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What will happen if Europe refuses Russian oil

22 April 2022

Salikhov Marcel R. President, Principal Director on Economic Studies, Head of the Economic Department
Тип: Papers

Tinkoff-Journal published an article by Marcel Salikhov, President of the Institute for Energy and Finance - "What will happen if Europe refuses Russian oil."

On April 14, the largest oil traders Trafigura and Vitol announced that they would reduce purchases of Russian oil. Trafigura will do this starting May 15, Vitol from the end of 2022.

Is it possible to replace Russian oil

The European Union has a plan to completely phase out Russian fossil fuels by 2027 and cut demand by two-thirds by the end of this year.

So far, Austria has refused Russian oil, and by the end of the year, Great Britain intends to refuse. Germany also said it wants to completely phase out Russian oil by the end of the year. But it is not yet clear how they implement it.

Oil refineries in East Germany are located on the Druzhba pipeline. They have no other logistics, they are located at a distance from seaports. If they want to switch to another oil, this will mean that they need to organize the logistics of oil supplies. And how to do this is not clear. Even if they bring oil by tankers from Saudi Arabia, they still need to somehow deliver it to the refinery in the center of Germany.

It should also be taken into account that in the European Union there are a number of countries most dependent on Russian oil - Bulgaria, the Czech Republic, Hungary, and Slovakia. Their oil products supply system is based on supplies from Russia. All Eastern Europe depends on Russian oil by 80-90%.

In general, Russian oil supplied by tankers can be replaced with oil from the Middle East - from Saudi Arabia, Iran, Iraq, the United Arab Emirates. In this case, Russia could lose up to a third of all its oil exports.

What will be the consequences for Russia

The main consequence of Europe's refusal of Russian oil, of course, will be the reorientation of oil supplies from Russia to Asia.

Russian oil will be sold at a discount. Oil and gas budget revenues will decline. The share of oil and gas revenues in the Russian budget is large. For example, in 2021 it was 36%. Moreover, the main part, up to 85%, is brought by oil. So the Russian budget will lose money in terms of tax revenues.

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