Following the Russian attack on Ukraine, major sanctions have been imposed, most notably with the aim of limiting Russia’s access to hard international currency. However, Russia remains the world’s first exporter of oil and gas, and at current energy prices this provides revenues estimated at above USD 1 billion for oil, refined products and natural gas.
As the brutal aggression of Russia against Ukraine continues, governments should scale-up their sanctions and hit Putin where it hurts the most: by limiting oil and gas export proceedings, which account for almost half of Russia’s federal budget.
The US, Canada, Australia and the UK have announced plans to phase down energy imports from Russia. The main buyer of Russian fossil fuels, the EU, has so far refrained from a full oil and gas embargo. The European Union (EU) buys 75% of Russian gas exports and 50% of Russian oil exports. An EU embargo on Russia would substantially undermine Putin’s geopolitical and economic positions.
But a full embargo would also have significant consequences for global energy markets as well as for the EU economy. For the EU an immediate fossil fuel embargo would imply substantial cost, as it used to import around 40% of its natural gas and around 25% of its oil from Russia. In comparison, the US imports 8% of its oil and the UK imports around 5% of its natural gas and oil from Russia. After two months of preparation, Germany and others have now reduced their dependency and found alternative sources, in particular for oil. Nevertheless, securing the approval of all EU countries may still prove difficult – not least because of the remaining dependency on Russian gas.
In a recent scientific article, we argue that a tariff on imports of Russian fossil fuels would allow cutting Putin’s energy rents while keeping up the flow of gas and oil. Contrary to a full embargo, the tariff can be adapted to the economic and political dynamics of the conflicts.
But wouldn’t the cost of a tariff primarily be paid by European consumers? A tariff ’s effect on domestic prices depends on whether sellers and buyers have relatively better alternatives. The more difficult it is for Russia to redirect its supplies to other destinations, the higher will be the share of the tariff that is borne by Russia. And the easier it is for European countries to reduce their demand or find alternative sources of energy, the smaller will be the share of the tariff paid by European consumers.
The good news is that in the short term, Russian exports cannot be easily diverted. Infrastructural bottlenecks prevent a substantial redirection of gas and even of oil to, for example, Asian countries. For oil, limited connections between the pipelines in Russia that flow towards China and the pipelines from Western Siberia fields that flow Westwards will prevent Russia from bringing oil originally destined for the European market to China via pipelines. Instead, Russia would be forced to use its Baltic and Black Sea ports to increase exports to Asian customers. Port capacity and access to enough ships will constrain exports. As concerns gas, currently, the only gas pipeline connecting Russia and China is the Power of Siberia pipeline inaugurated in 2019, with a capacity of 38 bcm/year – while pipeline exports to Europe were above 150 bcm/year. And while Russia only shipped 16.5 bcm to China in 2021, it will take time and investment to fully utilize the existing pipeline that is not connected to the gas fields that serve the West-bound pipelines – let alone exporting volumes that match those of the European market. The EU would therefore be able to ensure that tariff revenues are mostly paid by Russia.
To improve Europe’s strategic position, it is now central that policy makers in the EU focus on reducing demand for gas and oil while further developing alternative sources. Higher gas and oil prices, while unpopular, thereby do serve the purpose of reducing demand. Instead of lowering excise or VAT taxes on energy, policy makers could use the revenues from the tariff to support those most affect with lump-sum transfers. The tariff revenues should be sufficient to compensate consumers for tariff-induced price increases.