Measures designed to damage Russia’s economy have been introduced by countries opposed to its invasion of Ukraine. Foreign Secretary Liz Truss has said: These oligarchs, businesses and hired thugs are complicit in the murder of innocent civilians and it is right that they pay the price. Putin should be under no illusions – we are united with our allies and will keep tightening the screw on the Russian economy to help ensure he fails in Ukraine. There will be no let-up.
A Wide Range of Sanctions Imposed on Russia
Military goods and all Russian flights have been banned from US, UK, EU and Canadian airspace. Sanctioned luxury goods include cars, high-end fashion and art. Targeting individuals, the US, EU and UK have together sanctioned over 1,000 Russian individuals and businesses, including wealthy business leaders known as oligarchs, who are considered close to the Kremlin. One such high-profile oligarch sanctioned by the UK is Chelsea FC owner Roman Abramovich. In the finance sector, Western countries have frozen the assets of Russia’s central bank to stop it using its $630bn (£470bn) foreign currency reserves.
But We Can Say that the Most Controversial Sector is Russia’s Oil and Gas
This sector is “Squeezing Putin where it hurts: His oil exports.” as Politico explained, Russia is the third biggest producer of oil in the world, behind the US and Saudi Arabia. Of about five million barrels of crude oil it exports each day, more than half goes to Europe. Russian imports account for 8% of total UK oil demand. Oil and petroleum products are Russia’s most important exports by far. Gas is the third most valuable export, worth more than all other exports combined. Revenue from the export of energy finances over 40% of the Russian budget. Russia’s most important customer is the European Union, which buys about 60% of the country’s gas exports, 50% of its oil exports and 50% of its petroleum product exports. Europe has paid more than $19 billion to Mr Putin since February 24 for these products.
The US is banning all Russian oil and gas imports and the UK will phase out Russian oil imports by the end of 2022. The EU, which gets a quarter of its oil and 40% of its gas from Russia, says it will switch to alternative supplies and make Europe independent from Russian energy “well before 2030”. Germany has put on hold permission for the Nord Stream 2 gas pipeline from Russia to open.
The International Energy Agency warns that Moscow could respond to sanctions pressure by cutting back on production — although that would also close off the cash spigot of about €250 million a day going from the EU to Russia — which Ukraine says helps finance the war.
But in order to exclude Russia from the energy market, considering its vast oil and gas capacity, two points must be taken into account:
- The shock from the immediate removal of Russia from the market
- finding alternative choices for oil and gas importing countries
Energy policy research analyst Ben McWilliams says it should be easier to find alternative suppliers for oil than for gas, because while some comes from Russia, “there’s also a lot of shipments from elsewhere.”
The US Has Been Asking Saudi Arabia to Increase its Oil Production
The Saudis have rebuffed previous US requests to boost output in order to reduce oil prices. Saudi Arabia is the biggest producer in OPEC, the oil cartel which accounts for about 60% of the crude oil traded internationally with a key role in influencing prices. So far, no OPEC members have agreed to requests to boost output. Russia is not an OPEC member, but has been working with it since 2017 to place limits on oil production in order to maintain earnings for producers. The US is also looking at relaxing Venezuela’s oil sanctions. It used to be a key US oil supplier, but recently Venezuela has largely been selling its oil to China. Reviving the JCPOA or Iran nuclear deal could also be an alternative to Russian oil and gas.
Boris Johnson has been urging EU allies to follow the UK’s own planned boycott on Moscow’s oil – and potentially gas – exports, to punish its invasion of Ukraine
Tightening the Screw on Russia’s Economy has Backfired
A new report by the Treasury Committee, whose members include Thirsk and Malton’s Conservative MP Kevin Hollinrake and Labour MP for Hull West and Hessle Emma Hardy, has said the consequences of sanctions are “most definitely a cost worth bearing in order to aid Ukraine in opposing Russian aggression” and are pushing Russia towards “economic catastrophe.” The report highlighted that expert witnesses had suggested to the committee that diesel prices could reach £3 per litre and petrol £2.40 per litre.
Mr Sunak said yesterday: “The ongoing uncertainty caused by global shocks means it’s more important than ever to take a responsible approach to the public finances. With inflation and interest rates still on the rise, it’s crucial that we don’t allow debt to spiral and burden future generations with further debt.” The UK Chancellor of the Exchequer warned the effects will spread. Sunak said: “the UK economy would take nearly a $100 billion hit, or about 3% of its GDP.”
The UK would suffer a £70bn economic hit and be plunged into a recession if Europe banned Russian oil and gas imports immediately, Rishi Sunak has warned privately. British Prime Minister Boris Johnson declared a mission to build an international coalition against Russia and wean off dependence on its oil and gas exports in protest against the conflict with Ukraine, as he embarked on a visit to the [Persian] Gulf region on Wednesday.
Russia is by far the most important source for the UK’s supply of refined oil. In 2021, more than 24% of the country’s refined oil came from Russia at a value of £3 billion.
- Refined oil – £3 billion – 24.1%
- Unspecified goods – £2.6 billion – 20.2%
- Non-ferrous metals – £1.5 billion – 8%
- Crude oil – £1 billion – 5.9%
- Gas – £1 billion – 4.9%
This backfire felt in Germany as German Chancellor Olaf Scholz has again dismissed calls to boycott Russian energy supplies in the wake of the attack on Ukraine. Scholz said Tuesday that the sanctions already imposed on Russia were already hitting its economy “and this will only get more dramatic every day.” The price of a barrel of oil went past $110 this week even as the EU debated its moves. Analysts have warned that prices could touch $200; even more dramatically, Russia has warned of $300pb oil if the EU halts oil and gas imports. According to European Central Bank estimates, a 10% gas shortfall will trigger a 0.7% contraction in GDP.
Johnson Scheduled to Meet with Leaders in Abu Dhabi and Riyadh for Talks on Energy
The leaders are expected to discuss efforts to improve energy security and reduce volatility in global energy and food prices amid the ongoing Russia-Ukraine crisis. According to official data, the UAE and Saudi Arabia are among the UK’s two largest economic partners in the Middle East, with bilateral trade worth GBP 12.2 billion and GBP 10.4 billion in 2020 respectively. The UK is preparing for negotiations on a trade deal with the wider Gulf Cooperation Council (GCC) which will boost trade and investment with the whole region. The oil diplomacy of Boris Johnson, which means stepping up the search for alternatives to Russian energy, hopes to persuade the oil producer to boost output and relieve pressure on global markets. The economic pressure from the Russian sanctions is forcing the UK to ignore human rights issues in Saudi Arabia. This includes the controversial murder of journalist Jamal Khashoggi and the recent execution of 81 men in 24 hours which raised critics, stating that Mr Johnson’s efforts to reduce western reliance on Russians President, Vladimir Putin, was: Going from one dictator to another.
The world needs to “deal with the new reality” following the invasion of Ukraine, Mr Johnson said before leaving London. In conclusion, it seems that the UK is trying to save face by imposing oil and gas sanctions on Russia and playing a pro-Ukrainian role on the international stage. But domestic problems such as the energy crisis and rising costs in this sector make it hard to eliminate Russian energy, at least immediately.
