Interview | The Sixth Package, Unpacked
A conversation with Tomasz Wlostowski, EU Strategies
The Council Regulation implementing the latest sanctions package was published in the Official Journal on 3 June, after an agreement was reached at the political level at the European Council on 30-31 May.
Tomasz Wlostowski, Managing Partner at EU Strategies, helps us navigate the technicalities of the sixth sanctions package. Tomasz Wlostowski trained as a lawyer in Poland and the US. He worked for Clifford Chance, White & Case, Hogan & Hartson, and Hogan Lovells in Warsaw, Washington, and Brussels prior to founding EU Strategies. His practice focuses on EU and US trade defence and sanctions.
Overall, why was this sanctions package so hard to negotiate ? How will the negotiations on an oil embargo influence the thinking on a potential gas embargo ?
There were a few reasons for the delay. First, a number of economies needed to verify that alternative supplies of oil – that would replace Russian imports - could be purchased from global markets. This was not obvious at the outset. Only an intense brainstorming allowed most EU government to get behind an oil embargo, even if set for the end of year and with many exceptions. Second, a number of EU Member States found themselves in very specific situations with respect to Russian imports that made a blanket ban impossible: Germany with its Schwedt refinery dependent on Russian pipeline gas, also Hungary, Bulgaria, Croatia and the Czech Republic, dependent on imports of finished products. So a complete embargo on oil and petroleum products would be difficult to impose and a work-around these particular situations needed to be found. Finally, we also saw the typical horse-trading with Victor Orban exploiting the need for unanimity to secure a number of wins on specific points.
As for gas, I am quite certain that the Commission and some Member States are already thinking on how to ban Russian gas imports. This is for a number of reasons. The first one is that natural gas remains a big source of revenue for Russia and if we want to stop the war, we need to stop funding it. So gas revenues from Europe to Russia must be stopped ASAP. Second, Europe is uniquely positioned to stop these flows, as the EU accounts for a significant part of Russian gas exports, as for all the commotion about Russia’s turn to the East, the gas pipelines are still going almost exclusively to the EU. Finally, the Commission is already – for climate reasons – trying to convince Member States to abandon natural gas in general, and Russian gas accounts for a lion’s share of all imported gas. So sanctions are an excellent opportunity to accelerate the transition away from Russian gas and gas in general.
Also, the legal framework that will help introduce a gas embargo has already been prepared and installed during negotiations on the oil embargo. For example, the distinction between pipeline and seaborne deliveries – already made for oil – will also be very useful for gas. In my view, Russian LNG deliveries could be the first to be sanctioned. We also have already a number of exceptions for particularly-exposed Member States. The same concept can be used to tackle the situation of those Member States with significant dependence on Russian pipeline gas. All this shows, in my view, that in a few months’ time, gas will be centrally on the sanctions agenda.
The centrepiece of the sixth package is, of course, the oil embargo. Commentators focused on the ‘Orban exception’ within the embargo.
How is this framed and what are the implications ? The package also allows for additional exceptions, could you walk us through them ?
The first important thing is that we have a blanket embargo on Russian oil. This is very important. Prior to the publication of sanctions, concerns were raised on how narrowly the ban would be phrased, for example whether it would only apply to seaborne oil. In fact, the general principle is that all imports, purchases or transfer – directly or indirectly – of Russian petroleum and petroleum products are prohibited, as is assistance and financing of such transactions, unless an exception applies. That this is a general rule is important from communication and interpretative perspective.
There are about five exceptions to this ban.
First, imports of crude and petroleum products are allowed until 5 December 2022 and 5 February 2023, respectively, if they are either one-off transactions for near-term delivery, or for execution of previously concluded contracts. So for all practical purposes, the ban on oil comes in on 5 December 2022 and the ban on petroleum products on 5 February 2023. We can treat this not as an exception, but as a delayed entry into force.
Second, there is an exception for non-Russian crude and petroleum products sent by sea, which are only loaded, unloaded in Russia or transiting through Russia. Again this is not really a major exception, as the most important element of the embargo is that it is on Russian oil. Exemption of non-Russian oil does not really undermine the embargo.
Third, we have the exception of crude oil delivered by pipeline, the “Orban exception”. There is no end-date for this exemption, which is surprising and suggests that Orban may have been negotiating too hard. An obvious compromise would have been for this exception to be limited in time, and for the EU to help Orban fund investments aimed at diversifying Hungary’s oil supplies. As you can tell, the exemption is phrased in a general way without identifying the specific importing countries. So of course, Hungary is the major beneficiary, but so are potentially other EU countries with an oil pipeline from Russia on their territory, such as for example Germany. The Council has committed – although not in a legally binding way – these Member States to take all necessary measures to obtain alternative supplies as soon as possible and once “sufficient progress” has been made, the EC will propose to eliminate the exemption.
