On the Russian Oil Sanctions
The goal is to limit Russian imports. Existing measures already did that. The new oil sanctions will add to the pressure, but at substantially higher cost to the allies and the rest of the world.
Europe’s leaders have agreed to boycott 90% of imports of crude oil and refined petroleum products from Russia by the end of the year.1 The decision is a powerful demonstration of solidarity with the people of Ukraine. But unlike previous measures, the oil boycott will hurt ordinary Europeans at least as much as it impairs Putin’s war effort. It should therefore be understood mainly as a moral gesture rooted in self-denial, rather than as a serious escalation of the pressure on Russia’s beleaguered military. If the allies really want to do more to help Ukraine’s defenders, they should expand and accelerate their deliveries of heavy and long-range weapons.
The oil boycott likely won’t do much additional damage to Russia because the economic measures already in place have been extraordinarily effective at degrading Putin’s warmaking capacity. Russia has lost complete access to many imports, particularly for the parts and components needed to maintain and replace trucks, tanks, aircraft, missiles, ships, and other equipment. Without firing a shot, the global coalitition of democracies has shut down many of Russia’s armaments factories, as well as throttling the country’s (limited) civilian manufacturing base.
While the Russian government has stopped publishing monthly trade data, a comprehensive analysis of data from Russia’s trading partners shows that imports in March 2022 were 50% lower than the September 2021-February 2022 average.
Moreover, we now have enough data from April to show that things only got worse for the Putin regime after the first full month of sanctions.2 Compared to March, exports fell sharply in Germany (about 16%), Korea (30%), Japan (56%), and Taiwan (35%). Exports from China, Switzerland, Thailand, and Malaysia were basically flat, although exports from Turkey partly recovered to pre-war levels. The net effect was that the U.S. dollar value of Russian imports in April was almost certainly lower than in March.
The result, according to Russia’s own statistical agency, is that Russian manufacturing output of goods ranging from household appliances to internal combustion engines to railway cars to elevators to construction equipment to “equipment for the production of bakery products” has cratered. Moreover, without access to spare parts and maintenance services from the democracies, the imported aircraft and computers that Russia relies on will soon turn into paperweights, if they haven’t already. With time, even Russia’s commodity exports are set to decline on their own in the absence of foreign technology and expertise.
From this perspective, the incremental impact of cutting off European purchases of Russian oil on Russia is small. At the end of 2021, Russia’s global exports of oil and refined petroleum products accounted for less than a third of the country’s total hard currency earnings. Sales to the EU accounted for less than half of those exports.3 If Russia were somehow incapable of selling any of the boycotted oil and products to customers outside of Europe, even at a discount—which seems extremely unlikely—the effect would be to reduce Russia’s hard currency earnings by only around 12% (90% of 45% of 30%). More likely is that much of Russia’s oil and products will eventually find buyers in China, India, and elsewhere, which would diminish the impact even further.
By contrast, Europeans will be forgoing access to roughly 22% of their pre-war supply of oil and refined products. Unless they cut their consumption commensurately, which does not seem to be part of the agenda any time soon, Europeans will have to pay up to get oil from other sources. That in turn will raise prices for everyone else—unless of course the Russian oil is rerouted to new customers, obviating the (modest) impact of the boycott.4
The people who constructed previous packages of financial sanctions and export controls clearly understood all this, hence the original exemptions for energy (and food, fertilizers, etc). But many others apparently do not.
“Even as we enforce sanctions, we are still sending hundreds of millions of euros every day that are being used to fund the Russian war effort,” Anders Fogh Rasmussen, the former Secretary-General of NATO, argued in March, concluding that “the only efficient solution is a complete end of transfers to Russia”. Ukrainian leaders have been pleading for Europeans (and others) to cut their purchases of Russian commodities for the same reason. Just this week, Bloomberg News published a feature titled “How the World Is Paying for Putin’s War In Ukraine”, arguing that “Putin can ignore this damage [from the sanctions and export controls] for now, because his coffers are overflowing with the revenue from commodities.”
On the surface, it certainly looks as if Russia’s taxes on oil and gas revenues literally “pay for” the war effort. Back in the days when foreign investors could expect to get paid for lending hard currency to the Russian government, ratings companies looked at the “fiscal breakeven oil price” as one of their main credit metrics. Even reputable economists write that “without the natural resource export incomes, the Russian budget will be in deficit”, as if that matters.
But it would be a mistake to believe that a boycott of (some) exports from Russia will do much more than the existing measures that limit exports to Russia. To see why, we will need to dig into the links between monetary conditions, fiscal capacity, and the balance of payments.