Europe is planning to crack down on Russian coal. It’s bad news for Putin, but won’t devastate the EU.

The European Commission proposed a fifth package of sanctions against Russia this week in response to horrific scenes of mass graves and executed civilians in Bucha, outside of Ukraine’s capital, Kyiv.

The proposed penalties would include an entry ban for Russian ships at E.U. ports, a restriction on exports of critical commodities like jet fuel and semiconductors, and further sanctions on key Kremlin officials, including Vladimir Putin’s reclusive daughters.

But the centerpiece of the new plan is a ban on Russian coal imports.

If the package passes, it will push coal prices, which are already near record highs, even higher in the coming months as European buyers scramble to find alternatives to Russian supplies.

But unlike banning oil or natural gas, the proposed coal ban won’t be nearly as devastating to European energy prices, Dmitry Popov, a senior coal analyst at the business intelligence firm CRU Group, told Fortune. A few key differences between these energy commodities mean that coal sanctions could damage Russia without wreaking havoc in Europe.

Europe’s fading reliance on Russian coal

In 2021, Russia accounted for roughly 70% of the E.U.’s thermal coal imports—that’s the kind of coal used to generate electricity—and despite attempts to diversify away from fossil fuels, around 16% of the E.U.’s total electricity production is expected to come from thermal coal in 2022, CRU Group data shows.

Those are high numbers, but they don’t tell the whole story.

While the E.U. pays roughly $850 million per day for Russian oil and gas, its daily coal bill is only around $20 million, according to recent reports. And although energy prices in Europe have soared to record highs after the invasion of Ukraine, Popov said much of that increase is due to rising natural gas prices, and not coal.

Generating power from coal has actually been cheaper than using natural gas for almost six months now, according to CRU Group data.

Additionally, since the start of the war in Ukraine, many European coal buyers have begun to move away from their reliance on Russian imports, Popov said.

“I think the shift of European buyers from Russia has already been underway since Russia invaded Ukraine,” Popov said. “Many companies have already said that they will stop new deals with Russian coal exporters.”

The recent ban on coal is largely priced into the market, Popov argued, and while prices may rise in the near term, alternatives should become available relatively quickly to steady costs. That means that a coal disruption would hurt temporarily, but the pain isn’t likely to last.

“The expectation is that prices will stay high in the next quarter, but then through the second half of the year, we are expecting prices to come down quite sharply,” he said.

Thanks to Germany’s successful lobbying efforts, European coal companies also have until mid-August (under the sanctions package) to find new suppliers to replace Russian coal, according to recent reports.

That timeline gives European buyers a better opportunity for a soft landing than they might have otherwise.

Replacing Russian coal

European coal buyers are looking mainly to the U.S. and Colombia to find new supplies, Popov said.

CRU Group expects the U.S. will increase its coal exports by 9 million tonnes this year to the highest level since 2018, and Colombia will follow suit, increasing exports by 14 million tonnes. Although that isn’t specifically earmarked for the EU, the supply will help the bloc. That, coupled with increasing production from domestic coal producers in Germany, Poland, and the Czech Republic, should offset the majority of Russian coal losses.

However, the EU isn’t the only country looking to ditch Russia. Global demand for alternatives to Russian coal should remain strong through the year after Japan said on Friday that it also plans to ban coal imports from Russia and two South Korean utility companies decided to cut ties with the country altogether.

A dramatic increase in domestic production in China, leading to reduced demand for imports from the country, will help offset the loss of Russian coal globally, however, Popov said. And CRU expects global production of thermal coal will rise 3% year-over-year to counter rising demand.

This story was originally featured on Fortune.com

Source: https://finance.yahoo.com/news/europe-planning-crack-down-russian-103000897.html