Western governments must be clear about what sanctions can and cannot achieve – and how much sacrifice is acceptable

The grim scenes left behind after Russia’s withdrawal from Bucha, where Ukraine accuses Russian troops of torturing and slaughtering civilians, have intensified pressure on the West to provide more offensive weapons to Ukraine and for Europe to ban Russian energy imports. But beyond the legitimate question of Europe’s willingness to pay such a high price on Ukraine’s behalf lies the stark reality that sanctions are hardly a silver bullet.
Calls for sanctions began well before the invasion. When Russia was massing troops near Ukraine’s border, the Ukrainian government – and some American lawmakers – urged the United States and Europe to impose preemptive sanctions and offer Ukraine stronger security guarantees. But Western leaders demurred, arguing that sanctions would impede their ability to reach a diplomatic solution.
Of course, in geopolitics, as in life, hindsight is 20/20: we now know that those diplomatic efforts were in vain. What we do not know is whether preemptive sanctions would have motivated Russian President Vladimir Putin to rethink his plans, especially given that preemptive sanctions most likely would not have been as severe as the package of measures imposed after the Kremlin launched the invasion.
That package, after all, is the most comprehensive and co-ordinated punitive action taken against a major power since World War II. Overcoming initial reservations, the European Union joined the US in cutting off Russian banks from the arteries of global finance in a matter of days. The West also froze much of the Russian central bank’s foreign-exchange reserves – an unprecedented step that surely triggered a red alert in China, with its $3.25tn in official reserves.
At first, the sanctions seemed to be having the intended effect. Within a week, the rouble had fallen by a third against the US dollar. Tumbling share prices forced the authorities to suspend trading on the Moscow stock exchange for nearly a month. Russia’s GDP is expected to contract by 10-15% this year.
But, even as the sanctions vise continues to tighten, Russian markets appear to be stabilising. Thanks to robust intervention by the authorities, the rouble is now trading close to its pre-war levels, and the stock market has recovered some losses. With the violence showing no sign of abating, Western governments must be clear about what sanctions can and cannot achieve – and how much sacrifice is acceptable.
Sanctions, first used in the Peloponnesian wars, have been an instrument of foreign policy for some 2,500 years. While their sophistication and complexity have increased over time, the basic mechanism has remained the same: inflict enough economic pain to force the target to change its behaviour.
But the most comprehensive analysis of sanctions use, conducted by researchers at Drexel University, found that the goals of sanctions were completely met in only 35% of cases. Where sanctions have had an impact, such as in South Africa during apartheid, they have been combined with other measures to advance a specific foreign-policy objective.
Moreover, even well-targeted sanctions and asset freezes have limited efficacy against autocracies. From North Korea to Iran, regimes shield themselves from economic pain through convoluted schemes to evade sanctions. Putin’s regime – including his cronies – has proved adept at ensuring that sanctions do not affect them.
Instead, it is ordinary Russians who will pay the price for today’s sanctions. And, contrary to the hopes of some in the West, this is unlikely to lead to Putin’s fall from power. Dictators are not particularly vulnerable to shifts in public opinion. And a revolution does not seem forthcoming, not least because of the work of the Kremlin’s increasing repression and powerful propaganda machine.
By “cancelling” Russian culture and mounting “unprovoked” attacks on the country’s economy, the Kremlin narrative goes, the West is trying to destroy Russia – just as Putin had long warned. Anyone in Russia who opposes the “special military operation” in Ukraine is a “traitor” or a “gnat,” ready to “sell their souls.”
With no independent media left to refute these narratives, Russians seem to be largely convinced. A recent poll by the Levada Center indicates that 83% of Russians approve of Putin’s actions in Ukraine, compared to 69% in January – a relevant statistic, notwithstanding the complex realities in Russia.
While Putin’s regime insulated itself from the pain of sanctions, Europe is facing high costs of its own. In today’s economically interdependent world, sanctions often imply hefty costs for both sides. Though Western economies are not particularly dependent on Russia overall, Europe relies on it for a large share of its energy. So, while the US Congress votes to ban all Russian energy imports, EU leaders have targeted only Russian coal, not oil or gas.
A comprehensive ban on Russian energy imports to Europe would undoubtedly increase the pressure on the Kremlin. But such a decision must be approached with care. As German Chancellor Olaf Scholz recently warned, the economic and social costs of a sudden embargo would be massive. It will take time to wean Europe off Russian natural gas while also maintaining European social and economic stability.
Equally important, sanctions are an integral part of a broader negotiating strategy. Once the West has launched all its biggest economic weapons, it will have no remaining leverage. There must be room to escalate in response to Putin’s actions, particularly the deployment of chemical or tactical nuclear weapons.
The West’s arsenal in Ukraine is clearly limited. Sanctions are an important and powerful weapon, and they are putting some pressure on the Kremlin. But given their limitations – and the costs that must be borne by both the West and ordinary Russians – they must be used judiciously. Otherwise, Putin, who appears to believe his paranoid propaganda and oversees the world’s largest nuclear arsenal, may conclude that he has nothing to lose. — Project Syndicate

