U.S., EU are looking at ways to slash Putin's oil money

(Bloomberg) -- U.S. officials and the European Union are in talks over steps the EU could take to restrict oil imports from Russia and cut the income that Moscow makes from sales, according to people familiar with the matter.

The options discussed include a ban, a price cap and a payment mechanism to withhold revenue that Russia’s generated since the start of the war in Ukraine, said the people, who asked not to be identified because the conversations are private. 

The goal of the talks are to figure out how to hit Russian President Vladimir Putin as hard as possible, one of the people said. 

One U.S. concern is that an outright EU ban on Russian oil could see prices skyrocket and give the Kremlin even more revenue. U.S. Treasury Secretary Janet Yellen said Thursday that a full embargo could hurt European economies hard without inflicting as much impact on Russia as hoped.

Any decision over what measures to ultimately take will be for EU member states.

Russia has so far withstood sweeping sanctions imposed by the U.S., its European allies and other democracies, with the ruble recovering much of the value it lost since the Kremlin’s invasion. Still, the economy has taken a substantial hit and the central bank warned this week of a deep and prolonged contraction.

The IMF this week forecast an 8.5% contraction in Russia’s GDP this year.

The EU is currently working on its sixth package of sanctions and is also considering other potential measures to hit the Russian oil industry such as restrictions on some oil goods and taxing imports. The bloc’s top diplomat, Josep Borrell, told Spanish media on Friday that none of the proposals yet had the full backing of all EU member states.

EU sanctions require unanimity and a number of nations, including Germany and Hungary, have resisted moves to fully ban Russian oil and gas.

A spokeswoman for the White House National Security Council said the administration continues to talk with European allies about strategies to reduce dependence on Russian energy.

The EU could start putting forward proposals for member states to discuss as early as next week, several people said. One of the people told Bloomberg that reaching a consensus for a limited ban on crude would be easier than restricting imports of diesel and other products. 

The EU pays Russia about a billion euros ($1.1 billion) a day for energy supplies, while the U.S. banned imports of Russian oil last month. 

Earlier this month, Yellen said in a congressional hearing that an escrow account for proceeds from Russian oil and gas sales was an idea “worth exploring” as part of the effort to restrict Moscow’s revenues. Estonia has put forward a similar proposal, suggesting EU nations withhold and freeze a share of Russia’s energy revenue in a special account until the Kremlin withdraws its troops from Ukraine.

Russia’s oil exports to Europe come in the form of both crude, which is processed in European refineries to make fuels, and as finished products, the most important of which is diesel. With refineries in eastern Germany, Poland, Slovakia, Hungary, the Czech Republic and Slovakia linked to a major pipeline system carrying crude from Russia, shutting off crude supplies will be extremely difficult for some countries. 

Poland has already taken steps to wean itself of Russian crude, signing a major supply deal with Saudi Arabia in January. But abruptly stopping the flow of Russian crude could be particularly problematic in large parts of Germany.

Russia Oil Ban Would Bring Eastern Germany to Halt: Oil Strategy 

Stopping imports of Russian diesel fuel would cause different problems. The European diesel market was already tight before Russia’s invasion of Ukraine and cutting off a major source of supply -- about 20% of EU diesel imports typically come from Russia -- will only make the situation more difficult.

The Bundesbank said on Friday that the German economy may shrink by nearly 2% this year if the war in Ukraine escalates and an embargo on Russian coal, oil and gas leads to restrictions on power providers and industry.

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