The proposed oil ban

On May 4, European Commission President Ursula von der Leyen announced proposals for the latest round of EU sanctions towards Russia. This includes a wholesale ban on the import of Russian oil – a major source of funding for the Kremlin’s war effort – as well as the decision to cut three more Russian banks from the SWIFT international payment system. Despite the announcement, significant opposition remains in the form of Hungary as Viktor Orbán seeks exemptions from the oil ban for Budapest.

The proposed oil ban will be implemented gradually, with Russian crude oil set to be phased out within six months and refined products by the end of the year. Sanctions which included the imposition of an embargo on Russian oil were delayed over concerns – most notably from Germany – regarding the potential impact on European economies. Germany has been heavily reliant on Russian oil, although has taken steps to reduce its dependence since Russia invaded Ukraine. The country’s share of Russian oil imports are now down to 25%, leading Economy Minister Robert Habeck to suggest that Germany could withstand an embargo.

Resistance to the proposals

Both Slovakia and Hungary – who depend on Russia for 96% and 58% of their crude oil and oil imports respectively – rejected the initial plans, citing the need for a longer period of transition. The two countries collectively account for 6% of the EU’s oil imports from Russia. The original compromise of allowing both countries extended timeframes to buy oil from Russian pipelines is still an option, whilst adjusting their own infrastructure in the process. The Czech Republic could also be given an extension, although Hungary is still refusing to accept the current proposals. Viktor Orbán has suggested that the EU’s proposals would bring catastrophic implications for his country.

All EU member states must agree to the proposed embargo and Budapest’s opposition now presents the main obstacle. Hungary’s infrastructure is heavily orientated towards receiving Russian oil via the Druzhba pipeline. The proposed ban would therefore require Hungary to make significant adjustments to its existing infrastructure. Despite the EU setting aside €2 billion to assist central European nations with this transition, Hungary has not yet reached a deal on its share of the funding. Hungary is also accommodating demands from the Kremlin as to how Gazprom is paid for natural gas shipments, highlighting Orbán’s current diplomatic balancing act.

Despite the current standoff,  MOL – Hungary’s largest energy company – has tasked engineers with planning how its refineries could operate without relying purely on Russian oil, with the possibility of looking to alternatives via Croatia.

The European Commission recently announced REPowerEU – a €210 billion initiative signalling the EU's intention to move away from Russian fossil fuels. This appears to have done little to turn Budapest, as it does not include funding packages for those countries most concerned with the impact of the proposed ban. Ursula von der Leyen has cast doubt over an agreement being reached at the upcoming European Council Summit. 

Potential impact of the ban and alternative suppliers

Should an agreement be reached, the proposed embargo would enable the EU to exert considerable pressure on Russia, with oil serving as the single biggest source of economic income for the Kremlin’s war effort. Europe accounts for nearly half of Russia’s crude and petroleum exports, and has paid Russia almost 20 billion euros since the invasion of Ukraine. EU energy exports accounted for a fifth of the Kremlin’s budget in 2021. Unlike Saudi Arabia however, Russia lacks the capacity to descale production on a significant level and could therefore face problems if the embargo goes ahead. 

The EU is dependent on Russia for 26% of its total oil imports, meaning leaders are now faced with the issue of making up this shortfall. Realistically, only Saudi Arabia and the UAE hold enough spare capacity to offset this, although both are members of the OPEC+ arrangement which seeks to maintain control over global prices and have been reluctant to increase production. Besides Saudi Arabia and the UAE, only Iran with a spare capacity of around 1.2 million barrels per day (mb/d), Iraq (around 0.6 mb/d) and Venezuela hold significant extra capacity. However, both Iran and Venezuela have been the subject of sanctions, whilst Iraq’s ageing infrastructure restricts its capacity. Meanwhile both Qatar and Kuwait are limited in what more they can offer.

For now, it appears more will be needed to bring Hungary on board. Budapest’s opposition is proving a significant obstacle to sanctions that would significantly impact the Kremlin’s ability to wage war. Failure to reach an agreement would provide a significant boost to Vladimir Putin, whilst potentially derailing the EU’s sixth round of sanctions.