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Cost of living crisis exacerbates Europe’s quest for consensus over Russian oil embargo

May 2, 2022, 1:28 PM UTC

Nearly a month has passed since the European Union imposed its fifth package of economic sanctions on Russia, and political pressure is growing to finally move forward with the next round.

After authorities announced in early April a four-month staggered ban of coal imports worth €8 billion ($8.4 billion) annually, Brussels is now attempting to cobble together an embargo against crude oil to further weaken Vladimir Putin’s ability to wage war. Talks to reach a deal are set for this Wednesday, according to French news agency AFP.

Yet a small minority of countries including Germany, Slovakia, Austria, and Hungary are having second thoughts and questioning whether another round of sanctions targeted at the energy sector might ultimately prove counterproductive as the war exacerbates a cost of living crisis for Europeans.  

“Energy is significantly more expensive than it was a year ago, and our governments…are very worried how to help households and businesses,” conceded EU energy commissioner Kadri Simson last Thursday. 

Thanks to a 38% surge in the cost of energy, Europe may be facing its own bout of stagflation. Overall economic output for countries sharing the euro currency expanded at a sequential rate of 0.2% during the first quarter, while inflation was running at a blistering pace of 7.5% last month, far above the 2% target set by the European Central Bank. 

Some leading indicators like the purchasing manager index are already flashing yellow. On Monday, economists at market research firm IHS Markit reported April activity in the eurozone’s manufacturing sector expanded at its slowest rate in 15 months, putting further pressure on the euro.

‘Idiotic’ ban

This means Europe’s leaders are facing a dilemma if they impose an embargo on Russian oil. Global energy prices will likely climb further, resulting in the Kremlin earning more money per barrel, while EU member states suffer a further setback to their post-COVID recovery.

It likely won’t stop at Europe’s borders, either. An embargo could also mean higher prices at the pump for Americans as the U.S. approaches its key midterm elections in November, with inflation among the biggest headaches facing the Biden administration. Its economy even shrank in the first quarter.

“In this early phase of sanctions and embargoes, Russia will benefit as higher prices mean tax revenues are significantly higher than in recent years,” said Rystad Energy senior analyst Daria Melnik in a research note on Monday.

Another danger is that Putin might be willing to offer discounts to countries in exchange for political backing on the international stage. Russia has already enticed India by shaving roughly $30 off the price of a barrel.

In effect, it would backfire—at least in the short term for European countries. 

“Naturally that would be idiocy,” German economy minister Robert Habeck told domestic TV viewers on Thursday. 

In recent weeks, Berlin has attempted to reduce its dependence on Russian crude. It now claims only about 12% of its oil imports still come from Putin’s regime, down from 35% previously. Lowering the remainder is proving problematic however, as it is imported and processed in Germany at a refinery operated by Russian state-owned energy group Rosneft. Nevertheless, he said Germany would not stand in the way of an all-out ban.

“No one should be under any illusion: We will see enormous price spikes, the pain will really be felt,” Habeck warned. “But it will no longer lead to a national catastrophe.”

Putin ally in EU midst

Currently Hungary remains the biggest stumbling block to a European oil embargo. In addition to being a darling of the U.S. hard right, Prime Minister Viktor Orbán also happens to be Russia’s closest European ally and has copied the Kremlin’s playbook when it comes to erecting an authoritarian state. His political opponent received only five minutes of national airtime ahead of the April 3 vote, allowing Orbán to cruise to reelection last month.

To prevent the Putin confidant from vetoing its efforts as a bloc, Brussels is reportedly open to the idea of exemptions for Hungary as well as Slovakia, which imports virtually all of its oil from Russia.

So far, European sanctions have targeted over 1,000 individuals, including a Russian Formula 1 driver, as well as 80 entities such as companies. They have cut seven Russian banks off from cross-border transactions by severing them from the SWIFT financial messaging service, and prohibited the sale of dual-use goods to Russia that can be misappropriated for military purposes. The EU’s collective airspace has been closed to Russia, as have its ports, and even Moscow-controlled media Sputnik and Russia Today are no longer permitted to broadcast anywhere among the bloc’s 27 member states.

Moscow has responded in the meantime by turning off the gas to Poland and Bulgaria, the first two EU member states that owed Gazprom a payment in rubles. 

When asked why the EU didn’t immediately retailiate with another round of economic measures targeting Russia, EU Commission President Ursula von der Leyen asked for patience.

“The sixth package of sanctions will come in due time. We are working intensively on it,” she told reporters on Wednesday.

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