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OPINION

Slowly, but for good. How Europe is giving up Russian oil and gas

The war has dealt blow after blow to the oil industry, the backbone of the federal budget and the entire Russian economy. Familiar markets for Russian oil are losing interest for a variety of reasons.

First, the unprecedented sanctions imposed in response to the war in Ukraine are working. The banks that are supposed to finance sales and purchases, including banks from China, are also unwilling to cooperate with Russian export companies. The risk of Western sanctions is more important to them than working with Russia's tiny economy, which this year accounts for less than one percent of global GDP.

Secondly, the tragedy of the Ukrainian population has accentuated the world's moral and ethical considerations, and under the pressure of public opinion even those companies that did not want to close their businesses under the threat of sanctions are now refusing to work in Russia.

The world is ready to make sacrifices, such as power outages and critical fuel shortages, to punish the aggressor and force him to stop the war. Governments and businesses alike have to deal with this. The situation has come to the point of calling for a total embargo on energy supplies from Russia and a ban on maritime transportation of Russian cargoes - that is, basically starting a trade war against the aggressor.

The trend is such that Europe and the US intend to reduce their dependence on Russian oil and gas supplies not as a one-time measure, but with an eye on the distant future. The West has finally realized that such energy supplier is not only unreliable because it has repeatedly interrupted supplies for political reasons but is simply untrustworthy.

The West has finally realized that Russia as a supplier is not just unreliable but is simply untrustworthy

The current attempt to ban Russian oil imports across the EU is unlikely to succeed. Some countries, like Slovakia, the Czech Republic and Hungary, simply have no alternative sources of oil other than Russia's Druzhba pipeline system. Moreover, in a number of European countries, oil refining is in the hands of Rosneft or LUKOIL which count on Russian supplies.

One should also take into account the pro-Russian political lobby in the EU countries, i.e. the effect of the so-called «schröderization». During the war, the politicians corrupted by Moscow have been keeping a low profile, but they are still capable of disrupting a Europe-wide oil embargo initiative.

Nor should we expect quick results from the EU program to give up Russian gas. Europe dallied with its long-standing plans to reduce its dependence on Gazprom. Now the construction of new terminals to receive liquefied natural gas, the geographical diversification of suppliers, the installation of cross-border gas interconnectors and the development of alternative energy sources will take much longer, despite the urgency. Europe will be completely free of the dependence by 2027 at the earliest, according to an analysis of all the existing possibilities.

Europe won't be able to completely give up Russian gas sooner than 2027

By the end of 2022, the EU can cut gas imports from Russia by half if it takes the matter seriously, rather than by two-thirds or three-quarters as declared in the plans approved by the European Commission. And Gazprom will have to admit that redirecting export flows from Europe to China is hardly feasible in the foreseeable future: the Chinese are not ready to buy as much gas as Europe (and at European prices, too); besides, building the gas transportation infrastructure from Yamal to the Chinese border will require both enormous costs and a long time.

China is also unable to replace the traditional Russian oil markets. There are restrictions for the oil exports to the East in terms of transport capacities, which are now being used to the maximum.

The oil industry is already experiencing war-induced difficulties. The refusal to buy Russian oil and the boycott of its transportation by sea in March have led to a 6% drop in the production at the oil fields. If the independent foreign analysts are to be believed, this year Russia may lose up to 25% of exports, and with the tightening of sanctions due to the continuation of hostilities in 2023, the drop in production could reach 50%. Although domestic consumption is also declining due to production shutdowns, oil companies will have to stop drilling new wells and shut down working ones.

Even if according to a hypothetical scenario the war comes to an end, the industry is unlikely to recover. The sanctions will not be lifted any time soon, and the consequences will be long-lasting.

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