Using Energy Sanctions to Shorten the War: Working Paper No. 14

Russia is heavily dependent on oil and gas earnings, which finance Russia’s imports and budget, and thereby Russia’s war on Ukraine. In response to Russia’s invasion, Ukraine’s allies have targeted energy – the lifeblood of the Russian economy – through broad embargos on Russian oil and coal, including an oil price cap, and slashing purchases of Russian gas. These energy sanctions are helping to constrain Russia’s economy, and ability to conduct war. Russian oil sales to Ukraine’s allies – who account for about half the global economy – have largely ceased, pipeline gas sales to Europe are down over 80%, and Russian oil sales to other countries are at a deep discount. As a result, we estimate that Russia has lost $140-170 bn in oil and gas revenues since Russia’s invasion. Russian oil and gas revenues have fallen sharply this year, reflected in a two-thirds decline in Russia’s trade surplus and a 50% decline in oil and gas budget revenues. Last year, record oil and gas export earnings of $350 bn driven by a spike in global prices offset the record $240 billion capital outflow, allowing Russia to stabilize the economy despite the shock. This year, the halving in energy revenues has left the economy exposed, as capital outflows continue, and the cost of war rises. This drove the August weakening of the ruble, leading to public disagreement among policymakers, and the Central Bank of Russia’s abrupt shift to tighter monetary policy. Energy sanctions are working, undermining Russia’s ability to wage war. Unfortunately, just as energy sanctions start to bite, Russia is having some success in circumventing them, with some 35% of its seaborne exports transported by tankers not subject to the price cap. With Russian oil now on average selling above the price cap, and Russia maintaining and even increasing pipeline and LNG gas sales to Europe, Moscow is poised to recapture some of its lost energy revenues. To reinforce our steadfast support for Ukraine in the face of Russia’s ongoing aggression, we propose improved implementation to prevent Russia circumventing current sanctions, as well as proposing further options to increase pressure and shorten the war.