Adding it to the list of embargoed
products would make life as difficult
as possible for Moscow
T
he reports of massacres of
civilians in Bucha, close to
Kyiv, cannot, alas, be a surprise. In response,
Emmanuel Macron argued
that, “What happened in Bucha
demands a new round of sanctions and
very clear measures, so we will co-ordinate with our European partners, especially with Germany.” He added that “on
oil and coal, we must be able to move
forward. We should certainly advance
on sanctions . . . We can’t accept this.”
But sanctions on Russian oil and coal are
insufficient. It is necessary to embargo
imports of Russia’s gas, too.
According to the US Energy Information Agency, in 2021, 74 per cent of Russia’s exports of natural gas went to European members of the OECD. That would
amount to 5 per cent of Russia’s export
earnings. The difference between these
exports and those of oil and coal is that it
is easier for Russia to shift their destination than it is of gas, whose transport
depends on inflexible infrastructure.
Adding gas to the list of embargoed
products would therefore increase the
pain on Russia. The objections to this
idea are that some European countries
are particularly dependent on Russian
gas and so the costs of cutting imports
substantially for them would be huge.
Among the most vulnerable countries
are Germany and Italy. Germany, for
example, depends on Russia for a third
of its energy consumption. Moreover,
Germany received 58 per cent of its gas
from Russia in 2020, while Italy received 40 per cent. These countries
are also heavily reliant on gas: Germany’s consumption is more than double that of France, whose nuclear generation capacity is large. An embargo on
gas supplies would, it seems, devastate
the economy of Germany and similarly
vulnerable countries. (See charts.)
Recent economic research suggests,
however, that this fear — though understandable — is exaggerated. A paper on
Germany by economists headed (alphabetically) by Rüdiger Bachmann of
Notre Dame university notes that the
focus should indeed be on gas, since oil
and coal are supplied in global markets.
If necessary, as the paper notes: “Sufficient world market capacity exists from
other oil- and coal-exporting countries
to make up the shortfall.” Russia could
also shift its exports elsewhere, though
it might have to do so at a discount.
So what about sanctions on gas? In the
short run, the loss of Russian gas could
not be made up by imports from elsewhere. The paper assumes that the
result of an embargo on Russian energy
would be a cut of 30 per cent in gas deliveries, which is about 8 per cent of total
German energy consumption. The key
points in the analysis are that substitutability of gas in consumption and production is lower in the short run than
the long run and higher in some uses
than others. With very low short-run
substitution elasticities (a pessimistic
assumption), an 8 per cent decline in
consumption of oil, gas and coal leads to
a 1.4 per cent decline in gross domestic product — a cost of €500-€700 a year
for each German citizen. With a 30 per
cent fall in gas usage, the economic
losses rise to 2.2 per cent of GDP (2.3 per
cent of gross national expenditure) or
€1,000 per year per citizen. If one allows
for possible second-round macroeconomic effects, this impact might reach 3
per cent of GDP.
Alternative estimates exist. A survey
by Clemens Fuest of the Ifo Institute in
Munich presented at last weekend’s
Ambrosetti economic and finance forum, shows that estimates of the
decline in GDP vary between a tiny 0.2
per cent and 6 per cent. As he states:
“We don’t really know.” But we do know
that if an embargo became necessary, it
would be best to do it now: as the paper
cited above explains, the justification “is
the seasonality of gas demand. A cut-off
from Russian gas over the summer
months could be substituted from Norwegian and other sources, keeping
industrial supply going.” Such an early
move would also “trigger the substitution and reallocation dynamics that are
central to reducing economic costs”.
Above all, a comprehensive embargo
on Russian energy imports would be a
statement of collective will in defence of
the values on which postwar Europe was
founded against its fiercest enemy. It is
Germany’s duty to lead. Yes, it would bear significant costs. But the reasons it
is so vulnerable are, after all, what the
economist Hans-Werner Sinn rightly
calls “Germany’s Energy Fiasco”, with
its closure of nuclear energy and reliance on Russia. Moreover, even on the
worst assumptions, these costs would be
modest compared with the ones suffered by those hit by the eurozone crisis.
Of course, Germany and other vulnerable countries must be helped. The gas
available should be treated as a European resource, so far as is practical. It
would be a magnificent gesture if the UK
were to join in. It will also be necessary
to adopt fiscal policies that cushion the
blow on vulnerable people. Beyond
that, it is essential to build an infrastructure that delivers maximum flexibility.
The long-run goal should be for
Europe to be able to import from any where, while Russia remains reliant on
European markets. The short-run goal
should be to make life as difficult as possible for Putin. A superior alternative
would be the suggestion of Harvard’s
Ricardo Hausmann of a penal tax on
Russian imports by most buyers, worldwide. Alas, that is not going to happen.
It is possible that Putin’s demand for
payment in roubles will cut off supplies,
anyway. But this should not be necessary. Rightly or wrongly, Nato decided
not to defend Ukraine militarily. The
least Europeans can do is use all other
tools at their disposal. They must bear
and share the costs of cutting off Russian
energy imports. They must create an
energy policy that will maximise flexibility and resilience. It is time to act.