Russian oil and sanctions issue

EU’s plan for Russian oil… The European Union’s sanctions plan to ban oil imports from Russia has faced obstacles from Hungary. Hungary, whose oil and gas needs mostly depend on Russia, opposes this plan on the grounds that the sanctions will negatively affect its economy. In this context, Hungary insists that it will not support any sanctions targeting Russia’s energy exports.

The subject of Hungary… Hungary imports about 80% of its gas and 65% of the oil it needs from Russia. Arguing that the EU oil boycott will have devastating consequences for the economy, Hungary is a landlocked country and therefore very dependent on pipeline resources. Prime Minister Orban said it would take five years and a large investment to convert Hungary’s oil refineries and pipelines to process oil from non-Russian sources. He said this would further drive higher energy prices, which would lead to shutdowns and unemployment. The European Commission, on the other hand, is considering helping countries that are dependent on Russian oil, especially Hungary, Slovakia, and the Czech Republic.

European countries most dependent on natural gas imported from Russia… Source: Eurostat

Russian energy giant Gazprom has stopped gas supplies to Bulgaria and Poland after failing to pay for gas deliveries in rubles. This is clearly the Kremlin’s strongest ever response to several rounds of sanctions over the West’s invasion of Ukraine. Putin said at the end of March that Gazprom should only be paid in rubles for Russian gas. Most EU countries, including Poland, Bulgaria and Germany, did not accept it. The only EU leader who said he would pay Gazprom in rubles was Hungarian Viktor Orban.

Russia and energy prices… Despite Western sanctions and the serious fall in Ural Brent oil, Russia is running a record current account surplus due to rising energy prices. Russia’s current account surplus makes it more resilient to financial sanctions. In addition to rising oil and natural gas prices, Russia, whose energy exports have not stopped, has reached the current account surplus level this year, which it achieved almost throughout the last year, thanks to this price advantage. This net inflow of foreign currency to the economy also relieved the Central Bank of Russia, which had to face the harsh wave of sanctions after February 24 and had to raise interest rates seriously, and the bank reduced the policy rate to almost pre-war levels in the last meetings, and the ruble was stabilized.

Russia’s current account surplus and Brent oil price comparison. Source: Bloomberg

Conclusion? It is seen that the way to seriously damage the Russian economy is through the energy embargo. However, if the European countries, which are so dependent on Russian energy resources, fully implement their energy sanctions without preparing the B plan, they may have to face the distributive economic effects themselves. Energy prices continue to rise and Brent oil is back in the $120 band. About 2/3 of Russia’s current account surplus comes from energy exports. In this environment, prices that will continue to rise without the embargoes being cut and the EU’s inability to substitute Russian resources will benefit Russia.

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