Russia may face a domestic energy crunch as production slows following EU's oil embargo, natural-gas cuts to Europe

Russian President Vladimir Putin. Mikhail Svetlov/Getty Images

• A halt in gas supplies to Europe could cost Russia as much as $6.6 billion a year, per Bloomberg.
• The export slump could lead to deep cuts in Russian gas output, hitting domestic energy goals.
• The EU's oil embargo could also cause production of the fuel to fall, leading to a shortage in Russia.

Russia has halted natural-gas flows to Europe via a key pipeline amid the war in Ukraine, but the move may end up biting itself, according to Bloomberg, citing an internal document prepared for the Russian government.

While Russia is an energy giant, most of its exports go to European customers. In 2021, Europe snapped up about half of Russia's oil products and three-quarters of its natural gas, according to the US Energy Information Administration.

Thus, a fall in exports to Europe means Russian natural-gas production would have to fall to better meet lower shipment needs. This would, in turn, hit Moscow's plans to boost domestic gas supplies, per Bloomberg, citing the report.

Additionally, a complete halt in natural-gas supplies to Europe could cost the Kremlin as much as 400 billion rubles, or $6.6 billion, a year in tax revenues, according to Russia's internal report, per the media outlet. While Russia is trying to diversify its customer base, new markets will not be able to make up lost sales from European customers in the medium term.

As Europe is also set to ban most Russian oil imports from the end of 2022, the demand slump could lead to a deep cut in Russian production, causing a shortage of the fuel domestically, Bloomberg reported, citing the internal report.

Overall, the internal Russian report paints a gloomy picture of the country's economy amid sweeping sanctions over its invasion of Ukraine — which contrasts sharply with more upbeat data from the Kremlin in recent months.

The situation could worsen if the world enters a recession. That's because Russia would've already lost its stable European market, causing it to become a "swing supplier" of energy products — with the country having to adjust and adapt its output to changing market demands, according to the report.

This would mean that a plunge in demand for Russian oil products could have an adverse economic impact, such as pushing up inflation in the country and putting downward pressure on the ruble, the report warned, per Bloomberg.