The introduction of an oil embargo could significantly increase economic pressure on Russia. While the effect of an embargo on Russian military capabilities over the coming months would be minimal, it is unclear at present how long the war will last and whether it will spread beyond Ukraine. In the worst case, the West is currently financing a future war against itself.
In response to Russia’s attack on Ukraine, a broad alliance of Western countries has imposed unprecedented economic sanctions on the country. The Russian financial system has been hard hit by measures against major banks, as well as the country’s central bank. At least as damaging to the Russian economy are the climate of insecurity and the self-imposed sanctions put in place by many Western companies. Fear of reputational damage and concerns over a further escalation of the sanctions against Moscow have led to a large part of the economic exchange between Russia and the West being put on hold.
At the same time, Russia has maintained high foreign exchange earnings. Last year, Russia exported around 7.5 million barrels of oil and petroleum products per day. The average price of Urals crude oil, Russia’s major export brand, over the first two weeks of March 2022 was 100 US dollars a barrel, giving a ballpark estimate of around 750 million US dollars per day in Russian oil earnings. Added to this are revenues from gas exports, which are difficult to determine without insight into non-public supply contracts. In 2021, Gazprom’s revenues – totalling around 150 million US dollars per day – were substantially lower than those from Russian oil sales. However, spot prices for gas have since significantly increased, meaning that current revenues are likely to be much higher. On top of that come earnings from metals, coal, and timber exports.
In order to ensure that oil and gas revenues continue to reach Russia, the EU and the United States have spared some major banks, including Gazprombank, from the toughest sanctions. Russia’s high current foreign exchange earnings, combined with strict capital controls, have enabled the Russian central bank to stabilise the rouble for the present time. Given that the outflow of foreign currency from Russia is currently severely restricted by bans and reduced imports, this stabilisation is likely to continue and could also cause the rouble to rise further. If confidence grows among Russia’s trading partners over the coming weeks, buoyed by expectations that no further sanctions will be applied, it is likely that trade with Russia beyond oil and gas will be somewhat revived.
At the same time, there is no doubt that Russia will plunge into a deep economic crisis this year. The combination of a lack of investment, the withdrawal of many Western companies, and a strict technology embargo will transform the Russian economy for the worse. The sanctions in place will significantly lower the standard of living in Russia and lead to technological regression within the Russian economy. Thanks to its high foreign exchange earnings, however, Russia will fall prey to neither insolvency nor incapacity. Instead, it is likely to take further steps towards becoming a petrostate: the dependence of the Russian population on the redistribution of revenues from raw materials exports to cover (not much more than) their basic needs will grow. In future, many goods that are currently produced in Russia will only be available through import.
An oil embargo could significantly increase the pressure on Russia by hitting foreign exchange earnings. The strength of this effect would depend on the exact nature of the embargo. Unilateral embargoes such as those introduced by the United States and Canada often have only a weak, short-term effect because they simply lead to a diversion of trade flows. Russian supplies are sold to other states, while the previous suppliers of these states deliver to the countries that issued the embargo. A unilateral embargo by the EU, on the other hand, would have a somewhat stronger financial effect on Moscow. A key reason for this is that a sizeable percentage of the EU’s Russian oil imports arrives via the Druzhba pipeline. Russia could divert its oil deliveries to Russian ports for seaborne delivery to India or China, but this would entail a significant rise in transport costs.
The only really effective form of embargo would be one along the lines of the Iran sanctions, which rely on the extraterritorial reach of US measures. With the threat of secondary sanctions, Washington could prevent oil traders in India and China from buying Russian oil with relative effectiveness. While this would cause a noticeable fall in Russian oil exports, such a measure would also have a massive impact on the international oil market; at least temporarily. Even then, Russia could presumably still export residual quantities, as Iran currently does, benefitting from the sharp rise in prices. This means that even with the introduction of the toughest form of oil embargo, Russia’s foreign exchange earnings would be reduced at best.
We can assess the likely political effects of a possible oil embargo by using the three objectives developed for the analysis of economic sanctions: the signal effect, the build-up of negotiating leverage and/or the incentive effect for behavioural change, and containment, i.e. the reduction of Russia’s military options. While an embargo could serve all three objectives, it remains that its power to influence the course of the war in Ukraine over the coming months would be limited.