• Ana Palacio, a former foreign minister of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University.

Germany was warned it could face a €220bn ($240bn) hit to output over the next two years in the event of an immediate interruption in Russian energy supplies over the war in Ukraine.
Economic institutes advising the government in Berlin said on Wednesday in a joint forecast that a full halt in Russian natural gas imports would result in a “sharp recession.”
“The decision to become independent from Russian supplies of raw materials is likely to remain valid even when the military and political situation calms down again,” the report said. “That means part of the energy supply and energy-intensive industry must realign itself.”
While the €220bn estimate is the equivalent of 6.5% of annual output, it’s nowhere near the almost €890bn in borrowing Germany carried out in 2020 and 2021 to shield the economy from the fallout of the pandemic.
Amid mounting casualties and reports of brutal atrocities, Germany has been under increasing pressure to justify its resistance to an embargo on Russian gas – widely seen as the ultimate leverage against President Vladimir Putin.
Ukraine snubbed a request by Frank-Walter Steinmeier, Germany’s president, to visit Kyiv this week following criticism for his past support for the Nord Stream 2 gas pipeline from Russia to Germany and for his role when foreign minister in encouraging reconciliation and dialogue with the Kremlin.
Finance Minister Christian Lindner highlighted the huge challenges facing Germany as it tries to wean itself off Russian energy as quickly as possible while also pursuing a goal of climate neutrality by 2045.
“Our world will not be the same again as it once was,” Lindner, who’s chairman of the pro-business Free Democrats, wrote in a guest article for the Handelsblatt newspaper published on Wednesday.
“We need new business models, new ideas, new supply chains and new trade relationships,” he said. “We have to reduce one-sided dependencies, be it when it comes to importing energy from Russia or exporting to China.”
Berlin-based DIW, one of the institutes involved in the estimate, said on Friday that Germany could be in position to survive without Russian gas, which currently accounts for two-fifths of its gas deliveries. The group said a combination of high storage, bolstering other energy supplies and implementing programmes to lower demand could offset Russia as soon as this winter.
That’s not a view that’s generally shared by the business community, with industry leaders including Deutsche Bank AG Chief Executive Officer Christian Sewing warning of dire economic consequences if Russian supplies are severed.
Even absent a cutoff, Wednesday’s report pared the outlook for Germany’s economy, predicting growth this year of 2.7% and 3.1% in 2023. Those numbers compare with previous projections for expansion of 4.8% and 1.9%. Inflation will average 6.1% in 2022 – the most in 40 years.
“The shock waves from the war in Ukraine are weighing on economic activity on both the supply side and the demand side,” said Stefan Kooths, vice president of the Kiel Institute for the World Economy. “Increasing prices of critical energy commodities following the Russian invasion further fuel the upward pressure on prices.”
Germany’s industry-heavy economy faces considerable hurdles after the war sent energy prices higher while disrupting supply chains that had already been suffering from pandemic-related snarls. Inflation reached 7.6% in the first full month of the war – the highest level since records began after reunification in the early 1990s.
Companies are seen as particularly vulnerable because of Germany’s reliance on Russian gas. The ruling coalition last week agreed on an aid package for suffering businesses that includes loans, loan guarantees and capital injections, and is meant to help energy firms in particular.

