An embargo on Russian oil would trigger a recession in Europe and investors are underpricing disruptions to energy supplies, Barclays says

In the worst-case scenario, a ban on imports of Russian energy products by the European Union would cause a deep economic contraction in the region.

According to The Wall Street Journal, Germany ended its opposition to the EU ban on crude imports from Russia. The bloc will have to issue more sanctions against Russia after they launched a war against Ukraine. More evidence of Russian war atrocities are emerging and EU officials are discussing an energy embargo.

In the first quarter of 2022, gas imports from Russia accounted for 40% of Germany's supply, according to a report. Russian President Vladimir Putin demanded payment in rubles after Germany activated an emergency plan to deal with natural-gas disruptions. Businesses and households have been asked to reduce consumption.

If the situation gets worse, the country could start rationing gas, shutting down work at factories.

Any restrictions of flows would put more pressure on energy prices and lead to rationing. According to a research note published April 29th, gas disruption could affect euro area growth in at least three ways.

Natural gas prices would be negative in terms of trade shock since a large share of energy is imported. Second, physical shortages could limit production. She said that gas flow disruption would increase uncertainty.

An embargo on Russian energy products that leads to sharply higher wholesale prices without rationing would cause a mild recession in the euro area. A terms-of-trade shock could cause a 200% rise in benchmark Dutch gas futures and a 40% increase in oil prices.

If there is an energy embargo and rationing, the GDP of the Euro-area could fall by 5 percentage points.

Ardagna said that a deep recession would likely cause a fiscal and monetary policy response. Inflation is well above the target of the European Central Bank, so it has limited room for maneuver.

Russia halts gas flows 

Russia halted the supply of natural gas to Poland and Bulgaria because of their refusal to pay in rubles. There is a risk of widespread disruption of gas flows that appears under-priced, according to analysts at the British bank. The scale of disruption and likely recession was not currently priced into euro-denominated investment credit.

euro-area GDP could take a 4% hit, with a deeper recession in Germany and Italy.

The longer that gas rationing persists, the wider and more severe these disruptions would become, and we would expect to see an under performance of European issuers versus non- European issuers.