Blocking the Russian central bank’s foreign-exchange reserves was a brilliant move. Disconnecting some Russian banks from the SWIFT financial messaging system was helpful. And pursuing the offshore wealth of Putin’s cronies is appropriate. But none of these sanctions have stopped the Russian invasion of Ukraine for one reason, and none of them will.
The reason is simple: Russia continues to export oil and gas. Indeed, the war has boosted the price for these products, benefiting the most important sector of the Russian economy. So, a week after it began, Western energy consumption is still financing Russia’s invasion of Ukraine, and the Russian elite is doing better than ever. There is no way around it: The only way to stop Russian President Vladimir Putin’s aggression is to impose a comprehensive boycott on all Russian energy products.
Energy comprises the bulk of Russia’s exports, primarily in two forms: gas to Western Europe, via pipelines and paid for on long-term contracts, and oil to world markets, sold mostly on spot markets.
According to figures from the International Energy Agency (IEA), “Revenues from oil and gas-related taxes and export tariffs accounted for 45 percent of Russia’s federal budget in January 2022. Considering current market prices, the export value of Russian piped gas to the European Union (EU) alone amounts to US$400 million per day. Total export revenues for crude oil and refined products currently amount to around US$700 million per day.”
So far, there have been some small disruptions to Russian oil exports, but no impact on gas exports, according to the IEA. With Brent oil prices up from around US$90 per barrel to around US$110 per barrel since the invasion started (and up from US$80 at the end of 2021), Russia has plenty of cash coming in. If there is a discount on Urals crude, it is smaller than the increase in oil prices – so Russian oil exporters are still ahead, financially.
Over the past month, the daily value of Russian oil exports has increased by around US$100 million per day (calculated from the IEA estimate of daily Russian exports, multiplied by our estimate of the increase in the effective price for Urals crude). The Russian current-account surplus was about US$19 billion in January 2022, or about 50 percent higher than is typical for January (in most years, the monthly surplus is US$9-12 billion).
There is a view in policymaking circles in the United States (US) that the current policy of financial sanctions is degrading Russian oil capacity in a way that serves US strategic interests. But by putting more cash into the pockets of oil producers, the US and its allies are having the opposite effect.
There is no alternative to sanctions that immediately reduce the volume of Russian oil and gas exports.
A comprehensive boycott of Russian energy can start with the US imposing full sanctions, including secondary sanctions, on all Russian oil and gas exports. The world oil price will rise, but if the sanctions are fully enforced, none of that windfall will go to Russian producers.
In this scenario, the IEA estimates that oil production around the world will be boosted very quickly – Russia exports five million barrels per day (bpd); additional world supply can add at least three million bpd. Energy conservation measures can and should also be introduced where appropriate.
Of course, the European Union (EU) would need to follow suit. But, to put it bluntly, this is only a matter of time. The EU can either stop buying Russian gas now, to halt the invasion, or it can wait a month, until thousands more people have died – and the horrific photos of civilian casualties flood every channel. At some point soon, Europe will no longer be able to stomach the fact that it is paying for Putin’s atrocities in Ukraine.
The IEA has a sensible plan for how to wean Europe off Russian gas, and a team at Brussels-based economic think tank, Bruegel has published important proposals and have addressed how to get through the next few months without Russian gas. Every European policymaker needs to confront the issue head-on.
To be sure, Europeans will have to make difficult decisions, not least how to finance the immediate transition away from Russian gas. But imagine the decisions that must now be made in Ukraine, to keep people alive and to prevent the greatest humanitarian disaster Europe has seen since World War II.
Nor will the impact be limited to Europe. For example, very soon Ukrainian agriculture will collapse: No one can plow or plant seeds while being attacked by Russian forces. This will push up global food prices, because Ukraine is the world’s fifth-largest exporter of wheat, implying a major impact on budgets and poverty in low-income countries.
Some Europeans will need help to pay their heating bills, and they may face other economic costs because of what Putin is doing. But compare this with millions of Ukrainians already struggling to find food, safe drinking water, and essential medicine – and to avoid being shot or blown up.
Hundreds of thousands of Ukrainian children are already traumatized for life, and their suffering will only get worse unless Putin is stopped immediately.
The outpouring of support for Ukraine and Ukrainians has been amazing. More than one million refugees have been welcomed by individuals and governments throughout the EU, and the US, the United Kingdom (UK), and other countries are providing many forms of assistance. We are grateful for all of it.
But it is time to face the harsh reality that Putin and his cronies have gone berserk. The world can either boycott Russian energy fully today, to stop the invasion immediately, or it can continue to watch Russian forces commit one outrage after another – every day moving closer to the territory of EU countries.
No one in the world should buy Russian energy. The stigma should be worse than for blood diamonds. The world is arming and encouraging a violent, uncontrollable monster. It must stop.
Simon Johnson contributed to the writing of this commentary.