The International Energy Agency cut its forecast for global oil demand this year after China reimposed lockdowns to contain the spread of a resurgent coronavirus.
With the weaker demand outlook and the massive release of emergency oil reserves by IEA members, the agency now sees global markets in balance for much of the year. Crude prices have already lost most of their gains since Russia’s attack on Ukraine, to trade near $100 a barrel in New York on Wednesday.
“We’re seeing now that economic forecasters are continuing to downgrade their outlook for the world economy, and obviously this will have an impact on oil demand,” Toril Bosoni, head of the IEA’s markets and industry division, said in a Bloomberg Television interview. “The market does look more balanced.”
The Paris-based agency, which advises most major economies, lowered projections for world fuel consumption this year by 260,000 barrels a day, with a particularly steep reduction of 925,000 a day for China in April. Still, global demand remains on track to increase this year.
The IEA also dialled back estimates for the loss of Russian supplies from an international boycott over its military aggression. Production in April may be 1.5mn barrels a day lower than the prior month – roughly half the drop that was previously expected. Those losses may still double in May, the IEA said.
Oil surged well above $100 a barrel following Russia’s attack on its neighbour. While prices have eased, they are still high enough to stoke inflationary pressures and exacerbate a cost-of-living crisis for millions of consumers. To counter this, IEA members announced last week that they will deploy 240mn barrels from emergency reserves, the biggest stockpile release in the agency’s history.
“Prices are now back to near pre-invasion levels, but remain troublingly high and are a serious threat for the global economic outlook,” the IEA said.
World oil consumption will expand by 1.9mn barrels a day to average 99.4mn a day this year, according to the IEA.
“Oil demand is still recovering from Covid,” said Bosoni. “The aviation sector is recovering, there’s pent-up demand, so we are expecting growth. But obviously downside risk if the economic outlook deteriorates.”
China’s fierce zero-Covid policy has diminished demand growth, as millions are locked down in their homes, imports drop and business activity slows in the world’s second-biggest economy.
The IEA noted that Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have refused to open the taps faster, partly from a belief that markets didn’t face a genuine shortage, and partly to preserve the Opec+ coalition they lead with Russia.
Opec+ members managed to provide just 10% of the supply increase scheduled for March, according to the IEA. The 19 coalition members, which have been engaged in a pact to stabilise markets since the start of the pandemic, added a mere 40,000 barrels a day as diminished investment erodes production capacity across the group.
The clash over policy between Opec+ and the IEA – which has openly expressed disappointment with the group’s inaction – came to a head last month with Opec abandoning the agency as one of its data sources.

Europe’s push to ditch Russian natural gas is generating billions of dollars in new commitments to build a low-carbon hydrogen market.

A nearly 450% rise in gasoline prices in Europe last year made the green fuel of the future cost-competitive about a decade ahead of schedule, according to BloombergNEF. Now investment funds are joining governments and utilities in ambitious plans to make hydrogen a viable substitute for fossil fuels in manufacturing, transportation and heating.

“It’s kind of a tipping point,” said Phil Caldwell, chief executive of Ceres Power Holdings PLC, a UK-based hydrogen technology company. “You’re going to see that capital coming in on a massive scale now. There is no going back.”

Russia is ostracized on the world stage for invading Ukraine, but some of its harshest critics still need its oil and gas to keep their economies running. Europe is accelerating efforts to break that addiction, with Fortescue Metals Group Ltd. planning a $50 billion hydrogen supply chain project with German energy giant E.On SE; Norway’s Scatec ASA building a $5 billion production facility; and the investment fund Hy24 that allocates $1,600 million for infrastructure.

The case for hydrogen was already growing, mainly because of its climate benefits, but the war broadened investor interest by highlighting the need for energy security, Fortescue billionaire founder Andrew Forrest said in an interview.

“It has accelerated money flows,” Forrest said in London. “After the tanks crossed the border, there is none of that awareness in people’s minds. It is a physical, fiscal necessity.”

Some 93% of hydrogen producers, users and investors who attended a BNEF roundtable last month said they hoped the war would boost the development of the green hydrogen industry. Support for domestic production and imports from reliable sources will be key, participants said.

Green hydrogen has long been more expensive to produce than the traditional kind, which is made from natural gas in a process that releases carbon dioxide into the atmosphere.

That is starting to change. BNEF analysts found that green hydrogen, made by machines called electrolysers powered by the wind and sun, would be cost-competitive today with the fossil-fuel-based product.

“Without a doubt, the case for renewable hydrogen has improved significantly,” said Martin Neubert, chief commercial officer at Orsted A/S, which plans to produce green hydrogen for shipping giant AP Moller-Maersk A/S. Orsted is the largest developer of offshore wind farms.

Previously, that cost parity wasn’t expected until around 2030 through a combination of cheaper electrolysers and massive growth in turbine and solar panel deployment, making production cheaper.

