October 5, 2022

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The Russian economy may turn into a recession under the oil embargo imposed by the European Union

The Russian economy may turn into a recession under the oil embargo imposed by the European Union
  • One analyst told Insider that if the European Union imposes a blanket embargo on Russian oil, it could push the Russian economy into a recession.
  • Russia will have to cut its oil production because the country’s domestic storage capacity is very limited, said lead oil analyst Kpler.
  • Moscow will likely turn to China and India to help get more oil supplies, but they will not be able to bridge the gap.

Germany advertisement Its willingness to halt purchases of Russian oil this week makes a sweeping oil embargo by the European Union highly likely – with dire consequences for Moscow.

“The Russian economy is expected to contract by more than 10% this year. If there is a ban by the European Union, it will likely cause the economy to rush into


depression

Matt Smith, Principal Oil Analyst at Market Analytics KeplerInside, he said.

Without European buyers, Russia would need to find a place to put roughly 2.5 million barrels per day. Unless Moscow can quickly sell this supply or at least find a place to store it, he said, there is a strong chance that Russia will be forced to significantly reduce its oil production due to its limited storage capacity.

Russia could use its extensive network of pipelines as storage space, but that would not keep all of the excess supply, Smith explained, adding that unsold crude oil could also be loaded onto tankers and stored offshore.

But such solutions still will not address the hard-to-fill gap in the Russian economy that an EU embargo would create. Revenues from oil exports to Europe accounted for 11% of Russia’s GDP in 2021, much more than the 2.3%-2.6% implied by gas exports to Europe, According to the Rhodium Group.

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“A drop in 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 would be to cut production, which is not without its consequences.”

Why can’t Putin count on China or India?

India is already preparing to import Russian crude at a rate of 600,000 barrels per day, as the lure of sharp cuts outweighs international pressure to cut trade ties.

In the event of an EU embargo, these purchases could increase, 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 on Ukraine, could receive an additional 1 million barrels per day from Russia.

Smith noted that China’s onshore oil stocks are in fact 90 million barrels below their peak since late 2020. If Beijing moves away from existing suppliers, it could replenish its stockpile of heavily discounted Russian oil.

He added that even if China and India increase Russia’s energy imports, it is still “highly unlikely” that it will be able to absorb 100% of the stuck barrels.

“India normally imports about 4.5 million barrels per day, so it will be very difficult for them to logistically withdraw a huge amount of additional crude since they are likely to have a large volume of their imports under long-term contracts from the Middle East.” Smith said.

He cited other logistical issues, such as obtaining insurance for new shipments or finding enough ships available to accommodate the flow of oil.

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Meanwhile, China’s demand for energy has fallen under Beijing’s non-proliferation policies, and its oil refineries have declined.

He said it was still possible for China to buy more Russian oil and simply wait for the EU embargo to start so it could take advantage of steeper oil cuts. But either way, Moscow can expect to generate lower oil revenues.

Every dollar a country pays for Russian oil finances the war [in Ukraine]. “By cutting off that revenue, the goal is to ultimately cut off Russia’s ability to continue this war,” Smith said.