EU oil embargo would cause deep depression in Russia

 From Markets Insider

Germany's announcement this week that it's ready to stop buying Russian oil makes a sweeping European Union oil embargo much more likely — which would have devastating consequences for Moscow.

"Russia's economy is projected to contract by more than 10% already this year. If an EU embargo happens, it would likely send the economy spiraling into a depression," Matt Smith, lead oil analyst at markets analytics firm Kpler, told Insider. 

Without European buyers, Russia would need to find somewhere to put roughly 2.5 million barrels a day. Unless Moscow can sell that supply quickly or at least find a place to stash it, there's a strong chance Russia will have to slash its oil production dramatically due to its limited storage capacity, he said. 

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

But such solutions still wouldn't address the hard-to-fill hole in Russia's economy that an EU embargo would create. Oil export revenue to Europe accounted for 11% of Russia's GDP in 2021, far more than the 2.3%-2.6% that gas exports to Europe comprised, according to the Rhodium Group. 

"A dent in export revenue will ultimately result in significant deterioration in the country's economy," Smith said. "It seems the path of least resistance for Russia will be to cut production, which doesn't come without its own consequences."

Putin can't count on China or India. India is already set to import Russian crude at a rate of 600,000 barrels per day as the lure of steep discounts outweigh international pressure to cut off business ties.

In the event of an EU embargo, those purchases could increase, and China could also help absorb some of Russia's oil. Smith estimates the two countries, which largely have avoided condemning Moscow for its war on Ukraine, could take in an additional 1 million barrels per day from Russia. 

In fact, onshore oil inventories in China are 90 million barrels below their peak from late 2020, Smith noted. If Beijing pivots away from current suppliers, it could replenish its stockpile with heavily discounted Russian oil.

But even if China and India increase Russia energy imports, it remains "highly, highly unlikely" they could absorb 100% of the stranded barrels, he added. 

"India typically 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 given it likely has a significant volume of its imports under long-term contracts from the Middle East," Smith said.

He cited other logistical issues, such as getting insurance for new cargoes or finding enough available vessels to accommodate an influx of oil.

Meanwhile, China's demand for energy has dropped under Beijing's zero-Covid policies, and its own oil refineries have dialed back.

It's still possible China could buy more Russian oil and is simply waiting for an EU embargo to kick in so it can take advantage of steeper oil discounts, he said. But either way, Moscow can expect to generate less oil revenue. 

"Every single dollar a country is paying for Russian oil is funding the war [in Ukraine]. By cutting off those revenues, the goal is to ultimately cut off Russia's ability to continue this war," Smith said.

Source: How reliant is the world on Russia for oil and gas?

What do they mean by deep depression? During the 1929-1933 Great Depression, industrial production fell by 46% in the USA, 41% in Germany, and ±24% in France and the UK.  Real GDP fell ±25% in the USA, peak to trough.  In my judgement, a comparable fall in Russian GDP  from the peak before the war started seems perfectly plausible if its oil exports to the developed world are embargoed.  Russia may well introduce a ban on gas sales to Europe, in retaliation.  Europe is much more dependent on Russian gas than Russian oil, and such a ban would cause a downturn in Europe.  I've seen various estimates, ranging from a 2% fall in real GDP  to a 5% decline, if Russian gas is shut off.