But rising gasoline prices changed the calculus, meaning green hydrogen costs don’t need to fall that much to be competitive. Simply replacing current demand for hydrogen with the green kind in industries such as oil refining and fertilizer production could reduce the European Union’s demand for gas by 12%, according to BNEF.

At the same time, the bloc’s carbon price has nearly doubled in the last year, making emission-free gas more attractive.

“The economy is moving in favor of green hydrogen,” said Ivan Pavlovic, chief executive of French bank Natixis CIB, which is working on financing the fuel’s production. “The projects we’re looking at now seem more bankable from a financial perspective.”

However, the costs only cover part of the way. Gasoline prices could drop, returning the economy to where it was before. However, the war bolstered the political support essential to expanding the industry.

The European Union doubled its green hydrogen capacity target to 80 gigawatts by 2030, compared with less than 1 gigawatt today. The UK has just set a target of producing at least 5 gigawatts of hydrogen from electrolysers by 2030, the first time it has been so specific.

In the US, US President Joe Biden’s administration has said the infrastructure needed to increase natural gas shipments to Europe will be ready for conversion to handle hydrogen.

These projects will take years to materialize and will require a huge increase in renewable sources, but government support still gives private money the confidence to move. under management, and FiveT Hydrogen, the world’s first investor to focus exclusively on clean hydrogen.

“It’s a growth issue, it’s an ESG issue and it’s renewables at scale in countries that need it,” said Hy24 CEO Pierre-Etienne Franc. “Because of that, and because of greater certainty about the future, people are happy to make compromises.”

Danish fund manager Copenhagen Infrastructure Partners K/S initially raised €800 million ($880 million) for its first Energy Transition Fund, with plans to increase it to €2.3 billion. It recently acquired a stake in German electrolyser maker Sunfire GmbH and has agreed to buy 640 megawatts of the company’s machines for its own green hydrogen projects.

The London-listed L&G Hydrogen Economy UCITS ETF has exposure to companies with a minimum market capitalization of $200 million, including electrolyser manufacturers and hydrogen producers.

HH2E is seeking €2.7 billion to build 4 gigawatts of green hydrogen and green heat production capacity by 2030. Co-founder Andreas Schierenbeck, a former chief executive of German utility Uniper, said he is in talks with three financial investors to fundraising.

“There is a lot of money in the market,” Schierenbeck said. “Private equity firms want to invest now with early start-ups.”

Seated around the dining table, the family of four stares blankly at pictures of food sketched on the tablecloth. “Tonight,” the father says, “we’re coloring for dinner.”

The scene in a cartoon in a Moroccan newspaper speaks to the predicament facing the kingdom’s 37 million people and their peers across North Africa as the Muslim world marks Ramadan. Normally characterized by abstention broken by plentiful sunset feasts, the holy month for many this year is a confrontation with painful economic reality.

Global food costs are up more than 50% from mid-2020 and households worldwide are trying to cope with the strains on their budgets. In North Africa, the challenge is more acute because of a legacy of economic mismanagement, drought and social unrest that’s forcing governments to walk a political tightrope at a precarious time.

The Middle East and North Africa region’s net food and energy importers are especially vulnerable to shocks to commodity markets and supply chains resulting from Russia’s war on Ukraine, according to the International Monetary Fund. That’s in countries where the rising cost of living helped trigger the Arab Spring uprisings a little over a decade ago.

“Just how much more do we have to take?” asked Ahmed Moustafa, a 35-year-old driver and father of three in Cairo. He already had to sell some appliances to keep food on the table and cover other expenses, he said. “We keep being asked to cut and cut and cut, but there’s not much left to cut from.”

Home to large, mainly urban populations and lacking oil wealth, governments in Egypt, Morocco and Tunisia are struggling to maintain subsidies for food and fuel that have helped keep a lid on discontent.

The World Food Programme has warned that people’s resilience is at “breaking point,” while the United Arab Emirates moved to help ally Egypt, the world’s largest buyer of wheat, to shore up its food security and ward off potential instability. Egypt is also seeking IMF help.

Egyptian President Abdel-Fattah El-Sisi has tried to push ahead with reforms to revive the economy since coming to power in 2014 without fueling popular frustration. He sought last month to unite the nation behind inevitable sacrifices.

That includes shunning old habits of over-consuming — especially during Ramadan, which started on April 2. “People think that my dining table looks different,” El-Sisi said at March 23 event, urging the country of over 100 million to scale back during the Iftar meal that breaks the day-long Ramadan fast. But, “I am responsible before God,” he said.

