Tallinn University of Technology

Natalia Levenko, a senior lecturer of the Department of Economics and Finance talks about how costly would it be for Europe to impose a full embargo on Russian oil and gas, that would cut off a significant source of income for Kremlin and thus could cease the bloodbath in Ukraine. 

Natalia Levenko

After contributing to an extended debate in the media, a full embargo on Russian oil and gas is finally on the table of the European Commission. EU officials will have to wait, however, until the final round of the French elections to bring these negotiations up among the member states. Five rounds of unprecedented financial sanctions have already weakened Russian exports, strangled logistics, increased costs for the industrial sector, and contributed to an economic isolation of Russia. Even so, the already implemented measures are apparently not enough to stop Putin’s war machine, while a full embargo would cut off a significant source of income for Kremlin and thus could cease the bloodbath in Ukraine. 

When speaking about imports of energy, it is important to distinguish between imports of oil and imports of gas as those are very different markets. While oil is traded in the global market, the market for natural gas is a local one. It means that it is feasible for EU to change suppliers of oil, but the same is valid for Russia as it could easily sell its oil to buyers other than the EU. In other words, imposition of an oil embargo would have only minor impact on the Russian economy. Contrarily, in the absence of an alternative infrastructure such as pipelines and terminals for LNG (natural gas cooled down to liquid form), gas can be replaced only with other sources of energy, such as renewables, lignite, hard coal, and nuclear in the longer term, thus making an embargo challenging for the EU.

To put this discussion into the context, the prices on oil and gas have increased strongly since 2021 as the global demand for energy after the Covid-19 pandemic was restoring at a faster speed than the supply was. The increase in global energy prices has contributed to the upsurge in Russian government’s revenues from exports of fossil fuel, constituting roughly one third of its total revenues.

But how heavily does the West rely on Russian oil and gas? While the US oil imports from Russia was about 8% of all US oil imports in 2020, Europe is much more on the hook importing over 25% of its oil consumption from Russia. What is even more problematic is the dependence of Europe on Russian gas. Among European countries, Austria, Italy, the Netherlands and Turkey import quite a significant share of gas from Russia, but the weakest link is Germany, which imports 55% of its gas consumption from Russia, large amount not only in relative terms but also in absolute values.

Paul Krugman, a Nobel Prize laureate in economics, has recently criticized German government, naming it Putin’s prime enabler as the Russian-Ukrainian war runs on the money Kremlin receives from selling energy to Europe. Krugman has also pointed out that Germany’s energy policies are anything but responsible also when considered over time. Indeed, for a long time benefits of having access to cheap energy outweighed risks of becoming severely dependent on one quite questionable supplier of energy.

Bearing in mind that trading with an aggressor is rather a moral than economic issue, we might still be interested in how costly it would be for Europe to go cold turkey on Russian oil and gas. Since the start of this debate, words like no reasonable alternative, an unthinkable step, a painful measure, and enormous costs were used when describing a full embargo on Russian fuel. Experts say though that it would be far from catastrophic. Quite a few studies have been done for Germany as its share of the gas imported from Russia is the largest among the European countries.

According to conservative estimates, German GDP may shrink by 0.5 to 3 per cent should a full embargo be implemented. It is definitely not exciting to have a decline in output, but the cost is not enormous and it is even less than the Covid-19 recession in 2020. Estimates for the downturn in the euro area as a result of a cut off from Russian energy are in the range of 1.2 to 2.2 per cent. Additional inflation related to this step is estimated to be around 0.8 to 2.6 per cent. 

By today, US and Canada have banned oil imports from Russia completely. UK will phase out imports of Russian oil by the end of 2022. The same will do Estonia with respect to Russian gas, while Lithuania has already fully rejected from using Russian gas being the first in the EU to do that. Now it is time for other EU member states to take a joint decision needed to bring peace back to Europe.