Bullet sanctions: Europe is finally coming after Russia’s energy

On Tuesday, the European Commission proposed a step-by-step ban of 4 billion euros ($ 4.3 billion) in Russian coal imports a year as part of a fifth package of sanctions designed to further reduce Russian President Vladimir Putin’s war. Other proposals are aimed at Russian technology and manufacturing imports worth an additional 10 billion euros ($ 10.9 billion).

Europe has imposed punitive sanctions on Russia’s economy since Putin’s tanks rolled into Ukraine in late February, but have stopped targeting Russia’s energy sector – until now. Pictures of unarmed civilians, bound and shot, lying along Bucha’s roads – which until recently were under Russian occupation – have convinced leaders to change pace.

More details on the new round of sanctions, including the timeline for the coal ban, are expected on Wednesday when EU ambassadors meet for negotiations. The measures still need to be approved by all 27 Member States.

Sanctioning coal will bite some European countries, but it is among the easiest energy sources to get used to – much of the world is already doing just that. The harder question is: What happens then?

How much Russian coal goes to Europe?

Russia was the world’s third largest exporter of coal in 2020, after Australia and Indonesia, according to the International Energy Agency, with Europe by far its largest customer.

The continent received 57 million tons of Russian coal that year, compared to 31 million tons for China, IEA data show. This accounted for more than half of Europe’s coal that year, according to Eurostat.

But the EU was already turning away from the world’s dirtiest fossil fuel.

The amount of electricity generated by coal has fallen steadily across the block in recent years, falling 29% between 2017 and 2019, according to analysis from energy think tank Ember.

And despite a brief rise last year, when gas prices hit record highs, the IEA expects European demand for coal to resume its steady decline. Total imports were expected to fall by 6% in 2024, even before Russia’s invasion of Ukraine.

Other countries could step in to buy Russian coal. The IEA expects India’s coal imports to increase by 4% in 2024 and more than 6% in Southeast Asia. Russia has already benefited from a jump in exports to China following Xi Jinping’s blockade of Australian imports, the agency said in a December report.

What will an EU ban mean for coal prices?

Yet a reduction in supply – even one that has been phased in – can cause headaches for countries that still use coal for much of their electricity production, including Poland and Germany.

A fall in supply combined with rising demand in China helped push global coal prices up to record highs in October 2021 – before falling back, according to IEA analysis.

But higher prices could prove more sticky under an EU ban on Russian imports. Rotterdam coal futures, benchmark for European coal prices, closed at $ 257 per tonne. tons on Monday, but was last seen trading at $ 295, data from Independent Commodity Intelligence Services showed.

Matthew Jones, chief analyst for EU energy and carbon at ICIS, told CNN Business that the coal ban will “tighten an already tight European supply situation even tighter and will lead to a struggle to find alternative coal sources.”

“Last month Rotterdam coal futures traded on the ICE exchange rose almost 15%, and the spring by 13%, since yesterday’s closing in response to the news,” Jones added.

Nevertheless, Henning Gloystein, Director of Energy, Climate and Resources at Eurasia Group, believes that EU countries can withstand the shock. The think tank also said on Tuesday that any EU purchase of Australian coal would mitigate the blow.

“Sanctioning coal will also make life much harder for European utilities, which consume a lot of Russian coal, but energy companies can handle this,” Gloystein told CNN Business.

What is left to sanction?

Russia’s oil and gas supplies are particularly absent in the latest round of sanctions. The bloc imported 26% of its crude oil and 46% of its gas from Russia by 2020, according to Eurostat.

But blocking oil imports is on the table: European Commission President Ursula von der Leyen said in a statement on Tuesday that the bloc “was working on further sanctions, including on oil imports.”

Already, the United States has exploited its strategic oil reserves and released 180 million barrels to the global market to help bring down gas prices and counteract the reduction in Russian oil supplies. The IEA also agreed to release additional oil from its member states at an emergency meeting last week.
Natural gas is still the most unlikely target for sanctions, in part due to differences between member states that are heavily dependent on Russian energy and those that want to move faster to hit the heart of the Russian economy.
EU leaders have promised to reduce Russian gas consumption by 66% by the end of this year and to break the bloc’s dependence on Russian energy by 2027.

A country has gone further. Lithuanian Prime Minister Ingrida Šimonytė said in a tweet on Sunday that “from now on, Lithuania will not consume a cubic cm of toxic Russian gas.” Bringing import-dependent countries such as Germany and Hungary on board will prove to be more challenging.

But according to Gloystein, the bloc’s reluctance to sanction oil and gas is about more than avoiding self-harm.

“The EU is committed to continuing to escalate its response in line with developments in Ukraine,” he said. “If Brussels now enforces maximum sanctions, how will it react to a further escalation from Moscow?”

Gloystein also said that targeting Russian oil and gas risks backfire.

“There are serious and credible concerns that such actions will trigger a significant escalation of Russia, as Putin may feel compelled to act drastically and quickly in the knowledge that his war chest may soon run dry.”

Mark Thompson contributed to this report.

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