Russia has long been fueled by oil and Europe’s addiction to it. Moscow now faces an unprecedented challenge: if the continent bans the import of millions of barrels of crude oil, can it find new customers?
The European Union, once hesitant, is now taking steps to stem the flow of Russian oil and refined products to most member states this year as the war in Ukraine drags on. If the bloc agrees to an embargo, it will hit the heart of Russia’s economy, which continues to profit from its large energy sector.
The United States, Canada, the United Kingdom and Australia have already banned imports, and Japan has said it will follow suit “in principle” after the G-7 meeting over the weekend. Together with the EU embargo, this would put about half of the world’s economy out of Russian oil.
Moscow will not be crippled overnight. Countries like India continue to grab hundreds of thousands of barrels of crude oil a day, taking advantage of huge discounts. And the Kremlin’s tax revenues have been boosted by the overall increase in global reference prices caused by its invasion of Ukraine.
But over time, the loss of Europe – the destination for more than half of Russia’s oil exports – would hit the Kremlin, cutting government revenues as other harsh sanctions become more influential. It will struggle to find enough new customers to fill the gap. The International Energy Agency and other analysts predict that Russian oil production will fall sharply as a result.
“This undoubtedly hurts Russia,” said Henning Gloystein, director of the energy program at Eurasia Group, a consulting firm.
The importance of Europe
Moscow relies heavily on revenues from its powerful oil and gas sector, which accounted for 45 percent of the federal government’s budget in January.
And Europe has long been a top customer. Last year, it received about a third of Russia’s oil imports, according to the IEA. Prior to the invasion of Ukraine, Europe imported about 3.4 million barrels of oil a day from Russia.
This number has fallen slightly back. Since the end of February, oil traders in Europe have largely avoided Russian crude oil, which is delivered by sea, facing rising delivery costs and difficulties in securing the necessary financing and insurance. Europe imports about 3 million barrels of oil a day from Russia in April, according to Rystad Energy.
But after more than two months of war, the European Union wants to go even further. Its leaders proposed a ban on all imports of raw raw materials from Russia within six months and a cessation of imports of refined products by the end of the year.
Negotiations continue. While countries like Germany are vying to reduce their dependence on Russian energy, others have said they will not be ready. The Hungarian government has said it will take three to five years to give up Russian oil. Other landlocked countries, such as Slovakia and the Czech Republic, which rely heavily on pipeline supplies, want such an exclusion.
However, the EU plan will put pressure on the Russian economy, which the International Monetary Fund already predicts will shrink by 8.5% this year, entering a deep recession.
Analysts at Rystad Energy and Kpler, another research firm, expect Russia to have to cut production by about 2 million barrels a day – or about 20% – as a result of the embargo.
“Oil is Russia’s main source of hard currency and has become a vital lifeline for the Russian economy and a crucial source of funding for the war since the imposition of financial sanctions,” said experts from Bruegel, a Brussels-based think tank.
India intervenes, China lags behind
The embargo from a huge importer like Europe will have negative sides. If crude oil prices rise as a result, Moscow could actually bring in more government revenue from oil taxes, at least in the short term.
However, this depends on Russia’s ability to redirect oil to other buyers. This will not be easy.
A significant portion of Russia’s oil exports to Europe travel to the pipeline. Relocating these barrels to Asian markets will require expensive new infrastructure, which will take years to build.
Meanwhile, oil traveling by sea can find alternative buyers. India, which consumes about 5 million barrels of oil a day, has sharply increased its imports from Russia since the outbreak of war.
The main Russian oil Urals is priced compared to the reference Brent. Before the invasion, it was traded at a discount of a few cents. Now the discount is $ 35 per barrel, which makes it much more attractive to buyers who are not limited by sanctions.
Data from Rystad Energy show that crude oil imports from Russia jumped to almost 360,000 barrels per day in April, a fivefold increase compared to January.
“At a time when others are willing to avoid or avoid Russian crude oil, they seem to be the biggest beneficiaries of the lower prices here,” said Matt Smith, a leading oil analyst at Kpler.
India, for its part, has reduced the jump in imports. In a statement last week, the Ministry of Oil and Gas said the country imports oil from around the world, including a significant amount from the United States.
“Despite attempts to present it differently, energy purchases from Russia remain minimal compared to India’s total consumption,” the ministry said in a statement.
China, historically Russia’s largest buyer of oil, was also expected to go shopping.
Data from Rystad, Kpler and OilX show that imports have increased since the invasion of Ukraine, but not so dramatically.
OilX, which uses industrial and satellite data to track oil production and flows, found that China’s imports from Russia by pipeline and sea increased by just 175,000 barrels a day in April, an increase of about 11% from the average volumes in 2021. Imports by sea are growing more sharply in May, according to early data.
However, energy demand in China has declined as it intensifies efforts to stem the spread of the coronavirus by imposing severe restrictions on large cities.
For now, that leaves Moscow – a close ally of Beijing – in trouble.
“The Chinese have not accumulated or eaten everything,” said Gloustain of the Eurasia Group.
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