Russia: EU embargo on Russian energy could be a game-changer

Russia’s export-oriented economy will without a doubt suffer significant economic damage from the sanctions, but details still matter a lot in terms of gauging the magnitude. Russia has been running a current account surplus throughout the past years, which IMF estimated at 5.7% in 2021, and total exports are worth around 1/3 of Russia’s GDP. While Russia, as a part of its push to increase economic independence (‘Fortress Russia’) has been able to reduce its dependency on the western trade, EU’s decisions on sanctions still have a significant effect, given that EU accounts for 40% of Russia’s total exports.

Around 50% of Russia’s exports consist of energy, which means that the possible embargo would increase the sanctions’ impact considerably. From Russian perspective, oil and petroleum products are relatively more important, as they account for almost 79% of Russia’s total energy exports. Based on Russian customs data, around 50% of oil and oil products export value comes from sales to EU countries. In contrast, natural gas trade is more important for Europe, as it would be difficult to completely replace the Russian supply (see Research Euro Area - Rising stagflationary headwinds from Ukraine conflict, 28 February), which explains why oil is the more likely option for the EU embargo. The share of exports to China has increased steadily over the years, but remains smaller compared to EU, at slightly above 30%. China has so far remained relatively neutral over the sanctions, balancing its close relations with Russia against the West’s relatively higher importance in international trade.

China could potentially cushion some of the decline in Russian exports, as it has previously purchased oil from countries under western sanctions, such as Iran and Venezuela. Nevertheless, Russia’s exclusion from SWIFT has already affected trading with China as well, as despite both nations’ efforts to develop local payment systems, most of the bilateral trade is still conducted over SWIFT. So far, only a limited number of larger Russian banks have been excluded from SWIFT (e.g. Sberbank still included), so concrete near-term implications remain uncertain.

Aside from practicalities of sanctions, logistics could also be an issue, as especially natural gas trade is difficult to re-route. The key natural gas pipeline from Russia to China is not connected to the western pipes, even though Russia has plans to increase capacity towards east (see Reuters). Oil is more easily transported, but currently around 63% of Russian oil is transported via Baltic, Black and Arctic seas, far away from China. Consequently, IEA has estimated that even without an EU embargo, Russian oil exports could drop by around 40% already in April.

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