Germany’s announcement this week that it was ready to stop buying Russian oil makes it much more likely that a sweeping oil embargo on the European Union – which would have catastrophic consequences for Moscow. “Russia’s economy is projected to shrink by more than 10% this year. If there is an EU embargo, it is likely to lead to a recession,” Matt Smith, chief oil analyst at market analyst Kpler, told Insider. Without European buyers, Russia would have to find somewhere to put about 2.5 million barrels a day. “If Moscow can not sell this stock quickly or at least find a place to hide it, there is a strong possibility that Russia will have to dramatically reduce its oil production due to limited storage capacity,” he said. Russia could use its extensive pipeline network as storage, but that would not hold back all the surplus supply, Smith explained, adding that unsold crude could also be loaded on tankers and stored offshore. However, such solutions still do not face the difficult hole in the Russian economy that would create an EU embargo. Revenues from oil exports to Europe accounted for 11% of Russia’s GDP in 2021, well above 2.3% -2.6% that included gas exports to Europe, according to the Rhodium Group. “A reduction 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 will be to reduce production, which does not come without its own consequences.”
Because Putin can not rely on China or India
India is already importing Russian crude at a rate of 600,000 barrels a day as the lure of sharp rebates offsets international pressure to sever business ties. In the event of an EU embargo, these markets could grow and China could also help absorb some of Russia’s oil. Smith estimates that the two countries, which have largely avoided condemning Moscow for its war in Ukraine, could receive an additional 1 million barrels a day from Russia. In fact, China’s onshore oil reserves are 90 million barrels below the ceiling by the end of 2020, Smith said. If Beijing moves away from current suppliers, it could replenish its stockpile of Russian oil at a big discount. But even if China and India increase energy imports from Russia, it remains “very, extremely unlikely” to absorb 100% of the latent barrels, he added. “India usually imports about 4.5 million barrels a day, so it would be very difficult for it to pump a huge amount of extra crude material, as it probably has a significant volume of imports with long-term contracts from the Middle East.” said Smith. He mentioned other logistical issues, such as securing new cargo or finding several ships available to service an oil inflow. Meanwhile, China’s energy demand has fallen under Beijing’s zero-Covid policies, and its own oil refineries have declined. It is still possible that China will buy more Russian oil and is just waiting for an embargo to be launched by the EU so that it can take advantage of the sharper oil rebates, he said. But either way, Moscow can expect to generate less oil revenue. “Every dollar a country pays for Russian oil finances war [in Ukraine]. “By cutting off this revenue, the goal is to finally cut off Russia’s ability to continue this war.”
