- If the European Union imposes a large-scale Russian oil embargo, it could lead to a depressed Russian economy, an analyst told Insider.
- Russia will have to reduce its oil production as the country has very limited storage capacity, said Kpler’s leading oil analyst.
- Moscow is likely to turn to China and India to help take on more oil supplies, but they will not be able to fill the gap.
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Germany’s announcement this week that it is ready to stop buying Russian oil makes the European Union’s large-scale oil embargo much more likely – which would have devastating consequences for Moscow.
“Russia’s economy is projected to shrink by more than 10 percent this year. If an EU embargo occurs, it is likely to depress the economy, “Matt Smith, a leading oil analyst at market research firm Kpler, told Insider.
Without European buyers, Russia will have to find a place to put about 2.5 million barrels a day. Unless Moscow manages to sell these supplies quickly or at least find a place to hide them, there is a good chance Russia will have to drastically reduce its oil production due to its limited storage capacity, he said.
Russia can use its extensive pipeline network as storage space, but that will not hold back all redundant supplies, Smith said, adding that unsold crude oil could also be loaded into tankers and stored at sea.
But such decisions still do not address the difficult gap in the Russian economy that the EU embargo will create. Revenues from oil exports to Europe amount to 11% of Russia’s GDP in 2021, much more than 2.3% -2.6% of gas exports to Europe, according to Rhodium Group.
“Reducing export earnings will eventually lead to a significant deterioration in the country’s economy,” Smith said. “It seems that the path of least resistance for Russia will be to reduce production, which does not come without its own consequences.
Why Putin can’t rely on China or India
India is already set to import 600,000 barrels of Russian crude oil a day, as the lure of big discounts outweighs international pressure to sever business ties.
In the event of an EU embargo, these purchases could increase, and China can also help absorb some of Russia’s oil. Smith believes the two countries, which have largely avoided condemning Moscow for its war against Ukraine, could accept an additional 1 million barrels a day from Russia.
In fact, China’s onshore oil reserves are 90 million barrels below their peak since the end of 2020, Smith said. If Beijing deviates from its current suppliers, it could replenish its reserves with sharply reduced Russian oil.
But even if China and India increase energy imports from Russia, they remain “very, very unlikely” to absorb 100% of the blocked barrels, he added.
“India typically imports about 4.5 million barrels a day, so it would be very difficult for them to logistically withdraw huge amounts of extra crude oil, as it probably has a significant volume of imports under long-term contracts in the Middle East,” Smith said. .
He cited other logistical problems, such as getting insurance for new cargo or finding enough vessels available to handle the influx of oil.
Meanwhile, China’s energy demand has declined under Beijing’s zero-Covid policy, and its own oil refineries have withdrawn.
It is still possible that China will buy more Russian oil and is just waiting for the EU embargo to enter so that it can take advantage of bigger discounts on oil, he said. But anyway, Moscow can expect to generate less oil revenue.
“Every dollar a country pays for Russian oil finances the war [in Ukraine]. “By cutting off that revenue, the goal is ultimately to cut off Russia’s ability to continue this war,” Smith said.
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