The EU is quietly preparing “nuclear” for Russian oil

The European Union is quietly preparing to deal a much stronger blow to Russia’s oil trade. This time, Brussels is targeting less the price cap and more the reality of sanctions enforcement, writes Oil Price.

The EU is considering scrapping the price cap on Russian oil altogether and replacing it with a total ban on shipping services, according to sources cited by Bloomberg.

This would mean that European companies would no longer be able to provide insurance, shipping or other logistics services for Russian oil cargoes, regardless of price. The measure would close one of the most widely used loopholes in the current sanctions regime.

The price cap was conceived as an “ideal” solution. In theory, it allowed Russian oil to continue to circulate, but only at a reduced price that would reduce the Kremlin’s revenues. In practice, however, the mechanism has proven messy, difficult to control and easy to circumvent. Its enforcement depends on documents, declarations and a degree of good faith that the global oil trade does not offer, OilPrice also shows.

A ban on services would be much more direct, much harder to avoid and would represent a significant escalation of the sanctions regime. European officials say such a measure would simplify the enforcement of sanctions and increase pressure at a time when Russia’s oil and gas revenues have fallen to their lowest level in five years, amid low prices and the extension of sanctions.

Why now? The EU price ceiling is being lowered again, from February 1, to $44.10 per barrel, but the bloc is increasingly aware that lowering the numerical threshold does not significantly reduce Russia’s revenues, as long as volumes continue to flow through “shadow” routes.

Recent EU measures targeting refined products made from Russian crude have already forced refiners in Turkey and India to drastically scale back their operations. China has absorbed some of the diverted volumes, but mainly through small, “teapot” refineries that buy only at deep discounts. This has put pressure on revenues but has not stopped the flow of Russian oil.

A ban on services would further push Russian oil into these deeply discounted, high-cost channels. It would also make it much more difficult for sanctioned oil to re-enter the European market through blending, relabeling or using indirect routes.

However, unanimity at EU level is required for this decision, and several member states are reluctant. Some fear market disruption, others fear retaliation. The irony is that Europe’s crude oil imports fell by almost 9% last year, while LNG imports rose sharply and became much more expensive, according to the same source.