Eastern EU member states divided over sanctions on Russian oil and gas exports

Eastern EU member states divided over sanctions on Russian oil and gas exports
Eastern Europe is umbilically connected to Russian gas supplies through three main pipelines.
By bne IntelliNews March 18, 2022

The West is cranking up the economic pressure on Russia to try to force it to withdraw from Ukraine but, despite the demands of Kyiv and some of its allies in Central and Southeastern Europe, the European Union is still baulking at imposing sanctions on Russian energy exports.

The Kremlin receives an estimated 40% of its budget revenues from energy exports, so interrupting these flows could have a crippling effect on the Russian war machine. At current prices investment bank Standard Chartered has estimated that EU countries are paying Russia roughly $550mn a day for oil, equivalent to $200bn a year.

Washington and London have already imposed sanctions on Russian energy, though the UK’s measures only apply to oil and will only take full effect by the end of the year.

But only an estimated 10% of US energy and 8% of the UK’s comes from Russia. For Europe the cost would be much higher, particularly given the way the way it is so tightly connected to Russia’s network of gas pipelines. This gas supply could only be fully substituted with other sources – mainly liquefied natural gas (LNG) shipments – once new infrastructure is built.

Even for oil there would be significant substitution difficulties, given that several refineries are directly connected to pipelines from Russia and are specially adapted to handle its high-sulphur content.

Overall, Europe relies on Russia for some 35% of its gas and 30% of its oil, the prices of which are already soaring amid the feared tightening of supply. Sanctions would only drive prices even higher, creating further misery for Europe’s consumers. It would also cause more stoppages at highly gas-dependent industries such as fertiliser producers.

On March 10 an EU summit failed to back energy sanctions, with Germany warning that it would be plunged into recession if it suddenly lost access to Russian gas and oil. Russia provides around one third of Germany’s oil consumption, half its coal and 55% of its gas.

German Economic and Energy Minister Robert Habeck said that his government was looking to phase out Russian oil by the end of the year, but ending the country’s dependence on gas would be a much longer-term proposition. He warned of “mass unemployment, poverty, people who can’t heat their homes, people who run out of petrol” if Germany stopped using Russian oil and gas.

Instead the summit tasked the Commission with producing proposals by mid-May on how to achieve the target of freeing the EU from dependency on Russian gas, oil and coal by 2027. The bloc aims to reduce imports of Russian gas by 100bn cubic metres – or two thirds – by the end of 2022.

The debate may be over for now and yet Germany has already reversed course over exports of offensive arms to Ukraine and approving Russia's Nordstream 2 gas pipeline. There remains some hope that it might again be persuaded to take stronger measures. This could bring other waverers round, particularly if Russia continues bombing residential areas or unleashes chemical weapons.

If so, the first step is likely to be oil sanctions, given the difficulty the bloc will already have finding enough gas to fulfil its plan to make its underground stocks 90% full by the start of October for the coming winter.

Oil will also be much more painful for the Kremlin as it is more lucrative – in 2021, Russia generated almost three times more revenue from oil exports than from gas. Though oil is more fungible, Russia will still have a hard job finding alternative buyers for its production, given its high sulphur content.

According to the International Energy Agency (IEA), European OECD members import approximately 3.1mn barrels per day (bpd) of crude oil, largely Urals crude. Almost 1mn bpd comes via the 5,000-km Druzhba (Friendship) pipeline from central Russia to refineries in Poland, Germany, Slovakia, the Czech Republic and Hungary.

The IEA estimates that some 2.5mn bpd of Russian oil and products – of which crude accounts for 1.5mn bpd – already may not find buyers beginning in April, as oil companies and traders become increasingly wary of falling foul of potential sanctions.

Russian oil producers are reportedly having difficulty selling their oil on international markets and are having to offer discounts of up to 30% to ship their products, creating a widening spread between the prices of Brent and Urals crude. 