Just weeks ago, Egyptian officials were quick to take pride in the fact that the economy of the Arab world’s most populous nation had weathered the pandemic and posted solid growth. Inflation, too, was under control.

That changed after Russia’s invasion of Ukraine on Feb. 24. Investors pulled billions of dollars from the country’s debt market and the currency sank 15%. Egypt banned exports of key foodstuffs including flour, lentils and wheat.

By early March, the war had pushed up wheat-flour prices by 19% and vegetable oils by 10%, the government said. That’s in a country where the average family income is about 5,000 pounds ($272) a month — roughly 31% of which is spent on sustenance, according to the state-run statistics agency.

Hilal El-Dandarawy, a retired state employee in the southern city of Aswan, said he’s now bracing for a surge in fuel prices and a tsunami of other increases. “We are living in a price crisis in goods and services, electricity, water and gas,” he said.

A worse situation is playing out in Tunisia, the nation that gave birth to the Arab Spring revolts and which has been mired in political turmoil ever since. The pounding the economy took as a result of that infighting among officials is now amplified thanks to COVID-19 and Russia’s war on Ukraine.

The central bank has warned that strong measures must be taken to reform the economy, but such efforts have been repeatedly blocked by the powerful UGTT labor union. Tunisia, too, is turning to the IMF amid warnings about the risk of default on its debt.

The dilemma for Ahmed Masoud, a 40-year-old merchant in the old city in the capital Tunis, brings those broader issues into sharper focus. He complained that the dearth of tourists, which had begun due to the pandemic, is now exacerbated by the Ukraine conflict.

Government assistance to offset the drop in business has barely made a dent and he can barely cover utility bills. “I think I’ll close my shop and look for another job,” Masoud said, with a resigned shrug.

Back in neighboring Morocco, things aren’t any better. While it managed to avoid the political upheavals of the Arab Spring in 2011, it hasn’t been spared on the economic front. Growth is expected to grind down to 0.7% this year, around a tenth its level in 2021. The central bank predicts inflation, meanwhile, will hit 4.7%, relatively modest compared with even parts of Europe, though still the highest since the 2008 financial crisis.

Managing the “exogenous shock” of the war may force Morocco to seek a precautionary liquidity line from the IMF, Governor Abdellatif Jouahri said. Morocco is facing “an unprecedented situation,” he added. The war in Ukraine is threatening to stoke public anger over prices and send the state’s financing needs to historic highs.

Grains merchant Mohamed Bellamine, whose shop in Rabat’s Rahba market would normally be heaving with shoppers in the days before Ramadan, sees the impact clearly. He gestures to the empty street with a sigh: “Usually you wouldn’t even be able to find a place to park.”

After reports of alleged war crimes in Ukraine by Russian forces, Japan said it will follow the European Union and Group of Seven countries and ban imports of Russian coal. Prime Minister Fumio Kishida said the country will secure alternative sources of energy in a speedy manner, although no time frame was given. But shifting away from Russian fuel will be easier said than done for resource-poor Japan.

WHAT SANCTIONS HAS JAPAN IMPOSED ON RUSSIA?
Ever since the invasion of Ukraine in late February, Japan has joined the US and European countries in sanctioning Russia. It has imposed export controls, including on semiconductors and has sanctioned some oligarchs and their family members. Russia is barred from issuing government bonds in the country. Japan is also taking in Ukrainian refugees.

WHAT ABOUT ENERGY?
Japan had drawn a line there, as it has few resources of its own. Russia supplies Japan with 13 per cent of its coal for power generation, known as thermal coal; 8 per cent of the coal used in steelmaking and 9 per cent of its liquefied natural gas. Japan has stakes in the Sakhalin-1 and 2 oil and gas projects in Russia, which Kishida has called “an extremely important project for energy security.” But on Apr 8 trade minister Koichi Hagiuda said Japan “will aim to stop importing coal from Russia” as a longer-term goal.

WHY THE CHANGE?
Japan was standing with its G7 partners, who expressed outrage over reports of atrocities committed by Russian forces in Ukraine. “There needs to be accountability for such inhumane acts,” Kishida said, adding that he believes Russia committed war crimes in Ukraine.

