Why ending energy imports from Russia remains essential
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A partial oil embargo was finally agreed as part of the EU’s sixth sanctions package, and pressure is now high to include gas imports as part of a seventh package. The main argument is that paying for oil allows Russian President Vladimir Putin to wage war and commit atrocities in Ukraine.
But does it? My ex-colleague Matthew Klein writes“The oil boycott is unlikely to cause much additional damage to Russia because of the economic measures” already have been extremely effective in tearing down Putin’s war capacity.” Therefore, an oil boycott “must be understood primarily as a moral gesture rooted in self-denial, and not as a serious escalation of pressure on the beleaguered Russian army.”
This sounds like a most inconvenient truth. If an oil boycott would have little impact on Moscow’s capabilities, then continuing to buy oil is in fact no pay for Putin’s war.
Is Klein right? My answer is: in two main ways, yes, but the argument is incomplete. Its completion shows that the arguments for energy boycotts remain strong.
First, the two things I agree with Klein on. One is that exports are ultimately only worth the imports you can buy with them. This simple statement is true, but counterintuitive and extremely difficult to accept. But it has important implications. Namely that Moscow does not have to sell oil or gas abroad to acquire the things it can buy in Russia; and that for foreign supplies it’s not enough to have the hard money to pay for them if you can’t really import.
This is where Klein’s second key insight comes in: the sanctions regime has already significantly curtailed Russia’s ability to import things. Product-specific restrictions have left many high-tech goods out of reach and financial sanctions limit Russians’ access to hard currency to buy something else.
This is evident from trade data. Moscow has stopped publishing it, but analysts like Klein have looked at export data from its major trading partners to estimate how much Russian imports have fallen. Below I show his map (see the original here), showing that they are dropped by . † † a lot! According to Klein’s calculations, Russia only imported half as much in March as it had averaged in the previous six months, and early figures for April showed shipments fell further by double digits from Germany, South Korea, Japan and Taiwan.
So it seems clear that Russia is already struggling immensely to import what it needs. But does this mean that an energy boycott is just a moral gesture of self-denial, in Klein’s words?
It does not. First, because revenues from oil and gas exports are still for Moscow to spend at some point in the future, if not now. It is not as if the accumulated earnings are worthless; they are real claims that can one day be exchanged for imports from the west or for capital transactions and acquisitions there. (This is, of course, at the very least an argument to freeze the cumulative revenues of the Russian state energy exporters in the same way that the central bank’s assets are frozen, and even an argument to seize all that wealth outright, in order to help finance the reconstruction of Ukraine.)
Second, because even today cutting hard currency earnings will have economic effects domestically. Government revenues are heavily dependent on taxes on natural resource exports. Rosneft and Gazprom pay taxes in rubles, but how much they pay (and how they acquire the rubles to pay with) depends on their foreign sales. If those sales stop, there will be a big hole in the Russian state budget. That’s all the more true if income from other taxes falls rapidly while the economy freezes.
It can be accommodated by cutting back, raising taxes, or borrowing. It is easy to see how the first two have political costs. Of course, the Russian state can expropriate and confiscate any domestic resources it wishes – but to force Moscow to do so is to impose a political economic cost on it. After all, someone in Russia is on the losing side. As far as borrowing is concerned, it is doubtful how much really voluntary credit would be provided. Again, Moscow can of course force banks to lend to it – but that is essentially monetary financing and can be counted on to increase inflation, which in turn redistributes resources and creates losers.
So even though I said earlier that “Moscow doesn’t have to sell oil or gas abroad to get the things it can buy in Russia,” it’s still a big difference whether it gets those domestic resources in exchange for claims in foreign countries. currency (even if it is currently difficult to spend on imports) or in exchange for nothing at all.
In short, there are important differences between a world where Putin-controlled entities are equal to hard currency and a world where they are not equal – even if it is difficult to spend that foreign currency. I would also suspect that Putin is making more use of this hard currency earnings than it appears. After all, unfrozen money in the western accounts of Gazprom and Rosneft can be forwarded to many non-Russian entities that are not subject to sanctions. And, of course, there is an excessive incentive for smuggling.
So I do not accept that a European oil or gas boycott will mainly harm Europeans, while making only a negligible difference to Moscow. In any case, there’s another reason for a quick boycott: you don’t want to be at the mercy of Putin’s mercy for your energy needs. If it is painful to get rid of Russian imports now, it would be much more painful to remain dependent and suddenly be cut off at a time Putin has chosen.
One pleasure of working at the FT is the camaraderie with colleagues – even after they have moved to other fields. This week I reconnected with two former colleagues who are now producing an economics podcast – do switch to the episode of The New Bazaar about the economy of connectedness and what about the high-pressure economy of the US.
The EU has agreed to ensure “adequate minimum wages” in each of the bloc’s countries. In the UK, a think tank report calls for a minimum wage of £15 an hour “to restructure the labor market away from low-paid and precarious work”.
The ECB appears to be promising to curb financial fragmentation between eurozone countries. The FT editorial column welcomes the central bank’s embrace of its responsibility for the integrity of the euro. The FT’s Europe Express describes what else to look out for in today’s ECB announcements.
Airships are a thing again!