Moreover, as relations between the EU and Russia continue to worsen, the Kremlin has signalled that it might itself switch off the tap and refuse to sell gas and oil to Europe, even though this would be very costly and would also wreck its reputation in the markets.

Central and Southern European countries are among the most vulnerable to any cut-off in Russian energy exports, but this has not stopped some of them from being very vocal in demanding tougher action, with Poland and the Baltic states as always in the vanguard, and Bulgaria and Hungary dragging their feet.

Over the past few years CEE countries have made big efforts to reduce their dependence on Russian gas, by accessing other producers via new pipelines and LNG terminals. Most countries now avoid long-term contracts with Gazprom and instead private or semi-private operators make deals at spot prices with traders.

But many CEE countries remain very dependent, especially on gas. According to Statista, in 2020 the highest gas dependence on Russia in Central Europe was in the Baltic states, with Latvia on 93% and Estonia on 79%, though Lithuania had cut its dependence to 41% through the opening of the Klapeida LNG terminal.

Among the larger states, Slovakia is the most dependent at 70%, with Czechia on 66%. Poland has cut its dependence to 40%, partly through the Swinoujscie LNG terminal. Hungary's dependence is only at 40%, as it has benefited from its geographical position at the crossroads of east-west and north-south pipelines. 

In terms of oil, among the most dependent are the Slovakia, Poland and Bulgaria.

Below bne IntelliNews correspondents report on how vulnerable Central and Southern European EU members are to any cut-off of Russian oil and gas, and look at what stance their governments are taking on sanctions.



Despite being quite dependent on Russian energy commodity imports, Poland has been at the forefront of sanctioning them to cut off Russia from a key source of income.

“Russia uses fuels and energy commodities – its most profitable source of income – to finance its military [and] as a tool of political and economic blackmail as well as cross-border corruption,” Polish Prime Minister Mateusz Morawiecki wrote in a letter to fellow EU leaders last week.

Poland is one of Europe’s heaviest users of Russian oil, importing some two-thirds of demand – 16.4mn tonnes in nominal terms (2020 data). The Płock refinery is specially customised to handle the high sulphur crude oil supplies from Russia.

Poland also remains quite dependent on Russian gas, with imports accounting for 55% of demand. Unlike oil, however, Poland is on the brink of bringing down Russian gas imports to zero. That is thanks to the Baltic Pipe – a gas link from Norway via Denmark – that is becoming operational by November and reaching full capacity of 10 bcm of gas annually from January 1. The Baltic Pipe will displace Russian imports in their entirety, with the rest of the demand covered by the LNG terminal in Swinoujscie – currently being expanded to 7.5 bcm a year by 2023 – domestic production and a planned floating LNG terminal in Gdansk Bay.

Replacing oil will be more challenging but, over time, Poland could replace Russian imports by opening up new routes of supply. The Polish Economic Institute (PIE), a state economic think-tank, points to Norway, the US, or even Iran and Venezuela, recently back in the oil game after the US began looking for replacements of imported Russian oil.

Saudi Arabia may also be looking to step in for Russia on the Polish market after the Polish government sold Saudi Aramco a 30% stake in refiner Lotos in a deal that was a condition of merging Lotos with PKN Orlen.

Poland already had to manage a drop in oil imports from Russia in 2019. Poland ramped up purchases from Saudi Arabia and other producers after the Druzhba pipeline was taken offline for 46 days after millions of barrels of oil were contaminated with organic chlorides.



Hungarian Prime Minister Viktor Orban supported the EU’s plans to reduce dependency on Russian energy by 2027 at the two-day summit in Brussels and was relieved that EU leaders abandoned plans to levy sanctions on Russian gas and oil. Before the meeting, Hungary's premier had made it clear it would not support sanctions extended to the energy sector.

The agreement in Versailles was good news for Hungary, which gets 55% of its oil and 85% of its gas needs from Russia, with nine out of 10 households using gas for cooking or heating.

