In June, Ukraine decided to harden existing sanctions against Lukoil, Russia’s second-largest oil company. This decision has prevented Lukoil from using the Druzhba pipeline, which runs through southern Ukraine, to transit oil to Hungary, Slovakia, and the Czech Republic. However, one senior Ukrainian official claimed that Ukraine did not actually stop the oil flows through the Druzhba pipeline; instead, Russia itself ceased the exports. Hungary and Slovakia are among Russia’s closest allies within the EU and serve as conduits of Russian influence in Europe. We think it would make little sense for Russia to purposefully damage these relationships.
Another possible reason for the cessation of exports could be capacity limitations due to recent Ukrainian strikes on Russian oil refineries. Yet, this too seems unlikely, as Ukraine tends to widely publicize successes in diminishing Russian oil capabilities. Despite this, there remains a non-zero chance that the latter is still a possibility, which raises downside risks and complicates the outlook.
The direct implications for Russia are limited and largely immaterial, as Lukoil exports to Hungary and Slovakia represent a tiny fraction of Russia’s total crude exports. For example, in May, Hungary imported EUR 172 million worth of crude oil, while Slovakia, the EU’s second-largest importer of Russian oil, brought in EUR 152 million through pipelines. Similarly, the implications for the Czech Republic are also minor, thanks to diversification within its oil supply chain, which will allow Lukoil imports to be replaced easily. However, Slovakia and Hungary are more reliant on Russian oil, with Russian imports accounting for about 70% of oil imports in each country, half of which is supplied by Lukoil.
While both Slovakia and Hungary will have increased exposure to fuel supply shocks, we do not anticipate widespread fuel shortages or significant increases in domestic fuel prices in either country. The emergency oil reserves for both Hungary and Slovakia, without alternate sources being found, will cover the shortfall for around 250 days from July. We anticipate that within this timeframe, fuel supplies will already be supplemented by options such as rerouting Lukoil through the Croatian Adriatic pipeline or even switching to other Russian suppliers still authorized to use the Druzhba pipeline.
Finally, there remains the option of Lukoil flows being reallowed in the coming weeks, should the European Commission, which is currently mediating the situation, succeed in its efforts.
Business implications
Multinationals should not expect any immediate fuel spikes in Hungary or Slovakia in the next few months, although minor increases are likely if uncertainty continues, potentially leading to fuel hoarding among consumers and businesses. However, in the longer term, fuel prices are likely to become structurally elevated. The available replacement options will translate into increased fuel costs, either by transporting oil through Croatia’s Adriatic pipeline, which is more expensive and has been criticized by both the Slovak and Hungarian governments for uncertainty over price and capacity, or by sourcing from other suppliers at a premium.
Hungary and Slovakia’s heavy reliance on Russian crude oil and lack of diversification of suppliers will continue to be a significant vulnerability for their energy security. This issue is a key concern for businesses operating in the region, particularly if geopolitical tensions escalate. Companies should have contingency plans in place to mitigate any potential fuel supply disruptions and rising costs if the downside scenario materializes.
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