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Russian Energy Embargoes: A Double-Edged Sword?

24th February 2022 – a day that will go down in history as one of the most important events

in the modern era. By giving the order for Russian troops to invade the sovereign state of

Ukraine, Vladimir Putin sparked a crisis that raised global tensions to unprecedented heights and caused Europe’s fastest-growing refugee crisis since World War Two. In response to Putin’s aggression, Western powers sought immediately to impose sanctions on Russia and its economy. This was in an attempt to disable Putin’s plans of invasion and his credibility domestically, with energy embargoes being utilised as a main deterrent. However, given the reliance on Russian oil and gas from such powers, it beckoned the question: who will break first, Russia or the West?

For decades the world has relied heavily on Russian oil and gas imports to sustain its energy

usage. In 2021 alone, imports of gas, oil and coal from Russia to the UK were worth a combined £4.5 billion. In the same year, the EU would import 2.2 million barrels of crude oil

every day, meaning overall that Russia was the EU’s fifth largest trade partner in 2021,

representing 5.8% of the EU’s total trade in goods with the world. To demonstrate further

how important trade in energy with Russia is to the EU in particular, I created a model to

regress the GDP of the EU against its energy imports from 1970 to 2015. This was done in

order to ascertain whether energy imports have a statistically significant effect on GDP and

therefore explore how any trade embargoes should be handled.

The results are shown in the table and they may be slightly difficult to interpret for those

unfamiliar with hypothesis testing. However, what the blue underlined section shows is

that, unequivocally, energy imports are a highly significant factor in determining the EU’s

GDP, which means that any increase/decrease in energy imports to the EU will cause the

bloc’s GDP to drastically increase/decrease respectively. Furthermore, the orange

underlined section actually shows that almost 20% of variation in the EU’s GDP can be

attributed to their energy imports, highlighting once again their vast importance for the

health of the EU’s economy.

So, what does all of this actually mean? Well above all, Figure 2 shows that for the past 5 or

so decades, energy imports to the EU have been vital for the life and growth of its economy

and Russia is responsible for a large amount of these imports. Similar trends are also seen

worldwide regarding the effects of energy imports on GDP. Therefore, the conclusions we

make are that any attempt to impose embargoes on energy imports must be treated with

immense care and consideration, as the sustainability of an economy can depend on it.

Having said all of this, what are the embargoes that the West have imposed on Russia?

In March the UK stated that it would phase out Russian oil imports by the end of 2022, with

the EU following suit in their most recent announcement at the end of May. The EU-wide

ban will only affect imports by sea which constitutes around 2/3 of all oil imports from

Russia. Furthermore, Poland and Germany have also pledged to end any and all pipeline

imports, meaning a total of 90% of Russian oil will be blocked for those respective countries. These agreements have come after months of deliberation between EU member states, mostly due to the resistance of Hungary in opposing any proposed embargoes, since they import 65% of their oil from Russia through pipelines. As it stands Russia currently supplies 27% of the EU’s oil and 40% of its gas, demonstrating the mammoth task it will be to implement these sanctions.

Orchestrating international embargoes on natural gas has proven more difficult. Whereas in March President Biden signed an Executive Order banning all imports of oil, liquified natural gas and coal from Russia, the EU have, as of yet, placed no sanctions on gas imports.

However, plans that were drawn up for a pipeline between Russia and Germany, Nord

Stream 2, have since been frozen. Similar to the EU, there is no official deadline to stop

imports of natural gas to the UK, however the rhetoric of the UK Government has been to

end imports of gas “as soon as possible” after 2022. The Russian ambassador to the EU,

Vladimir Chizhov, has said that Brussels has "already approached the limits of what is

possible in terms of sanctions" and predicted "serious problems" if the EU were to try to agree on a gas embargo.

The consequences of these embargoes could be catastrophic, but for whom is still

uncertain. There is as much possibility of a Western economy crumbling under the pressure

of these sanctions than there is the Russian economy. After the news of the EU oil embargo,

oil prices sky-rocketed, with Brent crude rising to its highest level since March. Immediately after the UK imposed its embargoes in March, Chancellor of the Ex-Chequer Rishi Sunak warned that the UK could face a £70bn hit from an EU ban in Russian oil and gas, with similar sentiments lingering still. Petrol and diesel prices have hit record highs as families across the world are feeling the effects of these prohibitions imposed on Russia, not just Vladimir Putin. The worldwide consequence that is on the tip of everyone’s tongue at the minute is of course inflation. In a similar vein to GDP, I have derived a model that regresses inflation against energy imports, based on data from the EU from 1970-2015.

The results underlined in green put together demonstrate that not only are energy imports

a significant factor for inflation, but a decrease in energy imports will also dramatically

increase inflation for that country (and vice versa). This evidence is supported with the real-

world revelations that inflation has soared to record highs globally, particularly in western

countries that have imposed the greatest sanctions on energy imports from Russia. But

what does this really mean? Ultimately, the theory suggests that the longer the West

imposes these restrictions on energy imports, the higher inflation will climb without any

foreseeable end.

This article has designated a lot of time to the effects on western economies, but has Russia

actually been feeling the strain of these embargoes? Well, the sanctions have proved an

unprecedented shock to the Russian economy and have provided a recession, the likes of

which hasn’t been seen since the fall of the Soviet Union. Output in industries across the

economy has fallen drastically; in May, the number of cars sold across Russia tumbled by

83% from the previous month, to 24,000. Despite not apparently halting its military assault,

embargoes, in conjunction with other sanctions, have halted any economic progress that

Moscow was looking to make in the next few years or potentially decades. The outlook for

Russia’s economy is pessimistic at best, however many experts have questioned whether a

lifting of sanctions could bring all parties to the negotiation table sooner rather than later.

Whilst a move like this would be invaluable for peace-making efforts, it would also pave the

way for economic reforms on all sides.


References/Wider Reading:

World Bank Data

Russian oil: EU agrees compromise deal on banning imports – BBC News

Russia’s fraying economy: consumers start to feel the pinch of sanctions – Financial Times

West prepares to play ‘long game’ on Russian sanctions – Financial Times

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