"The most important issue for us has been settled favourably. There will be no sanctions covering oil and gas, which means that Hungary's energy supplies will be guaranteed in the coming period," Orban posted on Facebook after the marathon meeting.

Last September, Hungary struck two long-term contract deals with Russia’s major gas company Gazprom, which provides for the deliveries of 4.5 bcm of gas via pipelines in Serbia and Austria, bypassing Ukraine.

The agreement is for 15 years and may be reviewed after 10 years. In addition, Budapest wants to increase gas deliveries through Serbia by 1 bcm per year. This issue was brought up by Orban during his visit to Moscow in early February but no agreement was reached. Budapest also has access to LNG supplies from an LNG terminal in Croatia.

The government’s position is that Hungary condemns Russia’s actions in Ukraine and provides assistance to refugees, but does not want to pay the price of the conflict in higher energy prices.

“While we condemn Russia’s armed offensive and we also condemn the war, we will not allow Hungarian families to be made to pay the price,” Orbán said on March 8. The sanctions must not concern oil and gas,” he said. “The Hungarian economy just cannot work without Russian fossil fuels.”

Keeping energy prices is low is a key promise in Viktor Orban's re-election campaign. He froze utility prices for retail uses in 2013, which has helped him win two supermajority victories since.

Nevertheless, taxpayers pay the price of state intervention. State-utility giant MVM is expected to incur a €1.6bn deficit for selling gas and electricity below market prices this year, Julia Kiraly, chief economic advisor of the opposition alliance, told bne IntelliNews



The Czech government has so far taken an ambiguous position on sanctions on Russian energy. Before the EU summit in Paris, the Czech Prime Minister Petr Fiala said that cutting off Russian oil and gas immediately "is not the way to go". Fiala said he fully supports efforts to wean the EU off Russian gas and wants this to happen as soon as possible. "But it certainly won't be this year," he said, as quoted by daily DenikN.

According to experts approached by daily e15, Czechia is dependent on Russian oil for 29% of its requirements and Russian gas for close to 100% of its needs.

Czechia has oil and petroleum product stocks available for more than three months, thus exceeding the European limit. In terms of gas, there are currently reserves of approximately 800mn cubic metres, which should last for more than a month at current daily gas consumption levels.

"In the Czech Republic, obligatory supply volume for gas traders is set and must ensure supplies to households, healthcare facilities, etc. … at least 30% of these supplies must be secured through gas storage facilities," said Rene Nedela, Deputy Minister of Industry and Trade for Energy. The rest of the supplies are purchased on short-term and spot markets.

"In case of cutting-off Russian gas imports, the existing stocks from domestic reserves would have to be used up and, with a high probability, consumption would have to be reduced," warned Radek Novak, an economic analyst at Ceska Sporitelna bank.

"If the price were to remain at the current high levels of around €200 per MWh for a longer period of time, the end prices for households would increase eight times compared to last year and for companies seven times," he said, adding that this, given the industrial nature of the Czech economy, would have a significant impact on the domestic production of construction materials, the chemical industry, food processing and metallurgy.

"Therefore, I would see an embargo on imports of energy raw materials from Russia as the strongest possible sanction – and I would prefer it first for oil and then as a last resort for gas," Novak said. 

The Czech petrochemical group Orlen Unipetrol confirmed on March 11 it has sufficient oil reserves and its fuel production is sufficient to cover the current demand in the Czech Republic, therefore, it is prepared for a possible cut-off of oil supplies from Russia.



Slovak Prime Minister Eduard Heger has taken a strong stance on sanctions but it is unclear if he has the full support of his coalition.

Before the EU summit, Heger said EU members must quickly and completely disconnect themselves from Russian energy, including nuclear fuel. “We need to send a signal to Putin that we plan to cut ourselves off all energy from Russia,” he said.

"We're working on securing alternative sources of gas, oil and nuclear fuel to the largest possible extent," added Heger, as quoted by the Slovak News Agency.