With the introduction of an oil embargo, the West would make it clear that it is prepared to bear high costs in order to defend its security interests against Russia. The price that the West itself would pay for taking this measure is therefore decisive for the signal effect. The signal is not limited to economic measures. If the West is willing to introduce an oil embargo against Russia in the face of significant costs and domestic political resistance, this lends credibility to NATO’s collective defence readiness, which could also be politically unpopular in many of the alliance’s member countries. And Russia would not be the only recipient of the signal. The resolve with which the West applies sanctions will also feed into Beijing’s future foreign policy calculations.
With regard to Russia's invasion of Ukraine, however, it is less clear what the embargo could signal. The West does not want to threaten military action. As such, an oil embargo would be a substitute for military intervention rather than a precursor to it. It could only credibly signal a further tightening of sanctions, for instance in the form of a total trade and finance embargo against Russia. However, economic relations outside of the oil and gas trade are already severely restricted by the self-imposed sanctions introduced by many companies, meaning that the deterrent effect of a full embargo on all goods and services could be impaired, at least in the short term.
In contrast to other sanctions, oil embargoes are very well suited to building up negotiating leverage, for example in order to achieve a withdrawal of Russian troops. Financial sanctions inflict lasting damage on international trust in a business location. Even after sanctions are lifted, it can take years to rebuild this trust. The oil trade, in contrast, requires very little mutual trust between trading partners. Oil deliveries worth billions could be resumed as soon as Russian troop withdrawal from Ukraine was complete. An oil embargo thus creates a strong “carrot”, which in the case of the 2015 negotiations with Iran, for example, could have helped the parties to reach an agreement. Similarly, Moscow could be offered the prospect of resuming oil deliveries as soon as it withdraws its military.
The incentive effect of an oil embargo will, however, be limited by current efforts to achieve independence from Russian oil and, in the long term, from fossil fuels as a whole. Once it had been “digested” by the global oil market via increases in production in other states, any lifting of a potential future Western embargo against Russia would be unlikely to gain widespread acceptance in the West. At least, not while Vladimir Putin remains in power in Russia. At best, Russia could expect to sell smaller quantities of oil to the West for a few years after the embargo is lifted before the money tap is turned off for good.
The goal most often put forward in debates on a possible oil embargo is containment, i.e. the hope that Russia’s ability to wage war will be limited if foreign exchange revenues from the West fail to materialise. It cannot be denied that it was Russia’s substantial oil and gas revenues that made it possible for the country to invest considerable sums in its military in the first place. This means that the West helped to pre-finance the current war against Ukraine through its purchases of Russian fossil fuels. The running costs of Russia's invasion, on the other hand, are likely to be relatively low. Moreover, they are incurred in roubles. As such, even a total embargo would be unlikely to do much to limit Russia's military options in Ukraine in the coming months.
That said, at present it is entirely unclear how long Russia’s war against Ukraine will last and whether it will spread further. At worst, such a development could spell direct confrontation with NATO. If the war were to last several years, the foreign currency that Western states are transferring to Moscow today could well make a difference. In the worst-case scenario, the West is currently financing a future war against itself. In the event of a war with NATO, Russia would undoubtedly be completely cut off from Western payment systems, but until then Moscow could use its foreign exchange earnings from the energy trade to increase its military clout.
Besides the three objectives listed above, normative arguments also play a major role in the debate on a Russian oil embargo and should not be dismissed as mere emotionalism. Even if it is impossible to guarantee that an oil embargo would have a direct effect on the war, it is hardly justifiable to transfer over a billion US dollars a day to Moscow while the Russian military is directly responsible for many thousands of deaths and the suffering of hundreds of thousands of others. Ultimately, the arguments set out above are based on a range of assumptions. And if we have learned anything from Russia’s invasion of Ukraine, it is that making assumptions about the behaviour of the Russian leadership is fraught with great uncertainty. In retrospect, Western policymakers would have been better advised at many points to trust their moral compasses regarding Russia instead of relying on the assumed rationality of the Kremlin. If these moral compasses now point to an oil embargo against Russia, the decision to ignore them must be well justified to avoid drawing the same conclusion again in the future.
