The economy today

How will Russia suffer from the European embargo on its oil?

Audio 04:02

In an oil field in Russia.

REUTERS/Sergei Karpukhin/Files

By: Dominique Baillard Follow

3 mins

The embargo on Russian oil proposed Wednesday, May 4 by the European Commission tightens the noose around Russia a little more.

Can he really weaken the Kremlin?

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Depriving the Kremlin of oil revenues is also depriving it of resources to finance its war in Ukraine.

This Western calculation makes sense, because crude is the cash machine of the Russian state.

Taxes collected on black gold feed a large part of its budget.

Export revenues from oil destined for Europe represent 11% of Russian GDP for the year 2021, gas only 2.5%.

Since the start of the war, revenues from Russian hydrocarbon exports have doubled.

This mega bonus makes it possible to finance exceptional expenses, military or social, related to the war in Ukraine.

What happens if Moscow manages to find other outlets for its oil?

This risk now seems quite limited.

We see that Chinese refiners and Indians are rushing on this Russian oil which is currently being sold off, but on the other hand the large Chinese public companies are sticking to their usual quota.

And these two countries will not be able to absorb the two and a half million barrels that Russia was shipping to Europe every day.

Finally, the price will not be to Russia's advantage.

India is currently negotiating to get Russian oil at $70 as the price of Brent rises above $100 a barrel.

Russia's oil revenues are therefore bound to melt away with the embargo.

Russian exporters must also reorganize flows to new markets 

The main Russian oil pipelines are directed towards the West.

A single pipe connects Russia to China and it is running at full speed.

It will take not months, but years and a lot of money to build a new network serving Asia as well as the Druzhba pipeline, Friendship, which irrigates Europe.

The supertankers could take over, but not sure if they are ready to expose themselves to Western sanctions.

Finally, if customers are desired, Russian producers will be forced to close the wells.

Unlike their Saudi competitors, it is very difficult for them to easily reopen the tap.

This embargo will therefore have negative effects on export revenues and production capacities.

Any idea of ​​the potential shortfall?

The former oligarch and opponent Mikhail Khodorkovsky believes that a European embargo on gas and oil would deprive Moscow of half of its income.

No expert gives such a precise figure.

You also have to consider the reaction of the market.

If Russian exports were to fall, this could push prices up and therefore give back to Russian companies part of the shortfall.

The European oil embargo, if confirmed by the 27, will weaken the Russian economy, but it will not necessarily prevent the Kremlin from continuing the war in Ukraine.

Its sovereign fund showed 155 billion dollars on the counter in April, enough to cover war expenses and social expenses if the oil windfall dries up.

►In short

Oil is on the rise:

The barrel of crude is climbing because of this European embargo project, Brent gained 5 dollars yesterday, again exceeding the threshold of 110 dollars a barrel.

Wall Street ended the session higher

+2.80% for the Dow Jones;

American investors are reassured by the announcements of the President of the Fed, he will indeed proceed with a recovery in rates starting with a rise of 0.5%, but without too sudden a brake, there will be other rises in the same magnitude, but not beyond, contrary to what they feared.

In the wake of the US stock market, Hong Kong is up this morning, on the other hand, mainland China stock markets are down, they are still concerned about confinements.

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  • Oil

  • Russia

  • Raw materials

  • Ukraine