The West reacted to Russia’s invasion of Ukraine by imposing severe sanctions. So far, however, these sanctions have barely touched the core of the Russian economy: hydrocarbon exports. The United States has adopted an embargo on oil imports from Russia and the European Union has approved one on coal imports; but in both cases the imports are already modest. What really matters is the large flow of natural gas and oil from Russia to Europe. Putin is well aware of this, and on this very ground he blatantly launched a challenge by demanding payment in rubles. It is now up to Europe to take up this challenge and win it.
In the face of increasingly clear demonstrations of the Russian government’s imperialist positions and the brutality of the military aggression it is perpetrating, there is clearly no lack of ethical justification for a European embargo on Russian gas and oil. Such a radical measure would have a significant but sustainable cost. Recent and reliable estimates predict that the increase in energy prices and the risk of consumption rationing would reduce GDP by 2-3% in Germany and probably the same in Italy, but less in France and other EU countries. It is no coincidence that the European Parliament adopted with an overwhelming majority a resolution calling for an embargo.
The adoption of a total and immediate embargo stands in the way of the hesitation of the EU countries most dependent on Russian imports. Understandable hesitation, as President Zelensky himself acknowledged in a recent interview with Bild, given the political cost it would have for Chancellor Scholz to adopt a measure that would inevitably cause a German recession. Economic science, however, teaches us that the alternative to the embargo must not be the preservation of the status quo, but the adoption of more modulated sanctions. Strictly taxing Russian exports rather than banning them could significantly reduce the economic, social and political cost of sanctions for Europe, while their weight is modestly reduced for Russia.
Russian exports take place under a monopoly regime that is yielding enormous profits to Putin’s government and to the symbiotic oligarchs. The power of this monopoly cannot be opposed individually by importing companies. Instead, the EU can collectively oppose it, assuming a firm and credible commitment to remit to Russian sellers only a fraction – for example half – of the price agreed and up to now paid by European buyers, and withhold the remainder in the form of duty, such as forced contribution for peace. This optimal taxation strategy would transform a large part of Russian profits into European tax revenue.
What answer could Russia give to such unprecedented determination of the EU in asserting its economic power? Looking for other outlets for its exports would be difficult. The gas pipelines that notoriously tie Europe to Russian suppliers tie Russia even more to European buyers. 40% of European natural gas imports come from Russia, but over 60% of Russian exports go to the EU. All that would remain is an attempt to test European determination by refusing – in part or in whole – to export under the new conditions. The result would be a tug-of-war that is certainly costly for both, but less sustainable for Russia.
In the most extreme case, Russia could unilaterally decree a total freeze on its exports. It would be Putin who would impose this embargo and therefore assume the responsibility not only of completely suppressing the residual profits that finance his oligarchs, his government and his military machine; but also to jeopardize employment in the energy sector, which currently employs over 2 million Russians. Instead, Europe would have the double satisfaction of having left the door open to compromise and yet having obtained maximum pressure on the Russian economy. It would also have the internal advantage of increasing incentives for energy diversification and for the transition to sources with a lower environmental impact.
Game theory indicates that any Russian decision to completely block exports, and the consequent costs, would be only temporary. Russia would be trying to expose an EU bluff; but once it is discovered that it is not a bluff, but an immovable European decision to stop granting the enormous profits of the past, Russian exporters would agree to resign themselves to reduced prices and profits, rather than continue to refuse to sell and obtain therefore zero profits.
In the face of bullies such as Putin, the lesser the risk of having to resort to force the greater and clearer is one’s willingness to assume the costs for a just cause. The EU, rightly reluctant to use military force, can have great economic strength. It is time to show that the citizens of Europe and our governments also have the civic and institutional strength to use them, with considered and irrevocable decision, when it comes to restoring and preserving peace in Europe.
* Federico Boffa, Professor of Economics, Free University of Bolzano
* Giacomo AM Ponzetto, Professor of Economics, CREI and Pompeu Fabra University, Barcelona