Oil: Are Sanctions on Russia Effective or Counterproductive?

Written by: Sebastien Bischeri

While Europe condemns Russia's actions, other countries take advantage of the turmoil and buy oil at a discount. Are any of the sanctions even effective?

Crude oil prices jumped over 3% on Monday, with investors worried about tighter supply in the market and even more nervous about the prospect of new European sanctions against Russia, which could affect Russian exports.

27 EU members failed to agree on an embargo as part of further penalties for Russia’s military deployment in Ukraine, with Germany warning of hasty moves that could plunge the economy into recession. Finally, on April 5, it was decided to introduce a total embargo, including for Russian coal, truck transport, and ports for Russian ships. However, the UE did not agree on the most important issues, i.e., the embargo on Russian oil and gas. Some countries, such as Hungary – where Prime Minister Viktor Orbán secured a new consecutive victory in the past weekend’s elections – opposed any prohibition.

Germany, however, aims to phase out Russian oil imports by the end of the year, officials said, as does Poland. Many buyers in Europe are voluntarily avoiding Russian crude oil in order not to damage their reputation or avoid possible legal difficulties.

Meanwhile, India and China, which refused to condemn Russia's actions, continue to buy Russian crude oil.

Lured by deep discounts following Western sanctions against Russian entities, India has bought at least 13 million barrels of Russian crude since late February, which is over 80% of the whole of 2021, according to some Reuters data.

Until now, Russian energy imports provided Europe with 40% of its natural gas needs and another 30% of crude oil.

Switching to a new energy source is NOT that simple, and the refineries also need a certain adaptation period to be recalibrated to new imported sources as crude oil may have very different components depending on where it was extracted from.

This is what most politicians can’t even understand as they keep threatening supplies to their own country by pretending to be capable of just switching from one source to another as fast as an eye blink.

It is certainly not as simple as that, and the same goes with SWIFT and energy payments.
Many countries wanted to cut Moscow off from the SWIFT International Payment System. However, how will they pay for their gas after that?

They will, in fact, have to make some exceptions with a few banks. Alternatively, they blocked or seized Russia’s currency reserves (both those in US dollars and euros), but now they are refusing to pay for their energy imports in roubles.

Has Russian energy become free then?

More seriously, given that the rouble is not widely available outside Russia, and that they will only accept payments in their domestic currency, there are only two options now for importing countries to pay Russia for their energy needs. As for the first option, they will have to pay for their imports with gold, which will surely be accepted. The second option, more indirectly, will use an intermediary bank that has not yet been disconnected from SWIFT, such as Gazprom Bank, where they will have to open a client account and then transfer the money in euros, so the bank will switch to foreign exchange operations (euro to ruble) and take a commission. The second option is indeed the most likely to be agreed between the different parties if the EU's most reliant on Russian gas does not want Russia to turn off the gas tap.


  • Map of Europe showing EU-Russia gas pipelines

If you think that Europe’s gas supplies could easily be replaced if Putin cuts off its gas exports to the EU, just look at the world gas reserves below, take a deep breath, and think again:

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Map of Europe showing EU-Russia gas pipelines (Source: Dailymail.co.uk)

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WTI Crude Oil (CLK22) Futures (May contract, daily chart)

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Henry Hub Natural Gas (NGK22) Futures (May contract, daily chart)

Related: Who Benefits Most From the Russia-Ukraine War?