The European Commission will investigate Bulgaria for exploiting loopholes in the oil sanctions regime against Russia that have earned the Kremlin $1bn, Politico reported on November 10.
It has emerged that a Russian oil firm exploited a loophole in the sanction’s regime, earning €1bn of profits that can contribute to Russia's war efforts.
Bulgaria is one of the EU countries that has an exemption from the embargo on imports of Russian oil, thanks to the heavy dependence of the economy on the import of oil from Russia as a legacy from the Warsaw Pact days. It is allowed to import millions of barrels of Russian oil a year that supply a Moscow-owned refinery on its territory, which then exports refined fuels, including to EU countries, Politico reports.
A senior Commission official told Politico: "We're paying attention to it, and we've asked the Bulgarians to explain themselves." Bucharest has acknowledged the challenges posed by such derogations and exceptions.
Enforcing the oil sanctions has turned into a game of whack-a-mole that the West is failing to win; as bne IntelliNews reported, oil sanctions are increasingly a spent cannon.
The Bulgarian trade in oil products has generated about €983mn in production and export levies for Russia and nearly €500mn in refinery profits since the exemption began on February 5, according to a classified analysis.
While privately-owned Russian oil major, Lukoil, the owner of the refinery via its EU subsidiary Litasco, did not breach sanctions, it shipped nearly 3mn barrels of Russian-origin refined products to EU countries like Malta. This equated to around one-fifth of crude oil processed at Bulgaria’s leading port of Burgas where the refinery is located.
The revelations have stirred political controversy in Bulgaria, with Prime Minister Nikolay Denkov expressing surprise at the scale of the sanctions-avoidance scheme. He pledged to strengthen sanctions laws and redirect funds from Lukoil's profits to the Bulgarian budget.
Russian oil companies own several refineries in the EU and have been selling their own Russian oil to their own EU-based refineries at low prices, which is then refined and sold legally to EU customers. The profits generated then accumulate at the level of the EU-based subsidiaries and are not sanctioned. Thanks to these schemes Russia has built up an opaque slush fund controlled by Russian oil companies of legally earnt and spendable foreign exchange that is worth somewhere between €80bn and €200bn, according to various estimates. While the Kremlin has no direct access to this money, or indeed doesn’t know where it is, it does know roughly how much each company has thanks to production volumes and customs data on exports and so in theory can lean on the companies and use these funds to finance sanctions-busting trade.
The EU is also aware of these scams and is slowly starting to crack down on them. Compared to Russia’s energy giants Gazprom and Rosneft, Lukoil’s assets in Europe have been relatively unaffected by the fallout from the conflict in Ukraine, but the noose is starting to tighten around Lukoil’s neck. Lukoil has already been forced to sell its ISAB refinery in Sicily and on July 21 Bulgaria’s parliament voted to take control of the Burgas oil terminal controlled by Lukoil. Lukoil could also sell its refinery in Romania, local media reported in January, as well as its retail fuel operations in Moldova.
Bulgaria is slowly moving to join the EU embargo on the import of Russian oil. After heated debates, parliament decided last month to end its exemption on the import of Russian oil two months earlier than planned, in October next year. However, the EC investigation has spurred calls to end the exemptions even earlier.
Bulgarian lawmaker Delyan Dobrev, the chair of parliament’s energy committee says he will introduce a new motion to end the exemption immediately, stating that: "Everyone is shocked, including the government,” Politico reports.
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