EU bans imports of Russian coal

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The European Union on Thursday approved by a narrow margin a ban on Russian coal imports in the first sanctions against the vital energy industry during the war in Ukraine. The vote highlights the failure of the 27 nations to agree on a much more sweeping embargo on oil and natural gas that would hit Russia hardest but risk a recession in his country.

The coal ban will cost Russia around $4.4 billion a year, the EU’s executive commission said. Energy analysts and coal importers say Europe could replace Russian supply in months with other countries, including the United States

This decision is important because it breaks the taboo on the severing of Europe’s energy ties with Russia. It is also certain to fuel already record inflation. But compared to natural gas and oil, coal is by far the easiest to cut quickly and inflicts far less damage to Russian President Vladimir Putin’s war chest and the European economy. The EU pays Russia $20 million a day for coal, but $850 million a day for oil and gas.

Pictures of bodies in the Ukrainian town of Bucha are fueling the discussion of broader sanctions, with EU officials saying they are working on targeting Russian oil.

As the EU mulls additional sanctions, Italian Prime Minister Mario Draghi said no embargo on Russian natural gas was currently under consideration.

“And I don’t know if it will ever be on the table,” he told reporters on Wednesday.

EU countries, especially big economies like Italy and Germany, rely heavily on Russian natural gas to heat and cool homes, generate electricity and run industry.

Yet, Draghi said, “the more horrible this war becomes, the allied countries will ask, in the absence of our direct participation in the war, what else can this coalition of allies do to weaken Russia, to bring it to an end “.

Should a gas embargo be proposed, Italy “will be very happy to follow it” if it makes peace possible, Draghi said. “If the price of gas can be traded for peace…what do we choose? Peace? Or running the air conditioning in the summer?”

For now, even the coal ban has ominous consequences for politicians and consumers. Germany and EU members in Eastern Europe still generate much of their electricity from coal despite a years-long transition to cleaner energy sources.

“The coal ban means that European consumers will have to prepare for high electricity prices throughout this year,” according to a statement from Rystad Energy.

Higher prices in countries that use more coal will spread across the EU thanks to its well-connected electricity grid, the energy research firm said. It will bring more pain. Europe has faced high energy prices for months due to a shortage of supply, and war jitters have driven them higher.

Governments have already introduced cash support and tax relief for consumers affected by higher utility bills. High energy prices pushed inflation in the 19 member countries that use the euro to a record high of 7.5%.

Commodities analyst Barbara Lambrecht of German bank Commerzbank said EU governments could probably agree to a coal embargo as it would take effect after three months and only apply to new contracts. The downside is the limited impact on Russia, with coal accounting for only 3.5% of its exports and only a quarter going to the EU.

The German coal importers association says Russian coal could be completely replaced by the United States, South Africa, Colombia, Mozambique and Indonesia “by next winter” – at higher prices.

European coal futures jumped after the EU announced the coal proposal, rising from around $255 a ton to $290 a ton.

The big debate remains oil and natural gas, the European Union depending on Russia for 40% of its gas and 25% of its oil. It is harder for Europe to cut itself off than for the United States, which imported little Russian oil and no gas and banned both.

Yet European Council President Charles Michel said: “I think that action on oil and even on gas will also be needed sooner or later.”

It is difficult for the EU to agree on energy sanctions because countries like Germany, Italy and Bulgaria are much more dependent on Russian gas in particular than others. Europe has rushed to get additional gas through pipelines from Norway and Algeria and with more liquefied gas by ship, but those global supplies are limited.

For now, the EU’s plan is to reduce dependence on Russian gas by two-thirds by the end of the year and completely over the next few years by stepping up alternative supplies, conservation and energy. wind and solar.

Germany has reduced its dependence on Russian natural gas from 55% to 40%, but the government says the job consequences of a cut would be too great.

The German steel association, for example, has warned of forced closures that would deprive people of their jobs or government assistance and send shortages of basic parts ripple through the rest of the economy. .

Energy Minister Robert Habeck said the country would shut down Russian coal this summer, oil by the end of the year and gas by mid-2024.

Oil would be easier to ban than natural gas because, like coal, there is a large, liquid global market for oil and it arrives primarily by ship, not by fixed pipeline like gas.

But it’s not without problems either. Russia is the world’s largest oil exporter, with 12% of the world’s supply. Pulling its oil off the market to Europe would drive up prices from other exporters, such as Saudi Arabia, when supplies are already tight.

Russia could simply sell the oil to India and China, which are not participating in the sanctions, although the price Moscow gets may be lower.

The economic hit from a complete power cut ranges from a 1.2% to 2.2% drop in gross domestic product in the 19 countries using the euro, plus 2 percentage points of additional inflation, according to recent estimates by economists.

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