Ukraine has imposed sanctions on the Russian private oil company Lukoil. Slovakia and Hungary, which depend on oil from this producer, have been in an uproar for a week. These two EU countries are threatening Kyiv with legal action and possible cessation of electricity imports.
What is Brussels’ position, and how might the scandal with the Druzhba oil pipeline end?
Lukoil is the second-largest oil company in Russia and the sixth-largest private oil company in the world. Russian Lukoil is undeniably one of the sponsors of the war in Ukraine, with its key shareholder Vagit Alekperov receiving 186 billion rubles (over $2 billion) in dividends for 2023 and the first quarter of this year. Ukraine imposed sanctions on the Russian oil company back in 2018. However, at that time, the restrictions only included a ban on capital withdrawal from Ukraine, privatization, and property sales. At the end of June this year, the National Security and Defense Council (NSDC) expanded sanctions against Lukoil.
Hungarian Foreign Minister Péter Szijjártó announced that Ukraine had stopped the transit of oil from Lukoil through the Druzhba oil pipeline to Hungary.
Ukraine’s Government Response
The Ukrainian government has not yet officially commented on the decision to strengthen sanctions against Lukoil. It is clear that Kyiv aims to reduce Russian revenues that continue to fund the war against Ukraine. It should be noted that other Russian companies have not yet come under NSDC restrictions and can continue to transit their products through Ukraine. Notably, the state-owned company Rosneft and the private firm Tatneft, which contribute significantly to the Russian budget, are not under sanctions.
Position of Naftogaz
Meanwhile, Naftogaz has expressed its position. Naftogaz Ukraine CEO Oleksiy Chernyshov confirmed that Ukrtransnafta no longer transports Lukoil’s products, but as of July, the volume of oil transit remains standard since transit from other companies is not prohibited. “If this continues (without the resources of sanctioned companies), we are ready to continue the transit. I hope its volumes will remain the same in the future,” Chernyshov said.
Slovakia and Hungary Threaten Legal Action
For Hungary and Slovakia, which depend on Russian oil, Ukraine’s ban has become a serious challenge. The Centre for Research on Energy and Clean Air (CREA) reports that as of January 2024, Hungary became the largest importer of Russian fossil fuels in the EU, paying Moscow 184 million euros for this product. Hungary receives about 2 million tons of oil annually from Lukoil, accounting for one-third of its total imports. For Slovakia, oil from the Russian company covers 45% of its total imports.
EU Oil Embargo
Although the European Union imposed an oil embargo, Hungary, Slovakia, and the Czech Republic were exceptions and continued using oil from the Russian Druzhba oil pipeline. These concessions are related to the fact that none of these countries have access to the sea and face a deficit of diesel fuel and the need to reorient to alternative oil supply sources. The EU decision of June 2022 emphasizes that these three countries should take necessary actions to secure alternative sources as soon as possible, but no deadline was specified.
Reaction from Hungary and Slovakia
Hungary and Slovakia have expressed their anger over Ukraine’s sanctions, as they affect not only the Russian company but also these two countries, which depend on Lukoil oil. Budapest has already begun talking about a potential fuel shortage and accused Ukraine of blackmail. Hungarian Foreign Minister Péter Szijjártó called this decision unacceptable, especially from “a country that wants to join the EU and imports electricity from Hungary.”
Hungary’s Response
Budapest has used its traditional blackmail tactics and once again blocked the disbursement of a 6.5 billion euro tranche from the European Peace Facility to compensate EU member states for military aid provided to Ukraine. Hungary has been blocking tranches from this fund for over a year, each time finding new arguments.
Slovakia’s Concerns
In Bratislava, they warn that such actions may also affect Ukraine, as oil from Slovakia’s Slovnaft accounts for nearly a tenth of Ukraine’s consumption. According to Prime Minister Robert Fico, after the sanctions were imposed, Slovnaft, part of the Hungarian MOL group, will receive 40% less oil than needed for processing.
Appeal to the European Commission
Frustrated by the Ukrainian government’s decision, Slovakia and Hungary have already appealed to the European Commission to persuade Kyiv to resume transit. If negotiations fail, these governments threaten to take the matter to arbitration.
Compliance with the EU Agreement
Amid the sanctions scandal against Lukoil, Hungary accused Ukraine of violating the Association Agreement with the EU. Due to the lack of comments from the Ukrainian government, it is currently difficult to assess whether Kyiv warned its allies about the sanctions in advance.
Expert Opinion
Svitlana Taran, an analyst at the Centre for European Policy, told Channel 24 that according to the Association Agreement with the EU, Ukraine should have informed its plans to impose sanctions in advance, especially if it concerns a significant share of imports. The expert emphasizes that introducing restrictions without prior consultations with partners is prohibited not only by the Association Agreement with the EU but also by WTO documents. “Regarding the Association Agreement, it stipulates that Ukraine and any other country must ensure free, unhindered transit through their territory. (…) There are only certain circumstances under which transit restrictions can be imposed. But even if this is implemented, preliminary consultations with partners are required,” explained Svitlana Taran.
Legal Justification
However, in a state of war, Ukraine has the right to impose sanctions on specific Russian companies involved in financing Russia’s aggression. According to Taran, an argument in favor of Ukraine is that only one company is banned, while other Russian firms can still supply oil to Hungary and Slovakia through Druzhba. “This means that Ukraine does not violate this requirement for free transit to EU countries,” the trade expert explained.
European Commission’s Position
The European Commission confirmed that Executive Vice President Valdis Dombrovskis received a letter from the foreign ministers of Hungary and Slovakia on this issue. European Commission spokesperson Olaf Gill has repeatedly stated that the Commission is studying the letter and is in contact with Kyiv, Budapest, and Bratislava. “There is currently no direct impact on the security of oil supply to the EU. (…) The Commission is ready to support the affected member states in finding a solution together with Ukraine,” said Olaf Gill.
Support from EU Members
According to the Financial Times, during a meeting of the EU permanent representatives, 11 EU member states supported Valdis Dombrovskis’s position. The European Commission vice president says that more time is needed to clarify all details. Moreover, these 11 countries did not support Slovakia and Hungary’s calls. One of the FT sources reported that the Association Agreement includes a security clause that could allow the interruption of Russian oil transit.
Expert Insight
Trade expert Svitlana Taran believes that the European Commission’s mediation in this conflict is a positive factor, as it will help find a common solution. According to her, neither side is genuinely interested in taking the case to arbitration. The analyst suggests that Slovakia and Hungary may be offered a transition period to reorient supplies to other Russian companies or alternative non-Russian sources altogether. “This could be a compromise to avoid further escalation and the blackmail from their side regarding cutting off electricity to Ukraine,” Taran said.
Future Prospects
Svitlana Taran believes another advantage for Ukraine could be the EU’s policy of completely abandoning Russian fossil fuels by 2030 under the Repower EU program. This situation could serve as a “litmus test” and demonstrate how effectively this work is being done in Slovakia and Hungary. “It is important for the European Commission to monitor what has already been done in this direction to meet the requirement to reduce dependence and find alternative supplies, as well as how much more time these countries need to completely abandon Russian oil,” the analyst emphasized. It should be noted that Ukraine’s contract with Russia for the transit of Russian oil through the Druzhba pipeline lasts until 2030.
