Factories at night
Oil industry. Image by Alexander Popov, public domain.

Embargoing Russian oil: the Mother of all Sanctions

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The European Union and other Western governments have levied unprecedented sanctions on Russia following Putin’s full-scale invasion of Ukraine. The Russian central bank is one of the entities sanctioned, which will likely make Russia go into default. This will mean that it cannot pay its international creditors because its assets are frozen. However, the mother of all sanctions is still up in the air: embargoing Russia’s oil imports.

The United States has already embargoed all energy imports from Russia. However, these are relatively small compared to those of the EU. EU governments, and mainly Germany, are not really in favor of sanctioning Russia’s oil imports to Europe. This is due to the fear of the economic crisis that it will imply. The new center-left German government is very afraid that their spell leading the Bundestag will be short-lived if the post-Covid-19 recovery goes down the drain. The good (or the bad) news is that the Covid-19 health crisis shows that our governments and economies are strong enough to handle economic beatings.

Strong enough to collectively manage a raging airborne virus or a madman with nukes.

Embargoing Russia’s oil is the mother of all sanctions because the Russian economy is so dependent on such income. Black gold made up about ten percent of Russia’s overall GDP during the 2010s. Ten percent may not sound like much. However, that one source of income makes up such a great share of the total GDP is huge. The share of oil in Norway’s GDP, also a big oil exporter, for the same period, was half that of Russia’s. Therefore, Russia really needs that income to finance its economy, which ultimately keeps its war machine oiled up (pun intended).

Graph showing Russian energy exports
Graph depicting other countries’ dependency on Russian energy. From President of the EU Commission, Ursula von der Leyen’s Twitter account.

The US embargo of Russian oil is not going to make Putin or any of his billionaire oligarchs cry, but an EU embargo will.

According to the EU Commission, the European bloc imports about a quarter of its oil from Russia. The EU is much more dependent on gas imports, with about 38 percent of natural gas coming from Ukraine’s unwanted, vandalizing gatecrashers. However, oil has been a lot more expensive than gas and Russia exports about half of its oil to the EU. Currently the global price of oil stands at over 100 dollars per barrel. Natural gas provides Russia with only a third of the income that it gets from oil. Therefore, Putin has threatened to cut off gas supplies to Europe if the EU embargoes its oil, which the EU is a lot more dependent on.

Embargoing Russia’s oil will be painful for Putin, but for us as well.

Energy prices are likely to soar even more, but the current high oil price is already due to speculation of an oil embargo. While this explains the high prices now, these might not increase dramatically after an actual EU embargo goes into effect. Nevertheless, we are bound to feel the economic heat. So, are these sanctions even worth it?

Sabine Otto-Rød of the University of Greifswald recently clarified in a speech at this university that economic sanctions serve three purposes. They can pressure the sanctioned country into a change of behavior in a non-military way. Otto-Rød argued that sanctions help to reduce the capacities of the sanctioned state. It also creates signals for this and other states. They will bear dire consequences for such blatant violations of international law. The signals produced by this, the mother of all sanctions, can be even stronger. That is, if the international community sees that the EU is willing to push a fast and painful transition away from Russian oil, and likely also gas.

Oil tankers at railway station
Russian oil tankers at Ivangorod railway station. Image by sergejf, public domain.

However, Natalia Iost, also of the University of Greifswald, warns against thinking that economic pressures in Russia are going to lead to massive protests. Since the Kremlin’s constituency, older and more rural Russians, are going to be the last to feel the economic pain.

The Covid-19 crisis showed that we can collectively act to produce large-scale transformations.

Transformations such as that which the transition away from Russian oil will require. Germany became a bit more digitized due to the pandemic. One can now pay contactless in most places, so miracles do happen!

The German economic ministry aims to gradually transition away from Russian oil by the end of the year. This is done to minimize the economic pain for regular citizens. Economist Ricardo Hausmann argues that a punitive tax on Russian oil, upwards of 90 percent, would be more effective and sustainable. Such a move would indirectly embargo Russia’s oil and allow a gradual transition away from it. No matter what strategy EU policymakers choose to transition away from Russian oil, it will doubtlessly transfer costs onto regular citizens.

However, the mother of all sanctions will be the strongest signal that Europe and the West can impose on Russia. Short of all-out military conflict, which we all want to avoid. As energy specialist Andreas Goldthau said, rapidly transitioning away from Russian oil is like a divorce. Talking about it does not help, you just have to do it. And no matter how rough or how smoothly it goes, it will always be expensive.

A political scientist who follows global events with pious devotion. A Venezuelan by virtue of being born in that interesting tropical place, but who has lived and studied in several places around the world. He will write some analysis on important global issues, especially if they have an impact on Germany or Leipzig.

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