But Economy Minister Richard Sulík, leader of the right-wing Eurosceptic SaS party, said a ban would hurt the EU more than Russia in the short term. “If the entire EU bans imports of Russian gas and oil, the consequences for Slovak industry would be devastating,” Sulík said.

Slovakia is 85% dependent on Russian gas imports and 100% on Russian oil. The country said it does not plan to use its veto right if the EU decides to launch sanctions on Russia's gas or oil.

“We would not block a proposal within the EU to ban the import of these energy raw materials, but in such a case, we expect the EU to ensure energy security and compensation,” said the state secretary of the economy ministry, Karol Galek.

Ex-PM and current chair of the opposition Smer-SD Robert Fico said that cutting off Russian supplies would mean a sharp increase in fuel prices. He pointed out that Slovakia would also lose revenue in terms of transit. In the event of a sharp increase in the price of gas and oil, he said it is necessary to count on a rise in the price of all goods.

Slovak President Zuzana Caputova said that anyone maintaining that Slovakia should remain dependent on Russian gas is acting against the interests of Slovakia, stressing that the EU has to reduce its dependence on Russian oil and gas without delay due to the new security and geopolitical situation.

In a response, according to the news agency, Fico called Caputova "political polystyrene", claiming that she and her arguments have been sunk hundreds of times, but she always resurfaces to repeat American propaganda, according to the news agency.

"[Smer-SD] is simply convinced that an immediate embargo on Russian gas and oil would be an economic murder of the Slovak public. And it's not just us saying this. The European Commission itself, virtually all EU prime ministers confirm that reducing dependence on Russian gas and oil will require a difficult and expensive 10-year effort. That's why the EU summit didn't agree on a sanction to stop the import of Russian gas and oil, just as it didn't agree, sensibly, that the EU can immediately accept an unprepared Ukraine as a new member," he was quoted by the news agency as saying.

He called on both PM and president to stop such statements, asking whether it's in the interest of the Slovak public to pay €3 per a litre for petrol "in the name of fulfilling American dreams of weakening Russia".


Baltic states

Up to now the Balts have uttered strong words about sanctions but would struggle to follow through.

Lithuanian Foreign Minister Gabrielius Landsbergis backed an embargo on Russian energy on March 7. “Energy sources which we import pay for the Russian military operation,” he said in a joint news conference with US Secretary of State Anthony Blinken. “We cannot pay for oil and gas with the blood of Ukraine.”

During a meeting of EU member states and government leaders in Paris, Latvian PM Krisjanis Kariņs has said that Europe is fully committed to preventing indirect financing of the war waged by Putin’s regime and moving towards a complete ban of Russian gas and oil. Earlier, Karins said that cutting off Russian oil and gas would be the most effective way to get Putin to the negotiating table. “We should go much further and much faster,” Karins said.

However, though Lithuania has done its homework on improving its energy security, it still cannot disconnect from Russia’s energy supplies because its neighbouring Baltic states of Latvia and Estonia are much more dependent on Russian energy, and would find it very difficult to implement any sanctions on Russian exports.

Lithuania supplies its gas through the Klaipeda LNG terminal and could completely disconnect from Russian pipelines, but its neighbours are not ready for this. Lithuania, Latvia, Estonia and Finland operate in a common market.

“It is mainly because of the Latvians that the supply from Gazprom is there, because of the Inchukalnis storage facility and because the Latvians have gas-fired power plants. This is the reason why Gazprom’s gas enters our market,” says Virgilijus Poderys, director of the Lithuanian Energy Agency.

Lithuania has stopped imports of small cargoes of Russian LNG via the Baltic port of Klaipeda. Small LNG cargoes were regularly brought to Klaipėda from the Russian port of Vysotsk, where Russian company Novatek has its production facility. Russian gas accounted for approximately 20% of the total volume handled by the Klaipeda LNG terminal last year.

Estonian PM Kaja Kallas has not said anything specific about sanctions on Russia’s oil and gas. She has said recently that European leaders have to be "honest" with their citizens about the negative effects that EU sanctions against Russia might bring upon people's daily life, warning that "hard times lie ahead".

