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A partial oil embargo was finally agreed as part of the EU’s sixth sanctions package, and the pressure is now on to include gas imports as part of a seventh. The main argument is that paying for oil enables Russian president Vladimir Putin’s capacity to wage war and commit atrocities in Ukraine.
But does it? My former colleague Matthew Klein writes: “The oil boycott likely won’t do much additional damage to Russia because the economic measures already in place have been extraordinarily effective at degrading Putin’s warmaking capacity.” Therefore an oil boycott should “be understood mainly as a moral gesture rooted in self-denial, rather than as a serious escalation of the pressure on Russia’s beleaguered military”.
This has the sound of a highly inconvenient truth. If an oil boycott would have little impact on Moscow’s capacities, then continuing to buy oil does not, in fact, pay for Putin’s war.
So is Klein right? My answer is: In two important ways, yes, but the argument is incomplete. Completing it shows that the case for energy boycotts remains strong.
First, the two things that 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 exceedingly difficult to accept. But it has significant implications. Namely, that Moscow does not need to sell oil or gas abroad to acquire the things it can source within Russia; and that for foreign supplies, it is not enough to have the hard cash to afford them if you cannot actually import.
Here is where Klein’s second important insight comes in: the sanctions regime has already significantly curtailed Russia’s ability to import things. Product-specific restrictions have put a lot of high-tech goods out of reach, and financial sanctions restrict Russians’ access to hard currency to buy anything else.
This is clear from trade data. Moscow has stopped publishing them, but analysts such as Klein have looked at the export data of its main trading partners to estimate how much Russian imports have fallen. Below I reproduce his chart (see the original here), which shows that they have fallen by . . . a lot! On Klein’s calculations, Russia imported only half as much in March as it had on average in the preceding six months, and early figures for April showed shipments falling further by double-digit percentages from Germany, South Korea, Japan and Taiwan.
So it seems clear that Russia is already struggling mightily to import what it needs. But does that mean an energy boycott is merely a moral gesture of self-denial, in Klein’s words?
It does not. First, because the earnings from oil and gas exports are still Moscow’s 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 may well one day be redeemed for imports from the west or for capital transactions and acquisitions there. (This, of course, is at a minimum an argument for freezing the cumulative earnings of Russia’s state-owned energy exporters in the same way as the central bank’s assets have been frozen, and even an argument for confiscating all that wealth outright, to help fund Ukraine’s reconstruction.)
Second, because even today cutting hard currency earnings will have economic effects at home. The government’s revenues depend heavily on taxes on natural resource exports. Rosneft and Gazprom pay taxes in roubles, but how much they pay (and how they acquire the roubles to pay with) depends on their foreign sales. If those sales stop, a big hole appears in the Russian state budget. That is all the more true as revenue from other taxes is falling fast with the economy going into deep freeze.
It can be met by cutting spending, raising taxes, or borrowing. It is easy to see how the former two come with a political cost. Of course, the Russian state can expropriate and confiscate whatever domestic resources it likes — but forcing Moscow to do this is to impose a political economy cost on it. Somebody in Russia is, after all, at the losing end. As for borrowing, it is doubtful how much truly voluntary credit would be forthcoming. Again, Moscow can obviously force banks to issue loans 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 while I said earlier that “Moscow does not need to sell oil or gas abroad to acquire the things it can source within Russia”, it is still a big difference whether it obtains those domestic resources in exchange for foreign currency claims (even if it is hard to spend those on imports at the moment) or in return for nothing at all.
In short, there are important differences between a world where entities controlled by Putin are flush with hard currency and a world where they are not flush — even when it is hard to spend that foreign exchange. I would also surmise that Putin has more uses for these hard currency earnings than it may look. After all, non-frozen money sitting in Gazprom’s and Rosneft’s western accounts can be directed to many non-Russian entities not placed under sanctions. And there is, of course, an inordinate incentive for smuggling.
So I do not accept that a European oil or gas boycott will mostly hurt Europeans while making only a negligible difference to Moscow. In any case, there is another reason for a speedy boycott: you don’t want to be at Putin’s mercy for your energy needs. If it is painful to wean yourself off Russian imports now, it would be much more painful to remain dependent and suddenly find yourself cut off at a time of Putin’s choosing.
One joy of working at the FT is the camaraderie with colleagues — even after they leave for other pastures. This week I reconnected with two former colleagues who now produce an economics podcast — do tune in to The New Bazaar’s episode on the economics of belonging and what to make of the US’s high-pressure economy.
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 £15/hour minimum wage “to restructure the labour market away from low-paid and insecure work”.
The ECB looks set to promise it will keep financial fragmentation between eurozone countries in check. The FT’s editorial column welcomes the central bank’s embrace of its responsibility for the euro’s integrity. The FT’s Europe Express sets out what else to look for in today’s ECB announcements.
Airships are a thing again!
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