If Russian oil is embargoed, not every customer will participate – eg China and Belarus, and Germany's Chancellor Olaf Scholz has stated his opposition. But oil price is already up to a decade-high.
With access to foreign reserves already limited, a squeeze on oil revenues will shorten how long Russia can fund its war and its autarky. The risk is this pushes it to escalate in the short term.
Alternatives to Russian oil are available, albeit they will take time – excess supply (assuming global demand holds up), OPEC spare capacity (if Saudi changes policy), OECD inventories (if the current coordinated release is extended), and, potentially, Iranian exports (if the renegotiated Nuclear Deal gets to the finishing line).
We screen emerging markets for economic exposure to fuel prices should they stick at current levels. An oil embargo will contribute to the pain that all emerging markets are suffering during the commodity-driven inflation shock. But clearly, oil exporters will suffer less than importers, particularly the poorest importers of both fuel and food – eg Bangladesh, Pakistan, Philippines.
Not all oil exporters are valued equally: eg Qatar and Colombia look cheaper than Saudi. And longer-term, a prolonged period of very high oil prices likely accelerates the transition to renewable energy and copper exporter equity markets (the main EM play on renewables) are generally cheaper than oil ones (the main EM play on the Russia-Ukraine war).
Russia oil embargo
The potential US and European embargo on Russian oil exports has spiked Brent crude oil prices to about US$120 on 7 March (as high as US$138 at one point).
With access to its foreign reserves already largely cut off, an oil embargo puts at risk Russia's access to cash to fund its war and autarky — US$16bn per month in 2021 when oil averaged US$71.
Ultimately, this should shorten the time that Russia can wage war but there is a risk that this action pushes a more tightly cornered Russia into more escalation first.
Some countries may not participate in the embargo; eg China and Belarus, which accounted for 31% and 6%, respectively, of Russia's exports in 2020, according to the US EIA. In this scenario, an alternative for about 3.2mbpd will be needed.
Russia exported 5mbpd crude and condensate and 2.85mbpd of oil products in December 2021, according to IEA.
Russian total oil products accounted for 39%, 13%, and 6% of oil imports for OECD Europe, OECD Americas (9% for the US alone), and OECD Asia Oceania, respectively, in November 2021, according to IEA.
Russian crude oil accounted for 15.5% of imports for China in 2021, according to China's General Administration of Customs.
Russian crude oil accounted for merely 1% of imports for India in 2021, according to Government of India data and Reuters.
While Russia's blocked exports cannot be replaced seamlessly, there are alternatives on a six-month view: existing forecast excess supply from Q2 onwards, activation of spare OPEC capacity (mainly in Saudi), the release of strategic oil reserves from OECD countries, and the potential return of Iranian exports.
OPEC spare capacity – The IEA estimates that OPEC+ spare capacity (which is in Saudi, UAE, Iraq and Kuwait) was 5.1mbpd at the start of 2022, and, on the basis of demand growth projections prior to the Russia-Ukraine war, forecast at 2.5mbpd by mid-2022. Obviously, tapping into this capacity would require a change of policy from Saudi.
Forecast excess supply in 2022 – Prior to the Russia-Ukraine war, the IEA forecast a 2mbpd surplus in Q2, based on moderate post-Covid demand growth and a 3.3mbpd surplus by the end of the year, on the basis of supply growth from the full unwinding of OPEC+ restraint and output growth from the US, Canada and Brazil. If the spike in inflation and risk-aversion temper global demand growth, that surplus, or, at least the non-Russian supplied portion of it, may turn out to be larger.
Inventories – International Energy Agency member countries (ie the OECD) hold c2.7bn barrels of government-controlled oil reserves. The IEA's plan to release 60m barrels, announced on 2 March, was the first coordinated release for a decade, since the Libya civil war in 2011.
Iran – Within a year of the original Nuclear Deal, finalised in July 2015, Iranian exports expanded by 1mbpd to just over 2mbpd. Those exports peaked at 2.5mbpd in April 2018, a month before former US President Donald Trump's unilateral withdrawal from the Nuclear Deal. Official exports were merely 0.1mbpd in December 2021.
We chart the exposure across all of EM to sustained high oil prices below. Poor importers, where a high proportion of household spend is taken up by staples such as fuel and food – Bangladesh, Pakistan, Philippines – will be hit particularly hard.
A global inflationary spike from higher fuel and food prices is already on the way. Clearly, in the short term all emerging markets suffer in that environment but exporters – in investable oil equity markets, Saudi and the GCC, Kazakhstan, Colombia – suffer much less than importers.
The cheaper oil exporter equity markets are Colombia, with Saudi at the most expensive end. For oil importers, in the longer-term, the transition to renewable energy will accelerate sharply in the event of a sustained period of very high oil prices. The valuation relative to history of equity markets driven by copper – the key energy transition commodity – is much more appealing than that in their oil peers.
Oil and commodities
Oil importer alarm bells ring, January 2022
Emerging market commodities hedge, February 2022
Commodities back on top of Technology in EM after 2 years, February 2022
Russia and its implications
Russia in ruins in 8 charts, February 2022
Russia's end game: Autarky if no de-escalation, February 2022
Russia will dominate energy security until the grid is fit for renewables (Domjan), March 2022
Russian debt default now inevitable (Culverhouse), March 2022
Russia escalates in Ukraine, boosts all EM commodity plays, February 2022
Military spend and conflict after Russia-Ukraine, February 2022
Global division on Covid, Climate, and now Russia, February 2022
China-Taiwan impact from Russia-Ukraine, February 2022
Why India abstained on the Russia vote at the UN, March 2022