Western sanctions on Russia are working, an energy embargo now is a costly distraction
Western sanctions on Russia are working, an energy embargo now is a costly distraction The path to an EU embargo on Russian energy has now been agreed, but with an opt-out for Hungary. Editors' note: This column is part of the Vox debate on the economic consequences of war. Russia is a major exporter of energy to the world, including the West. Who stands to lose more by stopping Russia’s energy exports? When Putin’s war is grinding on far longer than anyone anticipated, the argument that it is paid for out of Russia’s export revenues suggests that Russia must be desperate to keep its place in the world energy market. It seems that both sides are treating Russian exports as their own weapon. If you find this confusing, then you’ve been paying attention. The reason for Russia’s growing export surplus is that, while exports are holding up, imports from a broad sample of Russia’s trading partners are collapsing – running at half the level of before the war’s outbreak. An expert quoted in The Economist finds Russia’s growing trade surplus “disappointing”.
To understand what Russia’s growing trade surplus really means, it is necessary to recall that the money flows are the counterpart of flows of real resources. How does that matter for financing Putin’s war? It is often said that GDP is a measure of a country’s capacity to fight a war, and this is correct – approximately. The national accounting concept of the resources available to a country at war is not GDP but ‘domestic absorption’ – the total of domestic expenditure, including expenditure on net imports. With percentage points of last year’s GDP as the units, Russia’s trade surplus of 7. Second, Russia’s most likely retaliation will indeed be to reduce exports by cutting off energy supplies to the West. Fourth, by pressing the unwilling – not only in Hungary but potentially in all Western countries – to do without Russian energy before the need arises, we are pointlessly spending NATO’s political capital (and sympathy for Ukraine) while exacerbating the national and social divisions on which Putin relies to make progress. Finally, are there risks in allowing Russia to continue to accumulate financial claims on Western economies accruing from energy sales? Yes, but as long as sanctions on Russia’s imports and financial institutions remain in place these risks are long term. Shifting the focus from Russia’s energy exports is not an argument for doing nothing. European Parliament (2022), “MEPs demand full embargo on Russian imports of oil, coal, nuclear fuel and gas”, press release, 7 April.
Financial Times (2022), “EU leaders agree to ban majority of Russian oil imports”, 30 May. Fortune (2022), “How Europe is trying to wean itself off its $1 billion a day Russia energy habit”, 9 March. Shagina, M (2020), “Drifting East: Russia’s Import Substitution and Its Pivot to Asia”, Center for Eastern European Studies Working Paper No. Sturm, J (2022), “The simple economics of a tariff on Russian energy imports”, VoxEU. The Brussels Times (2022), “Russia demands gas payments in rubles: What does this mean?”, 2 April. The Economist (2022), “Russia is on track for a record trade surplus”, 13 May. The Guardian (2022), “Buying Russian gas and oil has funded Putin’s war, says top EU official”, 9 March.
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