Coal sanctions: Europe is finally coming after Russia’s energy

London
CNN Business
 — 

European leaders have planned to phase out Russian coal imports in response to harrowing scenes in Bucha, a suburb of Kyiv.

On Tuesday, the European Commission proposed a phased ban of €4 billion ($4.3 billion) worth of Russian coal imports per year as part of a fifth package of sanctions designed to further diminish Russian President Vladimir Putin’s war chest. Other proposals target Russian technology and manufacturing imports, worth another €10 billion ($10.9 billion).

Europe has imposed punishing sanctions on Russia’s economy since Putin’s tanks rolled into Ukraine in late February, but stopped short of targeting Russia’s energy sector — until now. Images of unarmed civilians, bound and shot, lying along Bucha’s roads — which were until recently under Russian occupation — have convinced leaders to change tack.

More details on the new round of sanctions, including the timeline for the ban on coal, are expected Wednesday when EU ambassadors meet for talks. The measures still need the approval of all 27 member states.

Sanctioning coal will bite some European countries, but it’s among the easiest energy sources to wean off — much of the world is already doing just that. The trickier question is: What happens next?

Russia was the world’s third-largest exporter of coal in 2020, behind Australia and Indonesia, according to the International Energy Agency, with Europe by far its biggest customer.

The continent received 57 million tons of Russian hard coal that year, compared to 31 million tons for China, IEA data shows. This amounted to more than half of Europe’s coal that year, according to Eurostat.

But the EU was already turning away from the world’s dirtiest fossil fuel.

The amount of electricity generated by coal has decreased steadily across the block in recent years, falling 29% between 2017 and 2019, according to analysis by energy think tank Ember.

And despite a brief uptick last year as gas prices hit record highs, the IEA anticipates that European demand for coal will resume its steady decline. Total imports were expected to drop 6% by 2024 even before Russia’s invasion of Ukraine.

Other countries could step in to buy Russian coal. The IEA expects India’s coal imports to rise 4% in 2024, and more than 6% in Southeast Asia. Russia has already benefited from a jump in exports to China following Xi Jinping’s block on Australian imports, the agency said in a December report.

Still, a supply crunch — even one that’s phased in — could cause a headache for countries that still use coal for much of their electricity generation, including Poland and Germany.

A drop in supply coupled with rebounding demand in China helped push global coal prices up to all-time highs in October 2021 — before falling back down, per IEA analysis.

But elevated prices could prove stickier under an EU ban on Russian imports. Rotterdam coal futures, the benchmark for European coal prices, closed at $257 a ton on Monday, but was last seen trading at $295, data from the Independent Commodity Intelligence Services showed.

Matthew Jones, lead analyst for EU power and carbon at ICIS, told CNN Business that the coal ban will “make an already tight European supply situation even tighter and will lead to a scramble to find alternative coal sources.”

“Front month Rotterdam coal futures traded on the ICE exchange were up almost 15%, and front year by 13%, since yesterday’s close in response to the news,” Jones added.

Even so, Henning Gloystein, director of energy, climate and resources at Eurasia Group, thinks EU states can withstand the shock. The think tank also said on Tuesday that any EU purchase of Australian coal would cushion the blow.

“Sanctioning coal will also make life much more difficult for European utilities, which consume a lot of Russian coal, but energy companies can cope with this” Gloystein told CNN Business.

Russia’s oil and gas supplies are notably absent from the latest round of sanctions. The bloc imported 26% of its crude and 46% of its gas from Russia in 2020, according to Eurostat.

But blocking oil imports is on the table: European Commission President Ursula von der Leyen said in a statement Tuesday that the bloc was “working on additional sanctions, including on oil imports.”

Already, the United States has tapped its strategic oil reserves, releasing 180 million barrels into the global market, to help bring down gasoline prices and counter the reduction in Russian oil supplies. The IEA also agreed to release additional oil from its member countries at an emergency meeting last week.

Natural gas is still the most unlikely target of sanctions, partly because of differences between member states that are heavily reliant on Russian energy and those wanting to move faster to strike at the heart of the Russian economy.

EU leaders have pledged to reduce consumption of Russian gas by 66% before the end of this year, and to break the bloc’s dependence on Russian energy by 2027.

One country has gone further. Lithuania’s Prime Minister Ingrida Šimonytė said in a tweet Sunday that “from now and so on, Lithuania won’t be consuming a cubic cm of toxic Russian gas.” Getting import-reliant countries like Germany and Hungary on board will prove more challenging.

But, according to Gloystein, the bloc’s reluctance to sanction oil and gas is about more than avoiding self-harm.

“The EU is keen to be able to keep escalating its response according to developments in Ukraine,” he said. “If Brussels now enforces maximum sanctions, how does it react to a further escalation by Moscow?”

Gloystein also said that targeting Russian oil and gas risks backfiring.

“There are serious and credible concerns that such actions would trigger a significant escalation by Russia as Putin may feel forced to act drastically and swiftly in the knowledge that his war chest might soon run dry.”

— Mark Thompson contributed to this report.