The EU ceiling on Russian oil has been in effect since December 5, while from February 2023 the ban will also apply to other petroleum products. Regarding the import of oil, exceptions apply to Hungary, Slovakia and the Czech Republic. The above member states have a high degree of dependence on Russian crude.
However, especially in diesel, European drivers may find Russian diesel for a long time. The reason is that regulators do not have tools to trace the origin of fuel when it has passed through other countries. This is also the way to bypass the embargo.
The role of Turkey and India
The fact that the origin of the crude cannot be traced after refining makes it highly possible that Russian diesel quantities are delivered to countries such as Turkey and India, which in turn are exported after processing.
According to analysts, once the embargo comes into force, Europe will have to replace up to 600,000 barrels per day. One of the most predictable scenarios is that small amounts are going to be funneled to the EU.
Draconian measures in the UK and the Netherlands
The countries that are going to thoroughly check ships and drivers carrying petroleum products are the Netherlands and the United Kingdom. Dutch customs, which oversee the important Amsterdam-Rotterdam-Antwerp trade and storage hub, British authorities and the ICE exchange will check the official certificates of origin of the import ships.
In case of doubt, UK and Dutch customs may request additional documents to establish the origin of the goods, such as agreements, invoices or consignment notes from bills of lading. ICE will also review landing certificates and receipts from refineries of where the cargo has been processed.
In order to get approval for any diesel that is not of Russian origin, Britain and the EU require that it has been processed outside of Russia. Mixing Russian diesel in another country with a non-Russian equivalent would not change its origin. But refining Russian crude into diesel – in another country – would.
“Manufacturing is only considered substantial if it results in the production of a new product or represents a significant stage of the process carried out in an establishment equipped for that purpose,” the UK government website states.
Controls of reduced effectiveness
Britain and the EU take it for granted that diesel is Russian if it is transported and reloaded elsewhere. The UK authorities state that any processing to change the product must be for commercial purposes, such as producing a final product that meets specifications, and not to avoid the sanctions regime.
However, it is practically impossible to trace the origin of refined diesel, as well as to track ship-to-ship (STS) transfers, which means that aspects of the sanctions are highly dependent on market ‘goodwill’.
The volume of STS business between Russia-bound tankers has “increased dramatically” since February, shipping data and analytics firm Windward said. “If you unloaded Russian diesel in a more… relaxed port, you could mix it and re-export it with a different bill of lading and a different origin,” said one of the sources, who deals with the storage and transportation of petroleum products.
The financial disadvantages
As for the economic downsides of banning diesel imports, it is expected that this “global re-routing” of oil cargoes will result in increased supply costs further fueling the cost of energy thereby fueling rising inflation for oil-dependent economies. Also, the available tankers will be limited and ultimately the imported energy products will be even more expensive.
The influence on diesel flows
As highlighted above, it is very likely that the Russian diesel will be delivered, processed and re-exported from Turkey and India. Russia can quite easily send diesel to Turkey, where it has the ability to send medium-sized tankers.
To counter this, Europe has already moved to replace Russian diesel imports with refined product from the Middle East, but analysts expect India to refine even more diesel and increase exports to Europe.
Who can sell Russian crude?
The ceiling set by the Europeans prohibits both shipping companies and insurance companies from handling cargoes of Russian crude unless the selling price is below $60 per barrel.
BP and Shell have already imposed sanctions on Russian oil and oil products in general. In turn, Russia is expected to impose a lower price ceiling and not sell oil to countries or companies that adhere to the EU ceiling.
According to French shipping company BRS, it said that “owners of mainstream tankers will not be able to load Russian crude”. However, smaller companies already use “shadow fleet” tankers, adding that they have insurance contracts with providers in India.
Also, BRS points out that 111 aging tankers have been sold to private shipping companies since February possibly to carry Russian oil. European buyers are also increasingly receiving Russian diesel under the Incoterms Delivered Ex-ship rule, which leaves responsibility for insurance in the… hands of the supplier.
What happens if a ship does not respect the price cap?
If a third-country-flagged ship intentionally carries Russian oil above the price cap, EU companies will be prohibited from insuring, financing and servicing that ship to carry Russian oil or oil products for 90 days after the cargo bought, unloaded
If an EU vessel, such as an EU-flagged vessel, breaches the price ceiling, it will be subject to the following consequences under each Member State’s national law.