WHAT ARE THE CHALLENGES FOR JAPAN?
The global market for thermal coal is already tight, and with the EU also phasing out Russian coal, competition from other countries will increase, said Ali Asghar, an analyst at BloombergNEF. That means prices could rise, which could then translate into even higher electricity bills. Energy-intensive industries such as chemical manufacturers would be especially hard hit, and some might look for other sources of fuel.

Longer term, a drive to cut Japan’s dependency on coal could accelerate the transition to renewable energy and the restarting of nuclear power plants that were taken offline following the 2011 Fukushima disaster, said Isshu Kikuma, another analyst at BloombergNEF.

That said, neither offer immediate solutions. Hagiuda, the trade minister, said Japan will, over time, use energy conservation, other power generation and supplies from alternative countries to reduce its dependency on Russia.

CAN OTHER SUPPLIERS REPLACE RUSSIAN COAL
Not exactly, as Japan will have to take into account the variety of coal grades. Some power plants and furnaces are most suited for Russian coal and can’t easily replace it with supplies from Australia or Indonesia.

There are also logistical complications when it comes to quickly pivoting to new sources, as shipments may come from producers that are farther away or there may not be vessels readily available.

WHAT ABOUT THE OTHER FOSSIL FUELS?
Japan is facing a pretty tight supply situation. Tokyo hasn’t announced any intention to walk away from its energy projects in Russia, as UK oil majors BP and Shell have said they would do. It also has avoided any direct action on Russian oil and gas so far, in line with the EU.

Russia’s crude oil exports, a vital wellspring of income for Vladimir Putin’s regime, are giving no indications that they are beginning to crumble in the midst of the vanishing of European purchasers. Shipments in the seven days to April 8 proceeded with a bounce back that started the earlier week, after reliably falling since Russia’s Feb. 24 invasion of Ukraine. That is as per Bloomberg News’ first tracker of all crude leaving the nation’s export terminals on ocean-going tankers. Week by week shipments hit very nearly 4 million barrels every day in the first full week of April, the most significant level seen up until this point this year. That was up by just about one quarter over the earlier week.

Boosted by a combination of higher export volumes and an increase in the duty payable per barrel in April, the Kremlin earned an estimated $230 million from seaborne crude exports in the week to April 8, based on calculations of the amount payable on each cargo that left Russian ports that week.

And the same pattern holds for the export duty revenues that the Russian state receives on overseas shipments. In the week to April 8, they jumped back to equal their highest level this year, after falling in each of the two previous weeks.

But while overall export volumes are shrugging off import bans and self-sanctioning, there is one area where a clear impact is already being seen — the distances that cargoes are being shipped to find willing buyers.

At the same time, there are signs traders are starting to work on ways to get more crude to Asia, where buyers are willing to take advantage of big discounts on Russian oil. Increasing numbers of Very Large Crude Carriers, supertankers able to carry two million barrels, are loading Russian crude from smaller ships in the Mediterranean Sea and elsewhere.

European oil majors including Shell Plc and TotalEnergies SE, which normally run tanker loads of Russian crudes through their refineries every week, have said they will stop buying out of revulsion over the war in Ukraine. The U.S. has stopped buying all Russian oil and the U.K. will follow suit by the end of the year. The early data suggest it’s having an impact.

Before the war, Russia was the world’s second-largest oil exporter, behind Saudi Arabia, shipping almost 5 million barrels of crude oil every day with a spot-market value of more than $500 million. Some of that crude is delivered by pipeline directly to refineries in Europe and China, but about 60% moves by sea. In the coming months, we plan to systematically track the flow of seaborne crude from Russia, providing week-by-week insight into how the war is affecting those flows, and showing the impact on Russia’s petro-reliant economy.

Disappearing Markets

Traditional markets in Northwest Europe for Russia’s Baltic Sea exports are disappearing fast, as buyers self-sanction Moscow’s crude. Half of the ships loading at the northwest Russian ports of Primorsk and Ust-Luga last week are either heading to Asia, or not showing final destinations. Most of that second group are signaling destinations such as Gibraltar or Malta, suggesting that they may either be heading to Asia via the Suez Canal or to conduct ship-to-ship transfers in the Mediterranean (see below). The Mediterranean is starting to become a preferred location for transfers of cargoes of Russian crude from smaller vessels onto giant intercontinental supertankers for shipment to Asia.

Exports from the Black Sea terminal at Novorossiysk soared in the past week, surging to just under 800,000 barrels a day, more than three times the volume shipped in the previous week, when a backlog of vessels waiting to load built up off the port. Most shipments from Novorossiysk are staying within the Mediterranean region, which includes the Black Sea ports of Bulgaria and Romania, where three of the seven cargoes have discharged.

