Based on economic reasoning, would an oil and gas embargo be an efficient sanction against Russia?
On February 24, 2022, Russian forces launched an attack on their neighboring country, Ukraine. As a response, much of the Western nations, namely the United States and the European Union, have imposed a series of sanctions against Russia and its political elite. According to Berner et al. (2022) “the sanctions on Russia are among the most powerful we have seen”. The most important sanctions are of a financial nature, for instance: the freezing of assets held abroad by Russia’s central bank, the exclusion of most Russian banks from the SWIFT system, and the seizure of the foreign assets belonging to selected Russian oligarchs and political leaders.
Nevertheless, there have been no signs of de-escalation of the conflict. As explained by Berner et al. (2022), Russia has been able to maintain a foreign source of revenue due to its exports of energy and other commodities, which translate into a large current account surplus. For this reason, there has been a push for harsher sanctions on Russia, specifically those targeting the oil and gas exports. However, European countries highly dependent on Russian oil and gas for energy remain reluctant to impose such measures. This raises the question: Based on economic reasoning, would an oil and gas embargo be an efficient sanction against Russia?
Several studies have been conducted in order to determine the impact that these sanctions could have, not only in Russia, but on the importing countries as well. Countries that have high import levels of Russian energy commodities, such as Germany, may be the most economically affected ones. The following table presented by Bachmann et al. (2022) reflects its current situation.
Bachmann et al (2022) indicate that a German ban on Russian energy imports will cost Germany “a GDP decline in the range of 0.5% to 3%” which they label as “substantial but manageable” as the country has already been able to rapidly recover from worse economic shocks. They also point out that electricity production “can adjust quickly and at relatively low cost” by acquiring it from other sources, such as Norway. However, the replacement of the industrial use of gas and coal “will be more difficult or even impossible”. In order to mitigate such effects, the German government would have to provide companies with substitution incentives and roll out a series of financial subsidies for the population to be able to face the rising costs of energy. In the long run, the best solution would be to promote investment in alternative sources of energy.
For Russia, the ban on exports of oil and other commodities would be felt acutely. Pestova et al. (2022) developed a model to determine the demand-side effects of the ban in the Russian economy. Their model uses the Russian sovereign international bond spread to determine the level of stress its economy will face. In other words, they compare the change, due to the sanctions, in bond yields issued on international markets by Russia to those offered by governments with AAA ratings. Their results point out that the ban of exports will translate into a decline in industrial production, consumption, investment, and foreign borrowings, forcing the Russian government to increase the monetary policy rate and decrease the real effective exchange rate of the Ruble (depreciating it).
It is important to point out that in order for the sanctions to be effective, it will be imperative to maintain a credible commitment to revise and adapt them as needed while deterring third parties from undermining them. Nephew (2017) explains that the following points are essential when drafting and implementing effective sanctions.
- Clearly identify the objective.
- Understand the target’s vulnerabilities and its ability to absorb pain.
- Develop a strategy for focusing pain and weakening the target’s resolve.
- Continuously refine the strategy.
- Clearly state the conditions for removing sanctions.
There is no doubt that imposing these series of export sanctions will have a severe impact on the already strained world economy due to the effects caused by the COVID-19 pandemic. The economic downturn that Russia will face as a result of such sanctions could have a ripple effect in other countries as well. While both sides can implement a series of macroeconomic tools to alleviate the impacts, the prolonged imposition of such sanctions will ultimately affect the civil population on both sides of the conflict. The best solution out of this economic and military conflict will always be the negotiation table.
Bachmann, R., Baqaee, D., Bayer, C., Kuhn, M., Löschel, A., Moll, B., Peichl, A., Pittel, K., & Schularick, M. (2022). What if Germany is cut off from Russian Energy? VOX, CEPR Policy Portal. Retrieved April 24, 2022, from https://voxeu.org/article/what-if-germany-cut-russian-energy
Berner, R., Cecchetti, S., & Schoenholtz, K. (2022). Russian sanctions: Some questions and answers. VOX, CEPR Policy Portal. Retrieved April 24, 2022, from https://voxeu.org/article/russian-sanctions-some-questions-and-answers
Nephew, R. (2017). The Art of Sanctions. Columbia University Press. Retrieved April 24, 2022, from http://cup.columbia.edu/book/the-art-of-sanctions/9780231180269
Pestova, A., Mamonov, M., & Ongena, S. (2022). Macroeconomic effects of the 2022 sanctions on Russia. VOX, CEPR Policy Portal. Retrieved April 24, 2022, from https://voxeu.org/article/macroeconomic-effects-2022-sanctions-russia
Vernimmen, P. (2006). Sovereign spread. Retrieved April 24, 2022, from http://www.vernimmen.com/Practice/Glossary/definition/Sovereign%20spread.html#:~:text=Definition%20for%20%3A%20Sovereign%20spread&text=The%20sovereign%20Spread%20represents%20the,by%20governments%20with%20AAA%20ratings.
Las opiniones aquí vertidas son exclusivas de su autor/autora, y no representan la ideología del Instituto Tecnológico y de Estudios Superiores de Monterrey, ni del Consejo Editorial de la Gaceta Económica.