done the same for bond coupon payments by corporate issuers to German investors (and all Western investors). These must now be paid into rouble accounts which cannot at this time be converted into a hard currency or transferred abroad in any form. Our proposal is an appropriately calibrated form of reciprocity, of a kind that is common in the field of diplomatic retaliation.
German Galushchenko is the Ukrainian minister of energy and Oleg Ustenko is an economic adviser to President Zelensky. Follow them on Twitter: @G_Galushchenko and @OlegUstenko.