"It's going to be hard and we have to be honest with our citizens, as well, that the hard times lie ahead. And so far, our discussions in the European Union have been focussed on targeting the war machine of Putin and not hurting the people so much because we also need the people's support behind the decisions. And, if it is for the people something that they can't tolerate, it's also hard to keep the sanctions up,” she said to Euronews.



Romania’s mainstream political parties have not commented about the European Union’s plans to cut natural gas and oil imports from Russia, perhaps because broad support for such a step is assumed.

Nevertheless, the country remains quite dependent on Russian energy imports. Romania produces some 30% of the crude oil it consumes but half the remainder is imported from Russia.

Romania also produces some 80% of the natural gas it consumes, but most of the rest is supplied by Russia’s Gazprom and the options for alternative natural gas supplies are scarce.

Another problem is that the local storage capacities are insufficient to allow extraction covering consumption on cold winter days – when the consumption increases and the extraction capacity diminishes.

Therefore, in case of an abrupt decrease of the availability of Russian natural gas, it is possible that some industrial consumers might have to discontinue operations. Anyway, because of the high gas prices now in the market, the biggest consumer – the Azomures fertilizers producer – suspended operations during the winter. 



Bulgaria has said it would need some kind of exclusion from EU energy sanctions against Russia. The country is almost completely dependent on deliveries by Gazprom that comprise nearly 80% of all gas supplies. Previous governments have not made efforts to diversify the gas deliveries. Its only oil refinery is owned by Russia’s Lukoil, and this provides over 60% of the fuel used in the country.

“We are working with the European Union to make the measures as strong as possible, but we cannot afford to stop oil and gas imports,” Petkov said as quoted by The Sofia Globe.

He added that the country must diversify its gas suppliers as much as possible and that he will inspect progress on the Greek gas interconnector next week.

“Until we have real diversification we are very dependent and this should be a huge priority for Bulgaria,” Petkov said.

State-owned gas supplier Bulgargaz is more optimistic that Bulgaria could cover all its energy consumption needs without importing Russian gas, once its current contract with Gazprom expires at the end of 2022. Ivan Topchijski, the chairman of the board of directors,  said it plans to purchase all available gas volumes under an agreement with Azerbaijan after June 30, including by using alternative networks in case that the completion of the Greece-Bulgaria interconnector is delayed again. Local media have reported that the launch of the Greece-Bulgaria interconnector could be delayed until the autumn of 2022.

Bulgargaz also plans to import liquefied natural gas from several sources so that it can further diversify the energy supply. Bulgaria can use two liquefied gas terminals in Greece and five in Turkey. However, Topchijski said that the price of gas from alternative sources for short-term deliveries would be too high and the company is working on signing long-term supply contracts.



Slovenia has not made any public statements about energy sanctions but Prime Minister Janez Jansa has urged the EU to end its reliance on Russian energy as soon as possible.

Slovenian Infrastructure Minister Jernej Vrtovec also called on the EU to impose an embargo on the imports of Russian oil and gas as soon as possible, arguing that this is the only way to secure peace in Ukraine.

Slovenia’s reliance on Russian gas is 51%.



Croatia has also kept a low profile on the question of sanctions, with the government taking pains to point out that it could survive them.

Prime Minister Andrej Plenkovic said at the end of February that the floating LNG (FLNG) terminal off the island of Krk will secure enough gas in case Russia stops natural gas deliveries.

The terminal, with annual import capacity of 2.6 bcm, is a strategic project for Croatia, as it will improve security of supply for Croatia and other countries in the region.

Plenkovic has said that the terminal secures Croatia alternative sources of natural gas supplies.

Reporting by Robert Anderson in Prague, Wojciech Kosc in Warsaw. Linas Jegelevicius in Vilnius, Iulian Ernst in Bucharest, Denitsa Koseva in Sofia, and Clare Nuttall in Glasgow.