The international response to Russia’s invasion of Ukraine is seriously lacking.
There is one glaring question that needs to be answered: Should the US, Europe and Asia stop buying Russian oil? Choking off Russian oil sales would put significant pressure on the Russian economy, and perhaps actually encourage President Vladimir Putin to end this crisis.
Yet the political process in the US, Europe and elsewhere is proving an impediment when it comes to responding decisively. There are divides in the US political system about a full ban, just as there are divides in Europe. While the Biden administration looks set to impose a ban on imports of Russian oil, gas and coal, Europe is still dragging its feet. That’s no surprise: US imports are tiny compared with those of Europe, so banning them comes at a much smaller cost.
As of this writing, Russian oil and gas is still flowing into Europe and ships carrying Russian crude and refined products are still sailing to the US — at a vast and rising cost. The proceeds of these sales are funding Russia’s invasion of its neighbor.
Europe and China account for about 85% of Russia’s overseas crude sales, while Europe and the US take three-quarters of its refined product exports.
Even if China sits on the sidelines, as seems probable, or steps up its purchases of Russian oil, a ban by the US and Europe would still have a material impact on Moscow.
A ban may well trigger Russia to retaliate and halt natural gas flows to Europe. But that may happen anyway. Threats from Moscow to that effect have already sent European prices to new heights.
Although Russia could conceivably reroute some oil sales to compliant buyers, it would be virtually impossible to redirect gas flows. Russia’s biggest gas fields are tied to the European market by a network of pipelines. The only way for Moscow to diversify its overseas gas markets is to build new pipelines or liquefaction plants — a long and expensive process.
The undeniable truth is Russian oil sales won’t be materially impeded without a formal ban.
Sure, there will be short-term disruptions to the flow. Oil companies, ship owners, refiners and traders will shun Russian barrels for a while, imposing informal sanctions by refusing to buy, carry, unload or process Russian oil. That self-sanctioning will last for as long as public outrage over the invasion outweighs public outrage over soaring fuel prices and potential shortages.
But it will be a different picture as time goes by. Do we really expect the self-sanctioning to persist for several months? Without a serious embargo, I struggle to believe economic imperative won’t break an informal buyers’ strike.
What we have now is the worst of all worlds: Talk of a ban is driving up oil and gas prices and risks bringing economies to their knees. Merely threatening a ban without delivering would — over time — be financially beneficial to Moscow, pushing up prices while doing little to curtail the volumes it can ship.
So the US, Europe and those Asian buyers who feel similar repugnance for the invasion need to support Ukraine with the toughest step possible.
The economic costs of banning Russian oil will be huge, I don’t deny that. The disruption to fuel flows will be immense. Prices will continue to rise, there will almost inevitably be fuel shortages. We may stray from the path toward climate goals, at least for a while. And European consumers, in particular, need to get serious about using less oil and gas.
But more can be done to mitigate the worst effects. The release of 61.7 million barrels of oil from strategic stockpiles announced by the International Energy Agency is only a start. The volume to be made available represents just 3% of total emergency reserves, the IEA says, and it’s clear that more releases will be needed. This, after all, is why the stockpile was created.
So the decision is clear. Risk the economic shock of curtailing oil imports from Russia, or continue to fund Putin’s invasion of Ukraine. But don’t drag out the decision.
Bloomberg