We have an accompanying fourth exemption, which states that if the supply from Russia of crude oil by pipeline is interrupted for reasons outside the control of that Member State, Russian crude could be supplied by sea until the pipeline supply is resumed. This is to address the floated suggestion that if Orban continued to block sanctions on Russian oil, Ukraine could sever the flow of oil into Hungary to force Hungary to stop using Russian oil anyway.
Fifth, we have a set of exemptions for Bulgaria and Croatia. Bulgaria can import by sea Russian crude and petroleum products until end of 2024, while Croatia, which needs Russian vacuum gas oil for its refinery, may keep importing it until end of 2023.
Member States were concerned that such exceptions might tilt the game significantly towards those benefiting from carve-outs. Resale of oil and petroleum products delivered under the exemptions will be prohibited under the sanctions package. Additional restriction apply to product produced from such imported oil.
Can you walk us through this? What is your take on the prohibition of resales ?
Yes, in order to prevent distortions on the EU internal market, the EU decided to severely limit the tradability of crude and petroleum products imported from Russia into the qualifying Member States under the above exemptions. So, for example, Hungary cannot resell the Russian crude oil delivered by pipeline into Hungary. Likewise, Bulgaria cannot resell the oil or petroleum products brought by sea from Russia. Also, Croatia cannot resell the vacuum gas oil imported under the exemption mentioned above. The EU accepts these countries have a special situation, but the pipeline crude oil, oil and petroleum products brough by sea to Bulgaria and vacuum gas oil brough into Croatia must stay only in the importing countries that qualify for the exemption and cannot be resold.
What’s more, and this applies only to the pipeline exemption, after a temporary period of 8 months (so from 5 February 2023), the resales of petroleum products produced from Russian pipeline oil cannot be resold on the markets of other EU or third countries (with a special case of Czechia). So, for example, any products that MOL manufactures in Hungary from Russian oil imported by pipeline into Hungary must generally stay in Hungary. Or if Russian oil continues into Germany by pipeline, products made from this oil in the Schwedt refinery would in principle need to be sold only in Germany.
The only exception from this would be resales of such petroleum products into Czechia, which are allowed – as long as they keep within the averages delivered in prior years – until 5 December 2023.
So, in summary, products made from Russian oil delivered by pipeline must be sold on the domestic market of the importing country, or – until 5 December 2023 – in Czechia. This gives Czechia 10 months (from 5 February 2023, when reexports of petroleum products obtained from Russian pipeline crude are prohibited, to 5 December 2023) to diversify.
I have to say that the ban on resales of imported pipeline oil as well as a ban on sales of petroleum products from imported Russian oil is in my view somewhat problematic from the legal perspective. The EU is, after all, a common market. The purpose of sanctions under EU treaties is to interrupt or reduce economic and financial relations “with one or more third countries” and not to divide up the EU market into national markets or restrict free movement of goods imported into, or produced in, the EU. From client perspective, why should, for example, Bulgarian or Hungarian end-users get access to cheaper petroleum products than customers in, say Belgium or Spain? In short, I don’t think this aspect has been correctly analyzed from the legal perspective and there is some legal risk in case any litigation over the interpretation of these resale or distribution restrictions arises that EU courts may strike some of them down.
The package also prohibits Sberbank, Credit Bank of Moscow and Rosselkhozban from using the SWIFT system, de facto banning them from the international payments system.
How big of a step is this compared to the previous packages ? And why is Gazprombank left out of the sanctions list ?
The EU is clearly moving to decouple from Russia commercially and financially, so the restrictions around SWIFT are getting tightened. With the latest action, a total of ten main Russian banks has now been removed from SWIFT. Sberbank is one of the main banks in Russia, so its de-SWIFTING is of paramount importance, although it is important to see the big picture. All previously de-SWIFTED banks have also been subjected to the asset free and the ban on any transactions by the EU and the US, so they are completely out from international commerce. De-SWIFTing is normally the last step in sanctioning these banks, as it in practice extends EU sanctions to international transfers, so it practically (though not legally) prevents 3rd country banks from trading with the de-SWIFTed Russian banks. EU and US banks normally couldn’t trade with them even before, because of the blocking sanctions adopted earlier. So in this context, it is important to remember that first, Sberbank has already been subject to some financing sanctions by the EU that restricted EU investors ability to finance Sberbank and, second, the US fully sanctioned Sberbank already this April, so Sberbank’s ability to participate in international finance is already severely limited. I expect the EU to follow suit as well, and fully sanction Sberbank, as after its de-SWIFTing it cannot participate in international finance with EU counterparts anyway.
However, until EU continues purchasing Russian gas some forms of payments are needed, so – while some sanctions can be and are already imposed on Gazprombank (including ban on financing) – it will not be removed from SWIFT entirely, as long as some trade between EU and Russia continues.