How the EU might get around Hungary’s objections to Russian-oil sanctions

May 30, 2022, 1:25 PM UTC

European unity against Russia’s invasion of Ukraine is “already starting to crumble,” Germany’s economy minister and vice-chancellor warned Sunday.

Robert Habeck was referring to a deadlock that the European Union’s leaders are struggling to break regarding a potential embargo on Russian oil. It’s a hugely significant issue, as oil money is keeping the Russian economy afloat and effectively funding Moscow’s war.

While the U.S. was quick to forswear Russian oil after the invasion, that was a relatively easy decision to make—less than 10% of American oil imports came from Russia. In the EU, that figure is more like 36%, with certain countries in the bloc’s east particularly reliant on Russian fossil fuels.

One of those countries, Hungary, is blocking the oil embargo—and therefore the EU’s entire sixth package of sanctions, also intended to target Russian banks and broadcasters—on the grounds that it would be akin to “an atomic bomb” hitting the Hungarian economy.

Budapest wants five years and a vast amount of EU funding to ditch Russian oil.

All this is extremely embarrassing for the European Commission, whose president Ursula von der Leyen claimed at the start of May that the sanctions package would include “a complete import ban on all Russian oil, seaborne and pipeline” by the end of the year.

Economic sanctions require unanimity among the EU’s 27 members, and Hungarian prime minister Viktor Orbán—an old friend of Russia’s Vladimir Putin—is able to veto the lot.

The EU’s national leaders are meeting on Monday and Tuesday in an attempt to rescue the oil embargo, and a draft version of their summit conclusions reportedly describes a compromise that would only cover oil that is shipped.

Oil that is sent by pipeline to Hungary, Slovakia, and the Czech Republic—all of which are landlocked—would get a reprieve for now.

Even that watered-down version of the oil embargo is not a sure thing, thanks to Orbán and his veto. And according to Luis Garicano, a liberal Spanish member of the European Parliament, that means the EU should be taking a different approach.

Garicano—a seasoned economics professor—backs the idea of imposing high tariffs on Russian oil imports. As he noted in an op-ed for Politico, Russia is giving China and India discounts of around 35% on their oil purchases, so an EU tariff of around 30% would probably end up being paid by the Russians, while sending around billions to EU coffers, perhaps to offset soaring energy costs for consumers.

Best of all: Tariffs fall under trade policy, which is an area where the EU can make decisions without unanimity. Only a qualified majority would be needed—just 15 of the 27 member states would need to back the move.

U.S. Treasury Secretary Janet Yellen recently suggested the EU might consider combining such oil tariffs with a phased-in oil embargo.

The U.S. has also floated the idea of imposing a global price cap on Russian oil, which it could enforce by imposing so-called secondary sanctions on purchasers who insist on paying more to Moscow.

That coercive approach might prove unpopular across much of the world: As shown in survey results published Monday, only liberal democracies tend to support cutting economic ties with Russia.

Nonetheless, as with the tariff idea, it could help to avoid the price spikes that would follow from completely cutting off Russian oil supplies in the short term.

Garicano told Fortune Monday that the economic effects of tariffs and price caps would be similar, although a price cap “does not generate revenue to compensate European consumers,” making it “worse distributionally.”

“On the other hand, politically it is probably easier to explain, so [it] might have an advantage there,” he added. “I would be happy with either. What is completely unacceptable is for Europe to hide behind the Hungarians and do nothing.”

As for whether the tariff idea could gain further traction, Garicano said he did not know, but the “summit today is heading towards failure, [and] that is unacceptable, so things could move” afterward.

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