Andrius Kubilius: On Oil And Gas Sanctions (non paper). Updated September 2023

2023-09-21 | Political initiatives, Sanctions

Read the non-paper On Oil And Gas Sanctions

A year ago, after Russia began its war against Ukraine, the West began imposing sanctions on the Russian economy. Despite fears that the European Union would not be able to agree on the imposition of such sanctions and their impact on Russia’s economy and finances, the European Union has approved as many as 10 packages of such sanctions, including imposing an effective, almost one hundred per cent embargo on Russian oil and gas imports. This has enabled the European Union to become virtually independent of Russia’s energy supplies.

However, the impact of the sanctions imposed throughout 2022 on Russia’s economy and finances has not been as strong as projected by experts. Global energy prices have risen since the outbreak of the war in 2022 to the extent that Russia has received more income from energy exports than in any previous year, despite the fact that exports of such resources to markets of the European Union have significantly fallen. It was only after the G-7 decided in December 2022 to impose a cap on oil price of Russian oil exports that Russia’s revenues from oil sales started to fall radically and its budget deficit to grow rapidly.

In the political community of the European Union, throughout 2022, the introduction of new sanctions has been accompanied by doubts as to whether it is worth introducing new sanctions if they do not have a war-stopping effect on Russia’s economy and finances. The statistics of the last few months, which demonstrate that the imposed sanctions are starting to drastically reduce Russia’s budget revenues, so far are little known to the political community. Therefore, there are doubts as to the future direction of the sanctions policy. Over the past year, Russia has also demonstrated its ability to circumvent sanctions through its relations with third countries. What is more, Russia is able to continue the criminal war that it has started and to finance its high costs.

All of this is the main reason why, one year after the first sanctions were imposed on Russia, not only experts, but also European Union politicians need to take a much deeper and more systematic look at the achievements and shortcomings of the sanctions policy, and to also have a clear understanding of what gaps in the sanctions policy need to be addressed immediately, and what sanctions mechanisms need to be further developed or deepened. This is particularly the case with regard to restricting Russia’s exports of energy resources, since it is precisely these exports that generate the largest revenues for the Russian budget, and which finance the cost of the war.

The world’s leading experts have recently published a large number of analytical studies on the pros and cons of the sanctions policy towards Russia. These experts also point that further policies on sanctions could lead to even more painful restrictions on Russia’s export of energy resources. Such measures could include the further lowering the cap on oil price from the current USD 60 to USD 30 per barrel; the embargo on imports of Russian LNG gas; restrictions on imports of fuels produced by third countries using Russian oil; finally – the restriction of the service of European tankers and insurance services for tankers if they are used to export Russian oil. Each of such additional sanctions could reduce the daily income of the Russian budget by at least tens of millions of euros, while the cost of one new combat tank for Russia is between EUR 1,5 and 3 million.

We compiled a review which is intended to provide European Union policy makers with an overview of recent analytical publications by international experts on the impact of EU sanctions policy on Russia’s energy exports, as well as on the main directions suggested by the experts for the continuation of such sanctions policy. This overview is based largely on quotations from the analytical studies, arranged in a logical structure that is understandable to policy makers, and which makes it easier to understand, which elements of the sanctions policy are the most effective and which ones need to be further developed. This paper also provides a better understanding of why Russia last year withstood the impact of sanctions more easily than had been predicted, and why the relatively “easy times” for Russia’s economy and finances are coming to an end.

This paper is essentially limited to an analysis of the sanctions that have been applied to Russian energy exports: their impact as well as directions for their further reinforcement. Building on the analyses published by the experts, other papers on the impact and prospects of other economic sanctions are likely to be prepared.

The paper was first published in April 2023, and updated in September 2023.

Read the non-paper On Oil And Gas Sanctions