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Euro hits 6-month high vs ruble as oil embargo comes into effect

Published 12/05/2022, 11:00 PM
© Reuters

By Geoffrey Smith -- The euro hit a five-month high against the Russian ruble on Monday, the day on which a long-awaited EU embargo on imports of Russian oil and oil products came into force. 

The euro topped 66 rubles for the first time since late July, gaining 2.1% by 09:15 ET (14:15 GMT), amid a broad rebound helped by growing perceptions that the Eurozone will avoid a worst-case scenario of widespread energy rationing this year, despite the lack of both liquid fuels and natural gas from a country that was until this year its biggest supplier. 

The EU had been importing up to 1 million barrels of oil a day from Russia until recently, despite many importers' decision to look for alternative supplies as a result of the stigma attached to the country since its invasion of Ukraine in February. The bloc has needed months to prepare for the step, which has required big adjustments to become a reality. A number of refineries in Europe, such as Schwedt in northeast Germany and the others in Romania and Italy, are either bound to Soviet-era infrastructure or have been technologically configured to work with Urals, Russia's heavy, high-sulfur blend of crude that is its chief export blend.

To protect supplies at Schwedt, the refinery that dominates the regional market around Berlin, The German government has signed agreements with Poland to bring in alternative crude via upgraded pipelines running down from Gdansk. The Italian government meanwhile has struck agreements to bring oil from Egypt to the ISAB refinery in Sicily that is owned by Russia's largest privately-owned oil company, Lukoil (MCX:LKOH). 

At the same time, the bloc has enjoyed a relatively drama-free start to the winter-heating season, with generally mild temperatures in October and November allowing continued injections into storage longer than is usual, and allowing the bloc to meet its target of full storage ahead of time. Consumption has also scaled down significantly, with demand in Germany down 21.8% from a year earlier last week, when adjusted for temperature-driven factors. 

Even so, it appears highly unlikely that the embargo per se will lead immediately to any meaningful increase in economic pressure on the Kremlin to change course. 

"The economy of the Russian Federation has all the necessary potential to fully meet the needs and requirements of the special military operation," Kremlin spokesman Dmitry Peskov told reporters on Monday, using Moscow's term for its war in Ukraine.  "These measures will not affect this."

While Russian exports from its westward-leading export routes on the Baltic Sea and Black Sea are trading at a significant discount to world prices, shipments via the East Siberia-Pacific Ocean pipeline are trading more in line. That reflects the fact that neither China nor India, the two biggest Asian oil importers, have both indicated they won't observe a G7 effort to impose a price cap of $60 a barrel on Russian crude exports. 

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