London (CNN Business) — Russia has long thrived on oil and Europe’s addiction to it. Now Moscow faces an unprecedented challenge: if the continent bans imports of millions of barrels of crude, can it find new customers?
The previously hesitant European Union is now moving to stop the flow of Russian oil and refined products to most member states this year as Russia’s war in Ukraine drags on. If the bloc agrees to an embargo, it would strike at the heart of the Russian economy, which has continued to profit from its large energy sector.
The United States, Canada, the United Kingdom and Australia have already banned imports, and Japan said it would do the same “in principle” after a G7 meeting over the weekend. Coupled with an EU embargo, that would put about half the world economy out of reach of Russian oil.
Moscow would not be paralyzed overnight. Countries like India continue to buy hundreds of thousands of barrels of crude per day, taking advantage of deep discounts. And the Kremlin’s tax revenues have been increased by the general rise in global benchmark prices caused by its invasion of Ukraine.
But over time, losing Europe — the destination of more than half of Russia’s oil exports — would deal a blow to the Kremlin, reducing government revenue as other tough sanctions take an ever-increasing toll. You will have a hard time finding enough new customers to fill the gap. The International Energy Agency and other analysts predict that Russia’s oil production will fall sharply as a result.
“It hits Russia, for sure,” said Henning Gloystein, director of the energy program at consultancy Eurasia Group.
The importance of Europe
Moscow relies heavily on revenue from its powerful oil and gas sector, which in January accounted for 45% of the federal government budget.
And Europe has long been an important customer. Last year, it received about a third of its oil imports from Russia, according to the International Energy Agency. Before the invasion of Ukraine, Europe imported about 3.4 million barrels of oil per day from Russia.
That number has receded slightly. Since late February, oil traders in Europe have largely shunned Russian crude shipped by sea, facing skyrocketing shipping costs and difficulties obtaining necessary financing and insurance. Europe imported about 3 million barrels of oil per day from Russia in April, according to Rystad Energy.
But after more than two months of war, the European Union wants to go further. Its leaders have proposed to ban all crude oil imports from Russia within six months and end imports of refined products by the end of the year.
Negotiations are ongoing. While countries like Germany have been racing to reduce their reliance on Russian energy, others have said they wouldn’t be ready. The Hungarian government said it would take three to five years to get rid of Russian oil. Other landlocked states like Slovakia and the Czech Republic, which rely heavily on supplies delivered by pipeline, want similar exemptions.
Still, the EU plan would increase pressure on Russia’s economy, which the International Monetary Fund had already forecast would shrink by 8.5% this year, slipping into a deep recession.
Analysts at Rystad Energy and Kpler, another research firm, expect Russia will need to cut production by about 2 million barrels a day, or about 20%, as a result of the embargo.
“Oil is a major source of foreign exchange for Russia, and since the introduction of financial sanctions it has become a vital lifeline for the Russian economy and a crucial source of financing for the war,” wrote experts at Bruegel, a center of studies based in Brussels.
India steps in, China stays behind
The embargo of a large importer like Europe will have its drawbacks. If crude prices rise as a result, Moscow could generate more government revenue from oil taxes, at least in the short term.
However, that depends on Russia’s ability to redirect the oil to other buyers. That won’t be easy.
A significant part of Russia’s oil exports to Europe travel to the bloc through pipelines. Diverting those barrels to Asian markets would require expensive new infrastructure that would take years to build.
The oil that travels by sea, meanwhile, could find alternative buyers. India, which consumes around 5 million barrels of oil a day, has greatly increased its imports from Russia since the war broke out.
Russia’s main Urals crude is priced relative to benchmark Brent. Before the invasion, it was trading at a discount of a few cents. The discount is now $35 a barrel, making it much more attractive to buyers not constrained by sanctions.
Rystad Energy data shows India’s crude oil imports from Russia rose to nearly 360,000 barrels per day in April, a fivefold increase from January.
“At a time when others are willing to shy away or reject Russian crude, they are apparently the biggest beneficiaries of lower prices here,” said Matt Smith, principal oil analyst at Kpler.
India, for its part, has downplayed the rise in imports. In a statement last week, the Ministry of Petroleum and Natural Gas said the country imports oil from around the world, including a significant volume from the United States.
“Despite attempts to present it otherwise, Russia’s energy purchases remain minuscule compared to India’s total consumption,” the ministry said in a statement.
China, historically the largest individual buyer of Russian oil, was also expected to go shopping.
Data from Rystad, Kpler and OilX show that imports have increased since the Ukraine invasion, but not as dramatically.
OilX, which uses satellite and industry data to track oil production and flows, found that China’s imports from Russia by pipeline and sea rose by just 175,000 barrels a day in April, an increase of about 11% over average volumes in 2021. Imports by sea are rising fastest in May, according to early data.
Still, China’s energy demand has fallen as it ramps up efforts to stem the spread of coronavirus by imposing tough restrictions on major cities.
For now, that leaves Moscow — a close ally of Beijing — on the sidelines.
“The Chinese haven’t just huddled together and gobbled everything up,” said Gloystein of the Eurasia Group.