Germany’s announcement this week that it is ready to stop buying Russian oil makes a sweeping European Union oil embargo much more likely, with devastating consequences for Moscow.

“The Russian economy is already expected to contract by more than 10% this year. If an EU embargo occurs, it would likely send the economy into a depression,” Matt Smith, chief oil analyst at Reuters, told Insider. the market analysis company Kpler.

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

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

But such solutions would still not solve the hard-to-fill hole in the Russian economy that an EU embargo would create. Oil export earnings to Europe accounted for 11% of Russia’s GDP in 2021, far more than the 2.3% to 2.6% that gas exports to Europe accounted for, according to the Rhodium Group .

“A decline in export earnings will ultimately lead to a significant deterioration in the country’s economy,” Smith said. “It seems that the path of least resistance for Russia will be to cut production, which is not without consequences.”

Why Putin Can’t Count on China or India

India is already poised to import Russian crude at a rate of 600,000 barrels a day as the lure of deep discounts outweighs international pressure to sever trade ties.

In the event of an EU embargo, these purchases could increase, and China could also help absorb some Russian 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 a day from Russia.

In fact, onshore oil inventories in China are 90 million barrels lower than their peak at the end of 2020, Smith noted. If Beijing moves away from current suppliers, it could replenish its stocks with heavily reduced Russian oil.

But even if China and India increase energy imports from Russia, it remains “very, very unlikely” that they could absorb 100% of the barrels stuck, he added.

“India typically imports around 4.5 million barrels a day, so it would be very difficult for them to logistically attract a huge amount of additional crude given that they probably have a large volume of their imports under contracts. term from the Middle East,” Smith says.

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

Meanwhile, China’s energy demand has plummeted under Beijing’s zero Covid policies, and its own oil refineries have slowed.

There is always the possibility that China will buy more Russian oil and simply wait for an EU embargo to take effect so that it can take advantage of deeper oil discounts, he said. But in any case, Moscow can expect to generate less oil revenue.

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