Short of direct military involvement, oil sanctions represent the single most important policy instrument available to the West to sway Russian President Vladimir Putin’s political calculus. They are a tool that needs to be wielded resolutely.
Last year, Russia’s total exports reached $489.8bn. Of that, energy (in the form of crude oil, pipeline natural gas, and liquified natural gas) accounted for roughly half, nearly $241bn, with the lion’s share generated by the sale of oil. Last year’s average price of oil was $68 per barrel, and with the price of oil soaring (benchmark Brent crude was about $115 a barrel on March 22), it is providing the Kremlin far greater funds to fuel its aggression in Ukraine.
To be sure, the sanctions invoked so far on the Russian financial system, oligarchs, and certain industries will cause serious harm to the economy in the long run. They will also have an immediate effect on the wealth of oligarchs and the living standards of ordinary citizens. However, they will not deliver a fatal blow to the Putin regime as long as oil revenues flow into Russia. That’s because these funds oil Putin’s machine; they keep his security apparatus operating, and allow him to provide at least basic services to Russian citizens, thereby keeping their level of discontent low.
Based on this realization, the Biden administration on March 8 announced that it was banning the import of Russian oil, natural gas, and coal. So far, however, Europe has not followed suit.
Critics on the continent have opposed energy sanctions on the grounds that they would do serious economic damage given the reliance of many countries on Russian fuels. Indeed, Europe’s dependency on Russian energy has been a topic of perennial concern in recent years – but little concrete action. Germany is the largest importer, by product value, of Russian oil within the European Union. In 2021, the total EU energy import value from Russia stood at some $150bn, of which $104bn was for oil products. Germany was the largest importer at an estimated $23.6bn worth of crude oil, gasoline, and diesel.
As a result, European nations would undoubtedly feel the pinch if they went ahead with energy sanctions against Russia. As German Chancellor Olaf Scholtz said on March 7, Russian energy imports had to continue for now because oil and gas “cannot be secured in any other way.”
It is true that sanctions would hit Europe hard — EU states rely on Russia for 40% of energy supplies. Any such discomfort, however, needs to be balanced against new global realities — and the likely long-term economic and geopolitical costs if the current war in Ukraine continues.
Here, it’s necessary to clarify the nature of the energy business, and oil in particular. Oil is a global commodity, which means that there is a global oil market where prices are determined by supply and demand. In this regard, oil is different from natural gas, which is more a regional commodity and is characterized by price fluctuations in different markets.
As a result, a blanket Western ban on Russian oil won’t serve to take Russian oil off the streets — the Kremlin will simply sell to other consumers (like China.). But a joint U.S.-European ban would significantly constrict the potential buyers, while market forces will do the rest — with alternate clients negotiating cut-rate prices, knowing that the Kremlin has precious few options. The result will be a drastic slump in Russian oil income.
Such a move will admittedly not be cost-free for Europe. In the short term, the continent is likely to experience price hikes and commodity shortages. But equilibrium will be restored in time – and in a manner that disadvantages Russia.
Most of all, European leaders need to understand that the long-term costs of inaction are liable to be measured in both economic pain and humanitarian suffering, as oil revenue continues to fuel Putin’s war machine. Officials in Brussels have the ability to alter this equation, if they have the political will to do so.
Mamuka Tsereteli is Senior Fellow for Eurasia at the American Foreign Policy Council in Washington, DC.