Of 21 Urals cargoes loaded from Primorsk, Ust-Luga and Novorossiysk in the week to April 8, six are heading to India, four have unknown destinations and the remainder look set to deliver their cargoes within Europe, according to their destination signals. Shipments from the Arctic port of Murmansk are still finding outlets in northwest Europe, with all three cargoes that loaded in the week to April 8 heading either to Rotterdam in the Netherlands or Wilhelmshaven in Germany, according to their destination signals.

Shipments from Russia’s three Pacific Ocean terminals, dominated by exports of ESPO crude from Kzmino, are almost all now heading to China, with only occasional cargoes going elsewhere. Perhaps the biggest initial impact of the import bans and self-sanctioning of Russian crude is to be seen in the very long and unusual journeys that some cargoes are beginning to make.

Cargoes are being transferred from the ships that call at Russian terminals onto much bigger vessels in order to benefit from economies of scale on the long voyages to China and India. A supertanker, known in industry speak as a Very Large Crude Carrier, or VLCC, can be used to accumulate the cargoes from three smaller vessels, known as Aframaxes, that often load west Russian barrels. Vitol Group, the world’s biggest independent oil trader, booked a supertanker, Searacer, to load from Denmark’s Skaw, a popular location for ship-to-ship transfers of Russian cargoes.

8 April 2022
Roudi Baroudi

DELPHI, Greece: Russia’s invasion of Ukraine could force Europe to delay key decarbonization efforts for up to a decade, a prominent regional energy expert warned on Friday.

“They don’t have many choices left,” said Roudi Baroudi, CEO of Doha-based Energy and Environment Holding, an independent consultancy. “Unless some European countries pull out all the stops, much of the continent could soon be looking at crippling shortages, prohibitively high prices, or both.”

Now that Europe is moving to reduce imports of Russian oil and gas, he explained, some of the measures expected to reduce carbon emissions may have to be put off “for eight, nine, maybe ten years”, as would planned shutdowns of nuclear generating stations.

“The European Union will need to provide the necessary permissions in some cases, plus financing in others,” he said. “Eight to ten nuclear plants and as many as 30 coal stations slated for decommissioning will have to remain online to keep up with electricity demand, and several projects required to replace Russian gas will need to be accelerated with additional funding and/or guarantees.”

If and when gas stops flowing through pipelines from Russia, Baroudi told the conference, “it cannot be replaced by simply ordering more liquefied natural gas from Qatar, the United States, and/or other producers. Europe doesn’t have enough receiving facilities to re-gasify such huge amounts, which is why efforts to expand capacity in Germany and the Netherlands are so urgent.”

Coordinated releases of strategic oil reserves by the US and other countries are helping to contain upward pressure on crude and other energy prices, he said, but reasonable levels “cannot be maintained unless more supply makes it to market and that means oil producers –primarily OPEC but others as well – have to start pumping more.”

On yet another front, “Spain has both spare LNG receiving capacity and an undersea pipeline for imports of gas from North Africa – but very little of that can reach the rest of Europe unless and until a new pipeline connects the Iberian Peninsula to the rest of Europe via France,” said Baroudi, who has been advising companies and governments on energy policy for decades. “Paris has recently voiced new openness to that idea, but the EU can and should do more to facilitate it. It should also do more to establish an agreed route for another pipeline to carry gas from the Eastern Mediterranean to Greece and/or Turkey.”

Baroudi also argued that the EU would be wise to ensure adequate capital flows into renewables such as wind and solar. “We might have to retain fossil fuels longer than we had planned, but that’s no reason to stop funding a cleaner future,” he said. “In fact it’s a reason to move as quickly as possible.”

“The whole situation is very sad,” he added. “Ever since the Paris Agreements of 2015, and especially since the Glasgow climate summit last year, Europe had been on the right track to be ready for a decarbonized economy. But now those plans are temporarily being pushed to the back burner. Apart from the lives being lost in the fighting, the energy and economic implications will mean severe hardships across the continent and even beyond, especially for lower-income people, who are the most vulnerable as rising energy prices cause the cost of food to spike as well. So there will be hunger, too. And much of the cause is due to repeated delays in the diversification of Europe’s sources of supply. Now it finds itself scrambling to prevent an economic disaster.”