Full energy embargo: short-term pain for a brighter future

Full energy embargo: short-term pain for a brighter future

Photo: ua.depositphotos.com / bashta
19 September 2022

The sanctions that have already been imposed on Russia by the West are seen to be working, as evidenced by the slowdown in the Russian economy, according to EC’s Vice-President and Foreign Affairs Representative Josep Borrell. Considerable progress has been achieved regarding oil (but not natural gas) in Europe, while Asian countries continue to rely on Russian energy.

Russia is one of the top three fossil fuel producers in the world, and its economy relies heavily on revenues from oil and natural gas. According to the IEA, in 2021, these revenues made up 45% of Russia’s federal budget. In 2022, fossil fuel prices only went up, so if the exports remained unchanged, Russia would benefit enormously from higher revenues. It is arguably still benefiting from higher revenues even as its exports fall because of a partial embargo. A full embargo on Russian energy today by the EU alone would already decrease its GDP per capita by 1,500-2,500 USD (or 10 to 25%), a significant reduction to weaken Moscow’s capacity to sustain its aggression against Ukraine.

Because of the historic trade relationships, the rigidity of energy systems, and the infrastructure in place, the energy embargo is an unpopular measure with many governments due to its immediate effect on energy prices and the resulting political consequences. For some countries, however, the end of Russian energy is inevitable. This is the case in the EU, where we already see clear signs of Russia using energy as a weapon by cutting its supplies to Europe. But while Europe is already learning to live without Russian energy, it is not the case for the rest of Russia’s clients.

We argue that a world-wide energy embargo could in fact be seen as an opportunity, if we take a long-term vision and choose our actions accordingly. The EU seems to already acknowledge this, as Frans Timmermans, EC’s Vice-Precident, argued in March 2022 that “Putin’s war in Ukraine demonstrates the urgency of accelerating our clean energy transition.”

A world-wide energy embargo has a variety of potential benefits that should be considered. First, there are environmental benefits if less oil and gas is being consumed. Environmental and resource economists have long supported carbon taxes or caps on emissions. An embargo that effectively removes a portion of the world supply would lead to higher energy prices and a lower quantity of CO2 emitted into the atmosphere. Additional benefits from reduced air pollution and particulate matter could have significant human health benefits. These benefits will depend upon how countries respond to higher energy prices and lower access to Russian oil and gas. 

Additionally, higher market prices for energy could finance investments in a just transition. Currently many oil producing countries and regions are facing a challenging transition to renewable energy and calls to move away from fossil fuels. Higher revenues from an embargo would mean greater government revenues to sovereign wealth funds, as well as money for infrastructure and education to support future growth. 

Higher prices will also motivate greater innovation and reliance on carbon neutral energy sources. Germany is currently reconsidering the phasing out of nuclear power plants within its borders. Nuclear energy is carbon neutral and comparable to wind and solar energy in both emissions per kwH and safety. Higher energy prices would lead to other innovations in smart grids, energy efficiency in homes and other buildings, and transportation.

Finally, an embargo would help support the rules-based order upon which the modern world economy is built. By speeding the end of the war and helping to achieve victory for Ukraine, it would send a strong signal that the international community is willing and able to make sacrifices to defend the sovereignty of other nations and human dignity. Maintaining this order is of vital importance to ensuring future cooperation in confronting global threats like climate change.

The immediate costs of a full energy embargo are more salient than the benefits. High energy prices are a key driver of inflation around the world. This acts as a tax on all consumers and has led to political turmoil and hardship for families. This social discontent is also not equally felt. Lower income families face a much greater struggle in managing inflation, and individuals in colder and more energy intensive climates face a greater cost from higher energy prices in the autumn and winter months. Additionally, investments to mitigate the higher cost of energy by transitioning to other energy sources will be more expensive due to increasing interest rates, potentially stressing government budgets.

Because of this, there are potentially short-term barriers to a full energy embargo. There would be incentive for firms and nations to attempt to avoid an embargo and profit from access to cheaper energy. Russian oil is already selling at a discount, and as the market shrinks Russia will lose negotiating power and sell at a greater discount. The design of any such embargo should take into account these incentives and attempt to nudge nations and firms to cooperate through secondary tariffs and barriers.

Sanctions are instrumental in political action. As effective as it can be, a full energy embargo will no doubt have serious impacts for the economies that implement it. It will take time for sanctions to cause the desired impact on the Russian economy. What is important is to see these negative impacts as they are – the side effects of standing with the people of Ukraine and a necessary step in fighting environmental problems our society faces. If governments take the longer-term view and work to protect the most vulnerable, making this step sooner rather than later will save lives and leave the world better off.



The authors do not work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations