- If the European Union imposes a full-scale Russian oil embargo, it could plunge Russia’s economy into a depression, an analyst told Insider.
- Russia will have to cut its oil production as the country has very limited domestic storage capacity, said Kpler’s senior oil analyst.
- Moscow is likely to turn to China and India to help procure more oil supplies, but they won’t be able to fill the gap.
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Germany’s announcement this week that it was ready to stop buying Russian oil makes a full-scale European Union oil embargo much more likely – with devastating consequences for Moscow.
“Russia’s economy is expected to shrink by more than 10% this year. If an EU embargo materializes, it would likely push the economy into depression,” Matt Smith, senior oil analyst at market analysis firm Kpler, told Insider.
Without European buyers, Russia would have to find a place to store around 2.5 million barrels a day. Unless Moscow can sell that stash quickly, or at least find a place to store it, there’s a big chance Russia will have to drastically cut its oil production due to its limited storage capacity, he said.
Russia could use its extensive pipeline network for storage, but that wouldn’t absorb all of the excess supply, Smith explained, adding that unsold crude could also be loaded onto tankers and stored offshore.
But such solutions would still not close the elusive hole in Russia’s economy that an EU embargo would create. Revenue from oil exports to Europe accounted for 11% of Russia’s GDP in 2021, far more than the 2.3% to 2.6% that gas exports to Europe made up, according to the Rhodium Group.
“A dip in export earnings will ultimately lead to a significant deterioration in the country’s economy,” Smith said. “It seems that the path of least resistance for Russia is to cut production, which is not without consequences.”
Why Putin can’t count on China or India
India is already poised to import Russian crude at a rate of 600,000 barrels a day as the lure of deep rebates outweighs international pressure to cut deals.
In the event of an EU embargo, these purchases could increase, and China could also help absorb some of Russia’s oil. Smith estimates the two countries, which have largely avoided blaming Moscow for its war on Ukraine, could get an additional 1 million barrels a day from Russia.
In fact, onshore oil supplies in China are 90 million barrels below their late 2020 peak, Smith noted. If Beijing turns away from current suppliers, it could stock up on heavily discounted Russian oil.
But even if China and India increase Russian energy imports, it remains “highly, highly unlikely” that they could absorb 100% of the stranded barrels, he added.
“India normally imports about 4.5 million barrels per day, so it would be very difficult for them to logistically pull in a huge amount of additional crude as they likely have a significant volume of their imports under long-term Middle East contracts,” he said Smith.
He cited other logistical problems, such as obtaining insurance for new cargo or finding enough ships available to accommodate an influx of oil.
Meanwhile, China’s energy needs have fallen under Beijing’s zero-Covid policy and its own oil refineries have withdrawn.
It’s still possible that China could buy more Russian oil and simply wait for an EU embargo to kick in so it can benefit from higher oil rebates, he said. But in any case, Moscow can count on less oil revenues.
“Every single dollar a country pays for Russian oil is funding the war [in Ukraine]. By cutting that revenue, the goal is to ultimately deprive Russia of the ability to continue this war,” Smith said.