Russia’s diesel export ban may be just its latest attempt to hurt Europe

Analysis by Anna Cooban, CNN

London (CNN) — Russia’s decision to ban diesel exports to most countries could not have come at a worse time for Europe.

The European Union halted Russian seaborne imports of the fuel earlier this year as part of sanctions imposed on Moscow over Russia’s full-scale invastion of Ukraine. But the EU still needs a steady flow of Russian diesel to global markets to keep prices stable.

The Russian government announced the curbs — which also apply to gasoline — Thursday, saying they were aimed at stabilizing domestic fuel prices. The restrictions will stay in place for as long as the government deems necessary, Reuters reported Friday, citing a Kremlin spokesperson.

Diesel is Europe’s economic workhorse, powering the majority of vans and trucks ferrying goods and raw materials round the continent. It’s also a key heating fuel in some countries, and winter is approaching.

Moscow’s actions carry a wider economic threat, too — a possible uptick in inflation. Energy prices have already risen sharply in recent weeks, as Russia and Saudi Arabia have vowed to keep restricting crude oil supply until the end of the year.

Russia is the world’s biggest exporter of diesel, accounting for over 13% of global supply so far this year, according to data firm Vortexa.

Since the introduction of the EU import ban in January, Moscow has found new buyers for its barrels in South America, the Middle East and North Africa. Analysts warn that a tightening of supply could ramp up global competition for the fuel in the months ahead, sending prices higher everywhere, including in Europe.

Tighter markets, higher prices

Wholesale prices for European diesel jumped 5% Thursday, following the announcement of Russia’s export curbs, to close at $1,020 per metric ton, data from Rystad Energy shows. Prices fell back to trade around $990 by Friday afternoon, still above their level before the news.

“The timing is really, really bad,” Jorge León, a senior vice-president at Rystad Energy, told CNN. “Seasonally there is a lot of diesel demand in winter,” he said, referring to its use in making heating oil to warm homes.

“There is a lot of construction and agriculture and manufacturing demand for diesel that picks up in the fourth quarter of the year,” he added.

However, it is Russia’s new customers outside of Europe that will be most hurt by the ban.

Pamela Munger, a senior market analyst at Vortexa, told CNN that Turkey had taken “huge volumes” of Russian diesel since the start of the year.

Before Europe imposed its import ban, Russia supplied 40% of the country’s diesel. Over the past nine months, she said, that share has increased to 80%.

The Kremlin’s ban doesn’t make “a lot of sense” for Russia economically, she said, given its status as the world’s biggest supplier.

“Why would you ban what’s bringing you so much income?” she said.

Russia’s latest energy salvo?

Some analysts say the move may be the latest example of Moscow weaponizing its energy exports in retaliation for Western sanctions.

Henning Gloystein, a director at Eurasia Group, notes that the export limits have come “almost exactly” before Europe’s heating season. While there is evidence of fuel shortages inside Russia, Gloystein says he struggles “to believe that this a coincidence or purely a domestic issue.”

“It is no surprise that Russia is making another effort to inflict economic pain on the West as winter approaches,” he told CNN.

Still, Gloystein expects the damage to Europe to be “much more limited” than that inflicted by Moscow’s cuts to its natural gas exports last year.

“Given Europe has had one-and-a-half years to adjust to Russia’s threats and supply cuts, the risk of energy shortages this winter are very low,” he said.

But rising diesel prices coincide with a rally in prices for crude oil, fanning fears that inflation could surge again in Europe and the United States just as it has started to post significant falls.

The price of Brent crude, the global benchmark, has risen 30% since a low in late June mainly on the back of the production cuts by Saudi Arabia and Russia.

“We’re seeing the light at the end of the tunnel, we’re seeing inflation gradually coming down,” said León at Rystad Energy.

“If there is a spike in diesel, which is widely used in Europe, that is going to mean an additional fueling of inflation in the months to come.”

— Tim Lister and Anna Chernova contributed reporting.

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