With threats of sanctions, EU countries and the USA had created a threatening backdrop against Russia in the looming Ukraine conflict: Russia should shy away from a military invasion because of the threatening consequences of such sanctions. This strategy clearly failed because the threats did not prevent a military emergency from occurring. However, sanctions cannot only serve as a deterrent; they can also have meaningful effects after the start of the military conflict. Sanctions during the military conflict have ongoing costs. Sanctions that are lifted after the military conflict has ended can hasten the end of the conflict. Because of the elimination of sanctions costs, a larger peace dividend beckons. If the sanctions are costly for both parties to the conflict, they affect both parties in this form. And when these costs are greater for the sanctioned adversary than for the sanctioning conflicting party, these incentives increase more for the sanctioned party than for the sanctioning party. The greater “impatience” of the sanctioned party then proves to be an advantage for the sanctioning party in negotiations: the result of peace negotiations is more in favor of the sanctioning party.
Sanction calculations in the area of fossil fuels such as oil and natural gas played a particularly prominent role in political considerations. The raw materials sector is of dominant importance for Russia, but also of high relevance for the countries of Europe. After initial calls for the European Union to boycott Russian gas and oil supplies as a sanctions measure, the EU first issued import bans on Russian coal (August 2022), and later also on oil imported by sea (December 2022) and refined oil products from Russia (February 2022). 2023) subject to sanctions. But are oil or gas embargoes suitable as leverage in negotiations? Can energy commodities embargoes put significant pressure on the resource country with the hope that they will shorten the duration of the conflict and make the sanctioned country more concessional?
In response to a European boycott of oil and gas purchases, Russia can sell its energy commodities on an international market to consumers in non-boycott countries. These countries will then buy less from third-party suppliers in the Middle East, Africa or South America. Ideally, trade flows will simply shift, and if the markets and supply channels are sufficiently liquid, then the result will not change either prices or the total quantities consumed around the world or resource rents.
But even if all nations participate in an oil boycott of Russia, the sanctions effects of such a buyer’s strike are fundamentally different than a boycott of consumer or capital goods. In a recent study (“Elusive Effects of Export Embargoes for Fossil Energy Resources”, Energy Economics 117, 106441) we show that an import embargo on Russian gas and oil incurs sanction costs that are by their very nature very different from those for grain or other manufactured consumer goods. If Europe does not buy manufactured goods, the manufacturers will lose sales and profits for the period of the sanctions. If Europe refrains from importing Russian gas and oil, the oil and gas will remain on Russian soil as natural resources. These are assets that Russia will not lose. In an efficient market for natural resources, a supplier does not even care when it extracts and sells its resources. The present value of the resource rents derived from the sale proceeds is independent of the time of sale. In any case, this is true under the ideal conditions of a functioning competitive market for oil, as Harold Hotelling described in 1931.
So if Russia is prevented from selling its oil today and for a few years to come, this boycott will make Russia neither poorer nor richer. Ultimately, Russia can be indifferent to whether it converts its assets tied up in crude oil reserves into hard dollars or euros today or later. The sanction costs that such an EU buying strike imposes on Russia are thus close to zero – quite unlike for manufactured goods, where the failure to produce and sell causes a stream of real income losses.
The verdict on resource sanctions is less clear when one considers that the Russian rulers are not entirely in the saddle and may not always have access to their accumulated wealth. In Russia, a small government elite ultimately decides on the mining and sale of fossil energy supplies and presumably appropriates a large part of the profits made. The possibility of this stands and falls for this elite with the question of power. When the elite lose their power to govern, the business of appropriating those gains is gone. An incumbent power elite must always fear losing this power sooner or later. If you follow British (online) bookmakers who take bets on the Russian President staying in power, a possible loss of power is given a significant probability.
In view of the impending loss of power, the power elite in Russia should have an incentive to exploit and sell oil and gas as quickly as possible and to spend the proceeds in safe financial havens abroad. Insofar as there are safe financial havens, a buyers’ strike then actually has the effect of sanctions: the prospect of not being able to exploit reserves of raw materials today and convert them into safe financial investments is a considerable disadvantage for the incumbent power elite, because in a few years they may no longer be in power at all. The effect of sanctions is all the greater, the greater the probability of a loss of power, and the safer the financial investments in safe havens abroad are still available to the elite despite a loss of power. At the same time, a dilemma arises for the sanctioning states. If they sanction oil exports and at the same time confiscate the foreign assets of the power elite, then the sanctioning effect of the oil export embargo is reduced by the confiscation of foreign assets. The oil export sanctions are most effective when the power elite in Russia can be confident that they will have reliable access to their assets deposited in financial havens in the event of their own loss of power.
Overall, this shows that buyers’ strikes for Russian oil and gas have a limited sanction effect. And the bottom line is that these buyer strikes aren’t reducing the value of those resources. Russia itself will not become poorer or richer through such actions, it will only be forced into a different composition of the wealth it holds.
literature
Kai A. Konrad and Marcel Thum, Elusive Effects of Export Embargoes for Fossil Energy Resources“, Energy Economics 117 (2023), 106441
